Ask any entrepreneur: Starting a company isn’t easy. Currently, 30% of all new businesses fail within the first two years — and the cannabis industry is no exception. In fact, for marijuana businesses, a 40% failure rate isn’t uncommon.
But don’t let those numbers get you down. Hard work can produce amazing results, especially in an expanding market like cannabis, which is gaining more fans, legal approval, and business opportunities every day. In order to ensure success, you need to study why other dispensaries didn’t fare well, and how your marijuana dispensary can avoid making the same mistakes.
Why Dispensaries Fail and How to Avoid Making Similar Mistakes
Be up to date with all state and federal regulations.
Dozens of states have approved medical marijuana. However, federal law is still a gray area. Although Congress recently ended a ban on medical marijuana, that doesn’t necessarily mean it’s legal. And no matter what your state says, federal law still trumps state law. Dispensaries continue to be shut down because of small legal details. Remember to keep thorough documentation of every company and individual even remotely connected to your business. It’s still not unusual for federal agents to randomly raid a marijuana operation, even if it’s completely legal in that state.
It’s also wise to rely on an experienced medical marijuana consultant to provide insight into best-practice procedures for success. For instance, a consultant can advise you on licensing, a potentially costly endeavor. Depending on where you live, medical marijuana licensing fees can range from $1,000 to $75,000. Tack that onto a 3% to 9% sales tax rate and you’ve got quite the legal obligation. If you fail to make all the proper payments, you could lose your license and be prohibited from re-registering your business.
Keep track of all financial transactions.
Banks are sometimes wary of working with marijuana dispensaries because of inconsistent state and federal laws. In many places, processing transactions for cannabis companies can be considered money laundering or aiding the distribution of a controlled substance. Because it’s difficult for canna-businesses to get bank accounts or loans, a common medical marijuana business plan is to promote cash payments. However, even that strategy poses significant risks. Take for instance, Allgreens, a Denver dispensary that received a 10% penalty for paying monthly taxes in cash. The IRS ended up fining Allgreens more than $20,000 in penalties.
Federal taxes can be difficult. Outdated tax codes, such as what’s known as “280e,” prohibit medical marijuana businesses from filing tax deductions, meaning owning a cannabis company can get pretty expensive. Again, a marijuana consultant can advise you on effective cannabis business tax strategies.
Treat your business like a business.
Medical marijuana business owners need to be aware of the many variables that can affect finances. Climate, lighting, invasive bugs or bacteria, and soil chemistry are complicated topics that can have great consequences for cannabis plants. Dispensaries also need to keep up with marketing trends, as patients have become more dependent on digital marketing–deals featured in social media, smartphone app advertising, etc.
Finally, be willing to spend money to make money. According to the Marijuana Business Factbook, 83% of cannabis businesses are started with investors’ money and personal debt.
On average, businesses in the medical marijuana industry take between six months and two years to become profitable — and that’s with considerable investments. New business owners often lose confidence when dealing with those numbers. But remember, while a 40% failure rate may seem high, that’s in a market where nearly 100% of businesses are fairly new. If you pay attention to the small details, and stay in compliance with state and federal laws, you’ll have a good chance of being profitable well beyond two years.