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So You Want to Start a Legal Marijuana Business. Here Is What You Should Know

So you’re looking to carve out a piece of the marijuana business for yourself? No one can blame you. There seems to be limitless potential for making huge profits in this sector. With the rapid change in US state laws, the legal business of selling marijuana has developed into one of the fastest growing industries in the world, according to market research firm Arcview. Data from the 2016 Marijuana Business Factbook showed approximately 90 percent of wholesale cultivators, recreational marijuana stores, and infused product companies, which are the three pillars of the marijuana trade, were either breaking even or turning a profit. Among these businesses, 27 percent of infused product companies and 29 percent of wholesale growers described their businesses as being highly profitable.

The potential growth of the marijuana market is enormous as legal accessibility continues to increase. To date only 29 of the 50 states allow the sale and purchase of medical marijuana and 9 states allow recreational use for adults over the age of 21. That means 1 in 5 Americans lives in jurisdictions that allow some form of marijuana use.

According to ArcView research, the growth in revenue has been just as impressive. In 2016 marijuana sales reached $6.7 billion, which is a 30 percent increase from the previous year, and nearly $10 billion in 2017. ArcView projects that sales will hit $20.2 billion by 2021, which works out to an eye-popping annual compound growth rate of 25 percent. Eventually, marijuana could rival beer in sales, according to the Marijuana Business Daily, 2018 Factbook.

Despite these saliva inducing figures, a tangle of confusing regulations, high taxes, and other hurdles await prospective investors. To prevail and thrive, this is what you need to do.

Come Up with a Unique Idea

Just like in any other industry, having a unique idea that fills an unmet need is critical for success. That means you need to do your research to get the insights you need to generate suitable ideas and determine the sector of this vibrant industry that is worth your time and money.

Most prospective entrepreneurs gravitate towards dispensaries and grow operations. However, these two sectors are riskier and more tightly regulated, consequently they are less profitable. The margins are likely to decrease as the legal use of marijuana rises and leads to increased competition. That is why you need to come up with a unique business idea.

Are you a foodie? Consider investing in a line of edible products. Is hospitality more your speed? Cannabis-friendly lodging may be a good investment. Is aromatherapy your forte? Maybe developing a range of cannabis-based infusions holds the key to your success. Are you more of the creative type? Then come up with unique products to help users, ingest or process marijuana.

If you’re interested in making money from marijuana but don’t want direct contact with the product, you might want to consider offering ancillary services such as consultancy, security, or creation of an app. This approach has additional advantage because the bulk of cannabis-related regulations and taxes target sellers, growers, and suppliers. Thus, providing ancillary services is usually more profitable and less regulated.

Raise the Adequate Capital You Need

Planning to approach your bank for a loan to finance your dream business? Unfortunately, because marijuana businesses operate in a legal twilight zone, it is virtually impossible to obtain financing from traditional financial institutions. However, do not despair, as other options do exist.

Angel investors are one option. They specialize in high-risk, high-return investments in emerging companies. Apart from financing, these investors also offer connections, expertise and even logistical support. Unlike traditional financiers, who focus almost exclusively on profitability metrics, angel investors tend to also look for qualities such as passion and commitment from the founder.

However, passion and commitment on its own will not sway an angel investor. You also need to be clear on the kind of deal you want, and back your pitch with a business plan that reflects a return on investment for your investor. You must convince them why it is worth their time and money. In addition to providing proof of your personal and organizational competence.

If you are looking for seed funding that is beyond the capacity of what your angel investors will provide, then a venture capitalist may be a better bet. Like angel investors, they invest in businesses that have a high potential for growth but are too risky for banks to finance.

Lastly you can try one of these options. For a standard business loan consider an alternative financier such as National Business Capital, or Green Leaf Money, GoKapital and there’s Diamond Business Loans. They all provide business lines-of-credit for day-to-day expenses to term loans for large, one-time expenses. Then there’s always Crowdfunding, as another way of raising capital. It can be wildly successful if your idea resonates with a broad audience. Marijuana focused crowdfunding platforms include 420fundme, Fundanna, and CannaFundr.

Get Familiar with Laws and Regulations

You may have a winning idea and a receptive consumer base, but if you do not play by the rules, you could receive fines and even jail time, rather than profits. So for this reason, you need to get up to speed with the laws and regulations relating to the industry in the jurisdiction you want to do business in.

You may feel as if you can do it all yourself. However, the marijuana business is labyrinthine, so we strongly suggest you seek the services of an experienced attorney to successfully navigate through the numerous laws. The laws vary by state and although your state may allow the sale of marijuana, it may still be heavily regulated. For instance, although it may be legal to sell in your state, they may have a restriction on the number or size of cultivators and dispensaries they will license. In addition, they may also demand high application fees and impose stringent operating regulations, which include strict management and financial reporting requirements.

However, it gets even more complicated because although your state may allow the sale of marijuana, federal law still prohibits marijuana use of any kind, so engaging in a cannabis-related business exposes you to the risk of arrest and prosecution by federal authorities.

Also, apart from avoiding jail time, if you are in the legal marijuana business you are a part of a fraternity so to speak. What you do affects everyone else. You need to take that very seriously and handle with care. Be certain you play by the rules to avoid painting the industry in a bad light. Keeping in mind, that what you do affects the reputation of the industry as a whole, and recklessness only helps those entities that would like to see legalization overturned.

The bottom line is, the legal marijuana industry in the United States is still nascent, you need to make it your business to continually update yourself on changes to marijuana-related laws in your jurisdiction to avoid nasty surprises. And pay close attention to business best practices; among other things and get all required licenses.

Closing Marijuana Thoughts

Despite the challenges, there is arguably no better or more exciting time to invest in the industry. Its embryonic nature can present many uncertainties, but that incipience also minimizes competition and increases the potential for enormous profits. As long as you have a unique idea that meets an unfulfilled need, understand your customers, play by the rules and raise enough capital, you should have an excellent shot at eye-popping success.

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