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Jul 11, 2017 12:05 PM

Recreational Marijuana: Pitfalls of Starting a New Business

Launching a new business in the cannabis industry has pretty much the same key steps as any other start-up. You follow a plan, make sure all the steps are performed properly, invest money and effort, and then wait for the results.

The ways to achieve the desired outcomes in a new business are more or less the same regardless of the country or the industry you have chosen. First, you make a business plan; then, you work out the business structure, choose the location, get all the documents, deal with the infrastructure, make contacts, invest in ads, and try your best to make all the things work properly.

However, there are still some aspects that are a bit different in the marijuana industry. Building a new business in this field is associated with certain risks and challenges you need to take into account, and that is what we want to talk about it.

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Residency requirements

Most of the states require all owners and investors to be residents of the local state to start a business related to recreational pot. This fact is frustrating for out-of-state entrepreneurs. Residents are the people who have lived in the state at least for the last two years.

However, things have started to change for one state. This March, Oregon Governor Kate Brown signed HB 4014, a bill that removed residency requirements for the businesses that are covered by Oregon’s recreational pot program.

Now, people outside the state can start their companies in Oregon without being physically present at the property. The same goes for investors, who can be based in Oregon or any other state. However, medical patients still have to be residents of the state, just like it was before.

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Capital requirements

Unlike the fast food or insurance industry, the pot business does not have any formal capital requirements. In Oregon, for instance, you should pass a background check, find a place that meets the legal demands, pay a fee (up to $5,000 a year), and wait to get a license for growing recreational cannabis at your property.

However, these expenses are not the only ones that you should take into account. Remember that you will have to pay for laboratory tests, and if any new laws appear, the number of tests will only increase. The prices for this service are growing. Last year, you could do all tests for $300-$500, and today the same testing will cost you about $3,500.

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Time resources

Not only will the lab tests cost you a fortune but there is no guarantee that you will get your results on time. The thing is, there are not so many laboratories that are allowed to perform the tests, so if there is a delay due to a huge queue, do not be surprised.

Licensing can also be quite time-sapping. Do not expect to go from the very beginning till the actual start of the business within one year—you will need to be really productive and extremely lucky to pull it off. For instance, in California, the licensing will take about ten months; in Washington, the licensing process can last up to 18 months. Waiting for so long is not for everyone, and this fact may derail many entrepreneurs.

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Changes in cannabis regulations

Marijuana growing is a relatively new industry, and the requirements are still changing. You should be prepared for the fact that the rules that are functioning on the day you apply for the license may be completely different or even abolished by the time you actually get the paper. Both Washington and Oregon regulations in cannabis industry change on a monthly basis.

In February, four separate bills significantly modified the existing Oregon pot laws. Apart from allowing out-of-state money investments, they also now let the OMMP patients purchase weed tax-free in the recreational dispensaries. Moreover, in certain instances, growers are no longer required to acquire a land use compatibility statement. Apart from this, the Oregon Health Authority has changed the limit for weed components in edible products.

Such changes happen in all cannabis-friendly states, and it can be a real headache for start-ups. So if you are up to joining the race, you should keep abreast with all the changes.

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Finding the right place

Regardless of the state you choose for your start-up, there are numbers of restrictions about places for growing marijuana. For instance, in Oregon, you will find cities and counties that forbid growing recreational marijuana. At the same time, in Washington and Colorado, they do not differenciate between recreational and medical weed, so if it is allowed to grow cannabis for medical purposes, you can grow recreational marijuana as well.

However, even in cannabis-friendly places, there are many rules and restrictions that can make finding the right place tough. You need to submit a land use compatibility statement and show that the land or building you plan to use for growing belongs to you (an example of that would be the New York law).

Of course, you should also mind the zoning rules and the presence of schools nearby. Your growing facility can also be forced to shut down if a new school is built in your neighborhood. That is why finding a proper place can be really tricky.

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Increasing competition

Since the law base still keeps on changing, it is difficult to talk about the scale of the competition on the marijuana growing market. However, there are lots of signs that the number of new growing start-ups will increase significantly.

While in some states, like Washington, the medical and recreational markets are merged, others create more favorable conditions for the recreational part of the industry. In Oregon, companies that produce medical cannabis still follow the two-year residency restrictions. Moreover, they are still limited as to how much they can earn. Oregon's recreational market is much more flexible now, which may force medicinal cannabis growers to go recreational.

Apart from the competition, the increasing number of recreational cultivators will lead to the rise of testing costs and certain difficulties in finding a place for the garden. These factors can prevent some entrepreneurs from keeping pace in the race.

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Small businesses versus corporations

Regardless of whether your company is a great success or a failure, you will still have to pay all fees and taxes. Furthermore, you should add about $900 for all the materials and work necessary to actually produce a single pound of cannabis, and then about $400 for packaging and delivery. Do not forget the costs of the laboratory tests. Thus, the final price for a pound of weed can be as much as $5,000 or even more.

If big corporations enter the market, small businesses will have no chances to survive. Their costs for packaging may be cut in half since they will already have their own factories. Larger production volumes will also mean smaller expenses per pound (about $600). And since large companies can send not one but up to 20,000 pounds to the laboratory each time, the cost of testing per pound will also be smaller. That makes the final price of the same pound of weed about $800.

At some point, big corporations may take control over the recreational market, and if the current U.S. regulations do not change in favor of small businesses, it will happen sooner than we may expect.

Of course, large companies will not be able to replace all small businesses, but many will certainly be forced to leave the field. However, before it happens, entrepreneurs can make a fortune in this industry. That is why growing recreational marijuana seems to be one of the most tempting things to do these days. After all, if you embrace all the risks and still want to start your own business, why not?