In Pictures: High tech for high times. What it takes to run a medical marijuana business
In some ways, getting into the legal marijuana industry is a lot like launching any small business. You need capital. You need grow lights. You need Febreze. And you need technology -- which turns out to be the easy part.
Change is in the air. Within a few years, roughly half of U.S. states will allow legal cultivation and sale of marijuana for medical purposes, with a handful legalizing it for any adult use. Not surprisingly, many refugees from the tech industry are migrating from silicon to sativa. In part, that's because marijuana cultivation is a high tech business (no pun intended). You need hardware to both cultivate the product and sell it at retail. You need software that allows you to track the goods from seeds to sale and stay in compliance with strict state regulations. You need investors and strong entrepreneurial skills. You need Febreze.
The first thing you need to do is determine if you live in one of the 18 states that have legalized medical marijuana, or the two states (Washington and Colorado) that have also legalized adult use starting in 2014. Others states expected to climb aboard the Mary Jane express over the next two years include Illinois, New Hampshire, and New York. If you don't live in one of these places, your budding hempire may quickly go up in smoke.
An attorney with teeth
To the feds, marijuana is still a Schedule I controlled substance, as illegal to traffic in as heroin or cocaine. Legal cultivation and sale are governed by state laws, which vary wildly, notes attorney Khurshid Khoja with Greenbridge Corporate Counsel in San Francisco. To sell medical cannabis in California, for example, you must belong to not-for-profit collective or a co-op of qualified patients that have a doctor's recommendation. In Colorado you can sell medical cannabis for profit, but you must grow at least 70 percent of it yourself. Some states allow you to advertise, some don't. Some have strict regulatory environments, others are more relaxed. Bottom line: You'll want to consult a sativa-savvy legal eagle to sort out all the rules.
A lot of green
If you mean to go green, you'll need a stash of cash. Kayvan Khalatbari and Ean Seeb of Colorado's Denver Relief dispensary started as a delivery service between growers and patients with just $4,000 and a half pound of cannabis. But setting up their 13,000-square-foot grow facility cost $450,000, plus another $125,000 to build out the retail store and $5,000 a month in electrical bills, says Khalatbari. Other dispensaries we contacted say start-up costs range from $150,000 to $1 million or more, depending on the size and location of the operation. Thinking of applying for a bank loan? Fahgeddaboutit. Most dispensaries rely on friends, family, and self funding to get off the ground.
A serious disposition
We know – the temptation to make Cheech and Chong (or Harold and Kumar) jokes is overwhelming. But given the difficulties getting medical marijuana laws passed and the ongoing conflicts between federal and state regulation, sellers and cultivators need to play it very straight. The preferred term is either cannabis or medical marijuana, not blunt, boo, chronic, dope, grass, herb, kif, kush, Mary Jane, pot, reefer, skunkweed, Texas tea, wacky-tobacky, or any of the plant's 3,000 other synonyms.
If you live in a state that requires dispensaries to grow their own supply, you'll need a warehouse and a lot of gear. Your shopping list will include grow lights, ballasts, exhaust fans, irrigation systems, dehumidifiers, air conditioners, tables, trays, pots, plant nutrients, pesticides, soil, and of course seeds or seedlings. You may need to upgrade the power coming into the building, and if you can afford it, a backup generator if the lights go out. But getting the equipment is the easy part – any decent-sized garden supply store will have what you need. The hard part? The expertise to do it right, especially in large volumes, says Mitch Woolhiser, co-owner of Northern Lights Natural Rx.
Any small retail shop can be converted into a cannabis store, though you may be asked to pay triple the normal rent, says one dispensary owner who asked to remain nameless. You'll need scales, cash registers, display cases for your wares, and employees (known as 'budtenders') to guide customers through the process. But the most important ware is the software you use to run the business. Denver Relief uses MJ Freeway, a Web-based inventory and point-of-sale package designed specifically for the legal cannabis industry. Using bar codes, it can track every plant from seed to sale along the entire chain of custody – keeping stores in compliance with regulations designed to ensure no product goes missing, notes MJ Freeway co-founder Jessica Billingsley.
A righteous domain
Every business needs a Web site. And while you can't legally sell marijuana over the net, you can use your site to advertise your wares and sell peripheral goods like water pipes and T-shirts. That means you'll need a domain that expresses the essence of your enterprise. (Sorry, SmokeWeedEveryDay.com is taken – though, strangely, not by Snoop.) If you don't want to roll your own URL, Canna Domains would be happy to provide you a suitably aromatic domain name for prices ranging from $250 to $10,000.
Care for some Bio Jesus? How about some Blueberry Yum Yum? Or perhaps you'd like to sample Amnesia Haze, winner of the 2012 High Times Cannabis Cup. There are more exotically named strains of marijuana than there are Kardashians, so you'll need to get up to speed on your herbs and spices. But it's not just buds, bud. Legal marijuana also comes in tinctures, inhalers, ointments, body lotions, teas, cookies, candy, soda, gum and more. If you can dissolve cannabinols in it, someone probably sells it. And that someone could be you.
Banks typically won't process credit transactions for dispensaries, so most are a cash-only business. That means your store may need the same level of security as your average casino. Denver Relief's 1,000-square-foot storefront features 16 IP-based cameras connected to a DVR, bullet-resistant windows, steel doors, alarms, and a Kevlar-lined wall between the lobby and the back office. By law, dispensaries in Colorado are also required to have a sturdy 1000-pound safe like the $4,000 American Security model pictured here (but skip the guns, or you'll violate federal laws). The good news: Insurance is relatively easy to come by, so you can lose your stash and your cash and still stay in business.
Bet you thought we were kidding about the Febreze. Aside from making the retail environment a little less pungent, air freshener comes in handy in other ways. Many dispensaries store the day's cash proceeds in the same safe where they lock up the product at night. The problem? Many banks won't accept deposits of ganja-scented greenbacks, says MJ Freeway co-founder Amy Poinsett. To actually spend their money, dispensary owners often end up having to wire themselves cash.
A creative accountant
Here's where the marijuana business turns into Reefer Madness. Thanks to Section 280e of the IRS code, any costs associated with the sale of a Schedule I narcotic cannot be deducted on your federal tax forms, says Betty Aldworth, deputy director of the National Cannabis Industry Association. States usually follow the feds in the expenses they allow. However, dispensaries can deduct the cost of goods sold. In other words, the marijuana itself is tax deductible; the scale you weigh it on inside the store is not. That means dispensaries often end up paying an effective tax rate more than twice that of more mainstream retail operations, says Aldworth.
The patience of Buddha
If you're hoping to strike it rich in the legal marijuana business, you'll need a lot of capital or a lot of patience. “The situation is untenable,” says Aldworth. “The tax code and banking issues need to be repaired, and they can be.” With thousands of jobs and millions of dollars of potential tax revenue at stake, legislators have a strong incentive to fix them, she adds. Meanwhile, small dispensaries like Northern Lights Natural Rx are hoping to ride it out.
“I barely broke even the first two years, and my salary is still half what it was when I was doing tech support,” says Woolhiser. “But I think if you can hang in this business, it will pay off in the long run.”