NEW YORK (MainStreet) — There are few opportunities in life to get in on the ground floor of an all-new, exploding industry. The "Green Rush" of the legal cannabis business certainly fits that bill.
"These are exciting times, and new millionaires and possibly billionaires are about to be made, while simultaneously society will become safer and freer," says Troy Dayton, CEO of The ArcView Group, an Oakland-based cannabis market research and investment company, in the firm's annual industry overview.
The ArcView report says the U.S. legal cannabis market grew from $1.5 billion in 2013 to $2.7 billion in 2014. That's 74% growth. Patrick Rea, the executive editor of the report and the co-founder of CanopyBoulder, a mentorship-driven business accelerator for the cannabis industry, says there are plenty of opportunities. However, it's not quite a matter of simply staking a cannabis claim and watching the profits roll in. Especially if you dream of going the retail route.
Look out for the stiff taxes and obstacles-to-entry
"The tax burden on dispensaries because of IRS tax code 280e is quite high," Rea told MainStreet. "So people who launch dispensaries, I wish them all the best of luck, but it's a tough row to hoe."
He cites high overhead -- so to speak -- and declining wholesale prices, which triggers fierce price competition and pressures profit margins.
"And you know, retail isn't the greatest business in general," he adds. "There's more money in the growing of the plant than retail."
Rea says the real opportunities may lie in ancillary products and services.
"I see opportunities in market research and product testing," he said. "I see opportunities for people to work with sales data that come from dispensaries to guide the rest of the industry." He also points to apps and software platforms that help people run their businesses more effectively.
And yet, for more 'hands-on' entrepreneurs, there are edible products to consider.
"Even though there are 'leaders' in the market, they are just players," Rea says. "No one has established a dominant brand, primarily because of the interstate commerce restrictions. You go to a grocery store, there's upwards of 50,000 products. If there are 5,000 edible (cannabis) companies in the country I would be surprised."
Once you settle on your Big Idea, there's the matter of implementation. That can mean finding investors while navigating a changing legal landscape.
Day-to-day keeping the DOJ at bay
Hilary Bricken, an attorney with the Canna Law Group in Seattle, works with burgeoning cannabis businesses to keep them on the straight and narrow. Some of the biggest mistakes she sees ganjapreneurs make?
"Overall, a lack of understanding of the state rules and laws in play," Bricken told MainStreet. "The current trend is for states to legalize marijuana cultivation, manufacture, and distribution pursuant to 'robust regulations' as dictated by the Department of Justice. As a result, there’s usually a torrent of state rules and statutes with which to comply and the typical marijuana start-up simply doesn’t have the bandwidth or manpower necessary to constantly meet and comply with those rules."
In addition, she says, there are going to be local laws -- like city or county permitting, coding -- with which the business needs to comply.
"The devil is always in the details with those things," Bricken said. In addition, a start-up marijuana business typically doesn’t have a grasp over what the conflict with federal law actually means for day-to-day business dealings -- it’s more than just the DOJ and DEA raiding the facility these days.
That'll sure harsh your mellow. But there's another roadblock on the way to pot profits: finding a place to plant your budding business.
The location complication
"Many marijuana businesses make the grave mistake of believing that they’ll be able to find a location at which to operate with relative ease," Bricken said. "Nothing could be further from the truth."
In fact, because of federal asset forfeiture laws, landlords are subject to losing their properties in the event they rent to cannabis businesses -- and certain banks are more than happy to foreclose on the properties if a marijuana business moves in in violation of the mortgage/note -- so they’re very hesitant even now to lease to marijuana businesses.
Bricken says pot proprietors also have to comply with strict square footage requirements.
"Most of these are based on federal sentencing laws which tack extra prison time onto sentences for drug trafficking if the defendant is caught distributing, manufacturing, or cultivating a controlled substance within 1,000 feet -- as the crow flies -- of, for example, a school or a park," Brick said.
Of course, you can imagine how many marijuana businesses find the 'perfect property' only to find out much too late that there is a school or daycare within 1,000 feet of the structure, rendering it ineligible as a viable cannabis property under state or local law.
Where to stash the cash
And then there's the matter of dealing in an all-cash business. Not a problem, you say? Just ask the businesses toting backpacks full of money to safekeeping, surrounded by armed guards and in constant fear of getting robbed – or worse. Banking a cannabis business is virtually impossible due to federal laws. But Rae and Bricken are cautiously optimistic.
"It’s only a $2.7 billion industry today, but all indications are that the legal cannabis industry will grow rapidly in the coming years," Rea says. "With time, the banking problem will be solved -- either through state credit unions, private banks or through a change in federal laws. Certainly, it’s one of the largest opportunities in the cannabis industry. But at the end of the day, it’s a safety issue, and I don’t think the government wants to create an unsafe environment for cannabis entrepreneurs."
"Working on an all-cash basis is both dangerous and inconvenient," Bricken agrees.
In fact, he firm represents a couple of financial institutions that are running pilot programs under the FinCEN guidelines. The cost of compliance under those guidelines is not cheap, and it really only extends to banking marijuana businesses; it does not address commercial lending or real estate financing, which are also lucrative services currently denied to the marijuana industry. Still, she does think change is on the horizon and that banks will want a piece of the financial success of the industry; it’s just very likely going to take a few years to see banks regularly participating."
In spite of all the hurdles and high jumps required, there are still entrepreneurs willing to take the leap. In fact, Rea says CanopyBoulder, the cannabis accelerator he co-founded where startups are given seed capital and placed into a 13-week program to jumpstart their marijuana-related enterprises, is a smoking success. Some 115 applicants sought to gain one of the first ten slots offered earlier this month.
-- Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick