By Anne Holland
By noon yesterday, a line of executives clad in suits and business attire stretched far down a sidewalk on Manhattan’s lower east side – waiting for the doors to open for MMJ Business Daily’s East Coast Cannabis Entrepreneurs & Investors Seminar. They came from 21 states in all, from Maine to Florida, from across the Midwest, and even the West Coast.
Clearly the East Coast MMJ opportunity is of significant interest nationally.
How big is it? MMJ Business Daily’s publisher Cassandra Farrington put the figure of potential dispensary MMJ sales for Northeast and Mid-Atlantic states at up to $57.5 million for 2013 if all retail outlets were to open as allowed under current states’ legislation, all of which strictly limit dispensaries. (That figure doesn’t include other types of revenues, such as ancillaries, nor does it reflect the full potential of a marketplace with less-intensive regulations.)
Although that’s a tiny slice of America’s estimated total $1.3 billion-1.5 billion 2013 legal cannabis sales (data from the Marijuana Business Factbook), businesses that establish a presence now could have a huge future advantage, according to Brendan Kennedy, CEO Privateer Holdings, Inc.
“When the feds signal that medical marijuana will be legal, that’s when there will be Fortune 500 companies moving into mergers and acquisition, looking for a strategic beachhead,” Kennedy said at the event.
Chris Walsh, editor MMJ Business Daily, noted that the very strictness of East Coast regulations can be a significant business advantage to local entrepreneurs. Tight regulations tend to add up to unusually strong business stability and preclude the profit-killing competition that plagues some Western states. Steve Fox, chief lobbyist for the National Cannabis Industry Association (NCIA), added that in states with strict regulations and oversight, the feds have thus far not conducted crackdowns on local MMJ businesses except for those deemed too close to schools.
Thus, the East Coast opportunity is much brighter than initial financials might indicate, which is why so many investors are interested in it.
However, a perhaps surprisingly high number of potential investors in the East still have almost no knowledge of the risks involved in MMJ. Troy Dayton, CEO of The ArcView Group, said that investors typically first eye businesses that deal directly with cannabis. Once they realize how risky such investments are, investors start looking at ancillary firms that provide services to the industry but don’t actually handle the plant.
“Many investors are initially really interested and excited (to invest in dispensaries and cultivation operations), until they look under the hood and talk to their lawyer,” Dayton said. “When they realize they really could go to jail, it kind of takes all the air out of the room.” Ancillary businesses, on the other hand, don’t faces the same legal challenges, making them safer from an investment standpoint, he said.
“If you’re here just to make money, there really are easier ways” than pursuing investment opportunities directly related dealing with the plant, Dayton said.
Kennedy said the investors who do decide to get involved, regardless of risk, are often as passionate about “social returns” – i.e. business ideas that advance public acceptance of cannabis as a legitimate and worthwhile industry – as they are about financial returns. For some, this social aspect is the primary motivation. In fact, products and services need to have this element in order for the investment fund Kennedy represents to be interested in them.
Ean Seeb, co-founder of Denver Relief Consulting, noted that many East Coast would-be investors and entrepreneurs are also unaware of the banking challenges inherent in the MMJ industry. His own company’s Colorado-based dispensary was informed that its bank account is being closed just last week. His advice: open multiple bank accounts, preferably under innocuous-sounding business names, to ensure you have a back-up plan. Richard Evans, a Massachusetts-based MMJ business lawyer, also advised attendees to stick to state-chartered banks or credit unions instead of federally chartered institutions.
Perhaps surprisingly, roughly 20% of the audience indicated they were unaware of 280E, the IRS regulation that is perhaps the foremost financial concern for dispensaries across America, because it disallows many traditional business tax deductions. 280E alone can ravage dispensary profits, and has forced some Western dispensaries into bankruptcy.
Seeb and Fox explain to attendees ways that dispensaries can mitigate 280e’s effects. Under the provision, some costs of goods sold may be allowable deductions, such as expenses related to cultivation. You can also set up separate companies for discrete non-cannabis parts of your operation such as packaging and commercial real estate, which can take standard tax deductions. Then you become your own vendor.
No matter the risks, all speakers agreed that the floodgates have begun to open with thousands more potential investors and entrepreneurs seriously considering joining the field. To some degree this is causing a culture shock within the industry, which has been a fairly close-knit group of entrepreneurs, who were as much activists as they were businesspeople, for many, many years.
However, Doug Banfelder of Premier Southwest Insurance Group ` who’s helped MMJ businesses in both Western and Eastern states ` says the old guard and newcomers have more in common than they may initially think. “You’re all risk-takers in this industry. It’s a couple of notches higher than what I’ve seen in other industries. People in the medical marijuana business are very brave and motivated.” That’s true, no matter which area of the country they come from.
Note: MMJ Business Daily produces all-new East Coast Seminars for the industry roughly every quarter. If you’d like to be on the invitation list for the next event, you can sign up here.