Expanding your cannabis business into a multistate cannabis business can help you increase your brand reach and improve your revenue.
In this episode, Jim discusses how to become an MSO covering topics such as:
- Considerations before expanding to another state
- How to Find a Trustworthy Partner
- Deal Types for MSO Expansion
If you need help with expanding your cannabis to another state, please reach out to GreenGrowth CPAs or give us a call at 800-674-9050.
Hey there. Thank you again for joining us this afternoon for our webinar about becoming a multi-state cannabis business operator. Again, my name is Jim Breese from GreenGrowth CPAs and today we’re going to talk about one of the most important growth aspects that we’re going to see over the next 1224 36 months per some of the largest cannabis companies as well as small cannabis business operators. Multi-state expansion is not limited just to the big boys and big girls. It can be for your business as a smaller operator, parlaying your brand equity somewhere else in leveraging that to grow in another state, another market growing profit, growing awareness. So before we get started, I just want to explain who GreenGrowth CPAs is. So we are a cannabis only business in tax firms. So we started off with tax returns. We’ve prepared over 1200 annual tax returns for cannabis business operators spread across all the different verticals from dispensary distribution, cultivation, manufacturing, delivery in testing, we have over 400 active cannabis business clients and we’re spread throughout 12 States.
So you know, California, Colorado, Oregon, Michigan, Oklahoma, Arizona, Montana, Florida. All these different States where we can help take your cannabis business from one to the other state as well as we’ve done 17 audit related and valuation projects last year and through this year helping these M and a deals close with confidence on both sides of the deal and we have a thorough and deep understanding of tax compliance and assurance related requirements for the cannabis industry. Again, we’re bigger than just tax. We can do your tax return well. We can also connect you with people within the green growth network to help you expand your business, potentially sell your business or any other thing that has to do with cash and cannabis. We can help out with that transaction or with that business arrangement. And lastly, before we hop into today’s agenda, I need to let you know that the information contained in this webinar presentation is meant for guidance purposes only and not as professional, legal or tax advice.
Further, it does not give any personalized legal tax investment or any business advice in general. So what then out of the way, again, let’s hop into today’s agenda and understand what we’re going to be covering. So first I’m going to discuss a little bit about the context of cannabis and multi-state operations, breaking down some high level concepts and giving you kind of a healthy dose of reality. And then we’ll talk about the benefits of multi-state expansion. Yes, they’re probably very obvious, but let’s break those down as well. And then we’ll discuss some considerations before taking your cannabis business from your home state to another state for that multi-state expansion. Then we’ll discuss different deal types that you can use as a multi-state operator to expand your business. We’ll talk about how to select a particular market and then go into some miscellaneous other multi-state operator considerations.
So at a high level, I want to just talk about five different aspects to give you some context to multi-state operations as a cannabis business. So don’t get it twisted. Multi-state operations is really, really hard. The things you see in the news, Oh, this company is going here, or there’s an M&A deal here. You only seen the tip of the iceberg. You’re only seeing the result. You don’t see all the effort that goes into it, right? It takes a lot of effort to go from one state to state number two and it’s still going to be hard to go from state number two to your third state. It always is very, very difficult because it all has this little nuances, right? Operating a cannabis company across multiple States is challenging because each state has its own specific rules and regulations around ownership or on the cultivation of the product, the packaging of the product, how it’s tested, how you can market it and how you can sell it.
There’s a lot of different nuances you have to pay attention to. No two States are alike because no two regulatory bodies in any state are alike. Then secondly, cannabis is still federally illegal, so there’s no interstate commerce. That creates a lot of friction, right? Oregon does have an export law, but that does not supersede federal law, so you can’t just take product from Oregon and move it across state lines. That’s called drug trafficking and even hemp is being seized. You’ll see in, you’ll read articles about a 52 footer that’s full of hemp being seized by local law enforcement because the education is not there about, okay, well this is hemp and this is cannabis. And another reason for that is that there’s not field lab tools that are precise enough that a local law enforcement person could use to test out this product. They’re probably thinking, worst case scenario, let’s take this in.
I don’t want to get in trouble for allowing interstate cannabis commerce. And then third, I want you to understand that you need to run your business and play your game. Don’t focus on the auroras or the canopies of the world. Compare yourself to yourself and make your own plan and then execute against it. It’s very easy to get swept up in the excitement of all these news articles and Oh, this big valuation or this company is going public. You know, that was all the rave 10 12 months ago. Then you seen the past three, four, five, six months. There’s huge, massive draw downs for whatever reason, for any specific company. But you know, stocks were at say $1 billion. Now they’re worth only $300 million. When I say only, yes, that’s a big number. But quantify that as a 70% draw down. K every seed pops at its own time.
Don’t compare yourself to other companies. Just play your own game. So the fourth aspect for context here is that you need to understand that demand for cannabis has not risen as fast as investment money in the cannabis industry or as fast as the cannabis supply is growing, right? That’s why you’re seeing large conglomerate sell off large amounts of inventory at wholesale prices and they’re losing money. You know, you have, they’re producing a ton of cannabis, but no one’s buying all that cannabis. The demand is not there, right? It’s very easy when you’re knee deep into an industry, you think you’re on a speeding bullet train, right? But really step back, watch the consumer cause they’re the ones spending the bucks, right? And see how their habits are changing. People are not dropping their opioids or their aspirin immediately and moving right into cannabis cause you have some fancy brand colors.
And a tagline and now that it’s legal, there’s a lot of programming that needs to be undone, unlearned in an education or re-education of the consumer that brings him to wanting to choose over other options, right? Change takes a long time. So focus on building infrastructure that can help you win in the long term. Don’t focus only on the next 18 months. If you’re in the cannabis industry to make a quick buck, you will lose. But if you’re here for the longterm five, seven, 1215 years and you focus on creating a longterm strategy, you will be more likely to win. And lastly, the fifth aspect you need to understand for context, businesses go multi-state. Companies don’t go multi-state. So the difference between a business and a company, sometimes people don’t ever think about breaking these two down, right? It’s just words. But it’s really an understanding of what you’re actually building here.
A company, it just illegal entity type, maybe some branding in some products, but a business has standard operating procedures. The right people in the right places, good contracts and products that people love. Essentially they can operate without the head person being there. So the simple test is could the owner of the brand or business leave and have it still continue on and generate its revenue and keep things in order? If not, then it’s just a company and you’re just self employed. Don’t kid yourself. And if yes, then you probably or likely have a replicable business model that can now be expanded to other markets. So focused on building a business with systems that you can replicate in other markets. Don’t kid yourself that now that you’ve got an entity set up, you have some sales, you have an organization that you really have a business.
What you really need to focus on is creating a replicable business model that you can take to other States. Now let’s talk about the benefits of multi-state expansion. There’s three main benefits. I’m sure there’s more, but I just want to cover three cause I really want to get into the meat of the presentation, which is the deal types and other considerations for finding a partner. So the first one I want to talk about is expanding your brand reach. You want to leverage the love that you’ve built in one market with a specific target audience and see if that translates over to another market. Now, if it does, then you’ve got something going and if it doesn’t, then need to take the next few quarters to troubleshoot and switch up that strategy to make it work. Not expanding your brand reach in these early years of the industry can really help you create a foothold, make you the name that other people are looking for, becoming that household name or that brand recognition that people are like, Oh, when they walk into a dispensary, they recognize your logo.
They ask for you by name. Expanding that reach can really, really make a big difference and change the trajectory of your business even if it’s just something small where you’re advertising and not even bringing products there, right? You create some propaganda before you even move into the market. Then you have customers and clients going to dispensary’s or distributors asking, Hey, can we get your product and now they’re pulling you into the market instead of you pushing into the market. Now the second benefit is rapidly growing your revenue and diversifying your revenue streams. Obviously we’d like to all make more money, but diversifying your streams of income is critical to your success, right? With many different deal types, there’s lots and lots of ways to make money and grow revenue quickly in. This can help you in many ways because you have more proof of concept to help raise more capital for growing your business in other States.
It helps to build confidence on your team and it increases the value of your company in such the situation you may want to go for a merger and acquisition. When you have diversified revenue streams, it also helps to go to them. Third point I want to talk about here is hedging against state regulations. So we’re all very well aware of this vape crisis, quote unquote that’s going on. There’s a lot of knee jerk reactions and States that are, you know, banning particular products, right? So, for example, in Oregon as a ban on flavored vapes, right, where the flavor is not derived strictly from cannabis, it’s an additive ingredient, which would be the flavor in that is becoming outlawed like a six month ban or something along those lines. And yes, these can be appealed but they can kill or really limit your business growth overnight if you’re heavily entrenched in that state or in that business line only.
So you never know how regulations are going to change or how things are going to shake out or impact your business. So you really want to diversify your streams of revenue, where you’re getting your revenue from because regulations could change on a dime overnight, within months, and then you could be exposing your business to unnecessary risk. Now before you get all hyped up and want to get into a multi-state operation, you really have to think about and be thoughtful about your business before duplicating it elsewhere. So I’m going to talk about four major considerations before you expand your business. So first is standard operating procedures. You have to really be thoughtful and think hard about are your SLPs written. And executed properly in your first location, in your first business, in your first home state. Things like sales, SLPs, how you market the product, how you manufacture the product, how your transportation businesses working, how your cash handling procedures work and all the things along those lines because this is your blueprint that take from one state to the next and if you have an incomplete blueprint in your home state, that problem will only exacerbate itself once you go to another state where you have less control, less oversight, and you’re going to see a lot of growing pains that are unnecessary because you can solve these problems before you grow by making sure things are done properly in your home state.
Secondly, quality assurance of your product or your service, right? We are talking about all different parts of the cannabis supply chain, from the cultivators to the manufacturers, distributors, retailers, testing labs, everybody you’ve top to bottom in the industry, right? You need to understand are you producing a great product that people desire or do you run your business or your testing lab or your distribution service in a way that other people love the way that it’s run. They see that you’re customer centric or that you’re fair. Get your product and service running properly in your home market before extending to another market where you have less control. That process, especially if this is not going to be an MNA deal where you buy a company outright or where you go out and get your own license and you can send all of your own people. When you start to partner with an operator in another state, you have to make sure that your product is good and your service is Bulletproof so that they can take and replicate that.
If they’re going to take a bunk product or a product that’s subpar and replicated, say you’re a vape company and you’re trying to have them replicate a product that is just poor, is bad quality, and that out-of-state operator that you’re partnering with say they’re really good at marketing. They’re just going to only expose your product faster, that it sucks, right? You don’t want to have that happen because that will not only hurt your expansion sales, it could potentially also hurt your home state sales and now you’re in a big, big issue that you could have prevented. And then third, you need to define what is your goal for expanding to this new state. Because your goal will dictate your plan of action in which deal type is best for your situation. So for example, as a brand, if you just want to get a presence out there for your brand, then maybe you want to go to white labeling or maybe you just want to start with just marketing and creating that propaganda train before you actually move in.
So you can create more leverage for that white label deal. Or maybe it’s a distributor, you want some upside from that market, which means you don’t need to actually operate there. You just want to become an equity holder in a license, which means you may, you know, do a joint venture deal where you own part of the license or you invest. But if you want to operate then maybe the process is more intricate where you actually have to go get your license out there or you do an M and a deal. It’s all about what do you want to achieve. Don’t just expand for the sake of expansion. Make sure you have a plan that you can execute against and see if your actions are actually correlating to what your goal is and if the efforts that you’re putting in are bringing you closer to that bigger and better vision for your business.
And lastly, I think the most important part is have you developed an implementation team on the home base as well as in that new state to help you expand your business? So who’s going to go from your headquarters to the new market to make sure that things run smoothly and who’s going to be at headquarters? Making sure that those street team people are, those operations people in the other state are executing your vision properly. People like sales leads, manufacturing, quality assurance, operations managers, lead scientists. If you’re going to be a lab and any other key people necessary to bring your new market opened successfully, do not wish and hope that things go well. Just plan and execute and then realign and continue to reexecute. It’s a constant process. There’s no just straight line to expansion. It’s up, down, left, right front, back, side, side. It’s all different ways.
It’s constantly changing. It’s like being at the top of the ocean where all the ways in the commotion are and people think it’s like the depths of the ocean where it’s nice and quiet and very easy to navigate. We’re at the top of that ocean where all the activity is and there’s big waves and there’s things to watch out for and icebergs and other ships. That is the cannabis industry right now. It’s very volatile, so, so have a great implementation team, strong SLPs, a very good product or service and a plan and reason and a goal for expanding into this new state and then move from that space to expand your business. So let’s cover some deal types that you can do or create for multi-state expansion. We’re going to go over seven different deal types here. This is not the full list. This is just things to kind of get you to think about ways you can expand into other States to create upside for your business.
So first and foremost, of course you can apply for a license and go through the entire process yourself, but this is slow and it’s not guaranteed that you’re going to actually get that license to become operational and it can be very, very costly. But if you can be patient and you have the money, then this is good for all verticals is cultivators, labs, distributors, manufacturers, dispensary’s especially in the highly competitive markets. When you get one of those licenses and you know that it’s not going to be a growth in the license cap, this is a good thing to do. Go out there and get your license in the early days so that you can leverage that later potentially to sell it or to exploit it for operations of the second deal type is a joint venture. We’ve done videos on this before, but there’s typically two ways to do this.
There’s always more ways, but I’m just gonna talk about two ways. So first you can have shared ownership and assets and licenses and this is great for all verticals, right? Buying as a part owner in someone’s license and then you know, owning part of the assets or maybe only owning all the assets and none of the licenses. This way you can actually work together with somebody, grow the business and see where it goes and potentially leverage that to do an outright buy. Now another joint venture is white labeling. This is great for brands and this is the fastest way to get to market as a brand. So you don’t have to, you know, go buy a license and whip up all the operations yourself, leverage someone else’s manufacturing knowhow in their licenses and get your foothold in. One of the great things about a joint venture is that this can help you get proof of concept that this market is good and then you can buy deeper into that operation or buy it outright and say, all right, you know what?
This is great. We like you as a partner, but we really like to operate this on our own. And then you can move into an M and a deal where you buy the entire thing outright, which we’ll get into in a moment here. So the next deal type I want to talk about is a 10 X packaging deal or 15 X packaging deal or five X packaging deal. It’s understood that you cannot trademark cannabis business marks because cannabis is a schedule one controlled substance. It’s federally illegal. So you can’t get the trademarks around that. And some States don’t allow you to earn a royalty off cannabis businesses sales. So what you can do is buy packaging or create packaging for say $1 domestically in your home state and then sell it to an auto state partner for $10 a 10 X markup, right? And that’s how you get your revenue and your royalty in that way.
And this is great for brands, especially because you let someone do all of that manufacturing and everything else and then you sell that packaging at 10 times the markup. You know that you’re getting paid, they buy that packaging in the beginning, you get paid on it and then their performance to sell it is on them in the onus is on them to earn that money back is a very attractive deal type and it’s one if you can get it, I would surely say take it if the deal terms are good in favorable. Now the fourth deal type is mergers and acquisitions, M and a, right, and this is for full ownership and control is something you can move into again from that joint venture and then move into a full MNA. This is where you buy the licenses and the assets outright and even the intellectual property if they have any, and this is a solid idea for all different types of verticals because you’re buying a proven business and a proven model.
This is the most stable of the deal types and helps you maximize your margins because you’re in full control of the deal and of the operations and it gives you experience boots on the ground, especially if you acquire human capital, right? The people that are within the business, the chief manufacturer or the scientists. You get all these people that have a local understanding and a local knowhow that are boots on the ground to help you execute on your vision and help you grow your business. Because every market is hyperlocalized. For example, in Oklahoma, people in Oklahoma liked to work with people in Oklahoma. It’s just the thing out there and there’s many other markets that have that same kind of thought process and in the regulations, they’re small little nuances as we discussed at the beginning of this presentation. You know, these regulations, they have to be this way for this city in this way for another city or this state allows this and doesn’t allow that.
You need some local knowledge and understanding to help you successfully grow the business. And this partner, when you buy them outright will hopefully understand all the local context and can either become an Aqua hire or they help you transition the ownership maybe over 12 to 18 months into your hands. They stay on, they help you learn about the local market and then you move forward and you keep continuing to grow. Maybe you keep them on for longer, but there’s just something about buying a business local and keeping that human capital in there so they can give you that local context for sustained growth. Now the next deal type is a licensed rental or ownership. Now you sometimes see these as revenue share agreements on licenses because in many States you can not sub license your cannabis business license or you may see an ownership of the license being split up in certain ways.
Right? And this is great for distributors, manufacturers, cultivators, delivery companies because you can leverage someone else’s license under particular circumstances to help you get in there quickly, test things out and see if the market’s good and then spin off and do your own thing. Or again, doing to the M and a or seeing how that works out for you in, Hey, if the market’s bad, you don’t have to own the license fully. You can leave when the revenue share agreement is up. That’s what makes us an attractive deal type. And you may not even want to put a brand out there, but you may want to have a vested interest in that cannabis business market. So you want to become part owner of a license and not operate. You could be operating a great brand in California, but you want to own a part of a license in Illinois, you just want the financial upside.
You don’t have to operate the brand there. So don’t always think that you need to take your operation out there. You may just want to have financial exposure to a license in another state, another city, whatever that may be. Now the next deal type is a profit interest approach as an investors. So you may or may not have equity in the company, but you have interest in the profits of that company and you spell this out in your operating agreement. And this can work for nearly all verticals, but this also depends on what the regulations are about who can own a license and all the different things that go along with them. And this can help you get around the local ownership rules. For States, like say Oklahoma, you have to be a resident for two years to be on the license, but in the operating agreement you can dictate in right that Hey, 75% of profits go to ABC investor, which could be you.
The multistate or foreign state operator is many different ways to do that. So again, don’t always think about having your name on everything. You could just be a party of financial interest. And then lastly is a real estate investment. This also helps you get around the ownership rules of some States. And what you can do is you can buy real estate and set up a management agreement with a local operator and then that local operator is on the cannabis business license, right? They own that license outright and then you rent the building back to them. And this rent gives you control over that local operator because you can close a business on them or terminate their lease if things go sideways with them. Right? There are these checks and balances and controls and not saying going out there and be a jerk about it, but understand you kind of have an upper hand as we learned from McDonald’s.
If you don’t own the real estate, you don’t own the business and you can also collect management fees. Something where you can say, all right, I want a percentage of the top line or of the bottom line. We would suggest always trying to get that top line to protect yourself against costs and this makes sure that the operator is running a healthy business and not letting costs get out of hand or just sitting on their laurels and saying, Oh, well I don’t really care. I’m making a hundred grand. I’m happy if you start taking things off their top line. Then they’re incentivized to find ways to mitigate costs, find ways to grow that top line so they have more flow through to that bottom line. So again, those are a few different deal types. There are surely many other options and even more creative options, but these are seven different deal types that you can consider when trying to expand your business to other States.
Now that you understand different deal types and considerations before expanding, let’s think about ways to choose which market to actually go into. If you see there’s many States that are legal for medical or for recreational cannabis, so how do you choose which state to go into? For us, the number one indicator when we take someone to become a multi-state operators, we have in the past and as we currently do now, the number one we look at, especially if the market is a medical market only is the number of new patients signups and how that’s growing. What is the growth curve to that? If it’s very steady, you know it’s only growing at one or 2%, not really the best, but if you, again, look at something like an Oklahoma, I know I bring them up because this is a really pop in market. Their growth is parabolic.
I think it’s a state of 4 million people with 200,000 cards for medical marijuana. That’s really important. You’re like, okay, there’s something here. We should move into that market. Always move fast if possible, get in there when there’s medical. Don’t wait for recreational because you want to gain as much local context as possible so that when the regulators open up the floodgates for recreational, you can be there to capitalize in a thoughtful and smart way on the opportunity that’s in front of you. And I bring up the medical market because a lot of people in these newer States are going for the cards. They’re going to sign up. You know, a year in California, there’s not really all that much activity with medical anymore. It’s really, really recreational. But when you see these new States come online, one of the leading indicators of demand is how many people are signing up for the medical marijuana cards in what is the growth in that number of patients.
So that’s the first indicator we look at. And then the second one we look at is a competitive landscape in the vertical that you’re trying to go into, so if you see that there are 20 dispensary’s for every hundred thousand people versus another market where there’s only four dispensary’s per 100,000 people, so then you start to think, well, maybe we should go into those less competitive markets or try to understand why it’s less competitive. Are there really strict regulations out there? Are there just huge operators out there that are just crushing everyone that moves into that vertical into that particular state? Right? If there is a conglomerate in there that just every time a new business comes in, they undercut them on price and just crushed him and forced him to go out of business. Right? You have to be a history major when you start looking into certain markets.
Granted, there’s not a lot of history, but you have to look into see what’s going on there. Then after you understand the competitive landscape, you have to look at the human capital. I brought this up a little bit early in the presentation, but human capital is really around the smarts in the amount of people that are out there. So in Los Angeles, the epicenter of cannabis, there’s a lot of knowledge about the cultivation of cannabis, about how to operate a dispensary in all these different nuances to the cannabis industry. But say you go out to the middle of Massachusetts, there may not be a lot of people out there that understand how to cultivate great cannabis, which means you may have to take some people from your local state and move them out there. Right? That adds a relocation because the thoughts of the people that are actually moving out there, do I really want to be in a different state?
I love where I’m at is a lot of different things to thinking about when you move into another state, especially the people that are going to operate your business. So looking into what is the intelligence out there? What are the local meetups? Go out there and spend four, six, eight weeks and get a feel of that local industry. Figure out who is out there, what the opportunities are, and then make your thoughtful decision to jump out there and make a deal, or Hey, let’s back off and let’s explore other States and see where we should really grow. And then lastly, another consideration to choose a market to go into is how are the regulations and the regulators acting towards the industry? Are they making it incredibly difficult to be successful? Right? Are these these tightly controlled markets with limited license availability and these egregious process to go through licensing?
Because these high barriers to entry can do a few things. It can create limited competition, but it can also drive up the cost of getting a license and that headache of getting a license. So understanding that local context about how are the regulators acting. And then I brought this up a little bit earlier. As you know, I want you to move fast, but where is the state at with licensing for cannabis? Are they in the medical space right now and haven’t even opened up recreational? Because commonly what you’ll see is if there’s been a long standing medical market, typically those operators get first crack at the recreational licenses. So if you know that in 18 months a state is going to come online for recreational, maybe you go out there and you buy a medical dispensary, so you have first access to those licenses. When recreational comes online or you have vested interests, you have some financial interest in one of these dispensaries and let them go through the entire process and maybe you’re just a minority stake holder of 10% 1215 21% it’s all up to you.
But really understanding the regulations, the human capital, the competitive landscape in how the demand is growing. On the consumer side, I brought this up earlier, it’s really easy to grow a lot of cannabis, but if the consumers are not using up all that supply, it’s going to plumb it prices. It’s going to put kind of a bruise on that industry in that local market and it could push success out 1836 48 months because of just market conditions and all the timing stuff just doesn’t align properly. Now next, let’s talk about choosing a multi-state operations partner. Your partner is the most important aspect of the entire deal. It will make or break the entire process. So always try to get a warm intro to someone who can be a partner with you in a different state. And if it’s not a warm intro, have them vetted by somebody that you trust, someone who has experienced in the industry, someone who could help you understand and break down the operations of that other state and let you know, yes, this is a good partner or no, this is not.
Look for somebody else. So some things you need to look into about a partner is first look at the capacity of the partner. Do they have the equipment you need to actually make what you want actually happen? What if they hit a bottleneck? How does that get solved? Do they have the money to fix that issue and are they actually capable of fixing it? You know, is there a license limit? For example, in LA for certain licenses there’s a limit on canopy space and say that person that you’re operating with and you want to move in is already got 7,000 feet of canopy space and that limit is 10,000 you’re going to be only limited to 3000 feet of canopy space as if they don’t expand. So you have to look into what are the capacities of the partner and is it worth it for you to get into an agreement with these people.
Then look at their reputation and their experience, see what kind of brands they carry or services that they work with. So if there’s a dispensary, do they carry a lot of brands? If the distributor do they carry a lot of brands and one of the sales of those brands, if it’s a cultivator, who are they selling their products to? You want to check the reviews online and see what the end consumer is saying about these people. Check the white label air and see what their return rate is of their product and we’ll get into that a little bit more in the next point. But I want to tell you like really dig into these partners in ask these hard questions to them so that they can actually answer. You don’t just want to assume that things are going to be good. You have to ask and do your due diligence and also look into the actual partners in the business and the people behind the business.
Are these people you actually want to do business with? Do you vibe with these people? Are they trustworthy? Are they fair? Are they open minded? Are they generous businesses are made by people, right? You have to be able to work with these people in like the people that you work with. So really look into who the actual people you’re going to be shaking hands with and signing on those dotted lines with. Then the quality of the products that they produce or the quality of the service. So just going into quality of the products, what’s their test results for their products? Are they failing? And why are they failing? Now again, the return rates, say they’re selling 10,000 vapes per week and they’re getting a thousand of those back. That’s a 10% return rate. That’s terrible. Or say they’re getting 500 back, that’s terrible. That can wreck their reputation.
You want someone that’s operating at 1% return rate, 2% maybe, but around that 1% rate, there’s going to be some failure and product, but you really want to look into what their return rates are. Then next look into how well this partner is funded. If they don’t have a lot of money, they probably can’t solve many of the problems that will come with multi-state growth and they may make decisions to increase money in the short term and not build a longterm business relationship with you. So understand really who has more to lose in this situation, you or that multi-state operator partner in the other state. You have to be thoughtful about that and it’s okay. You can have discretion and I really advise you to have discretion when choosing your partner, especially by how well they’re capitalized. Then look into their compliance systems. Do they have finance and legal systems set up to make sure that they’re not exposing themselves to any unnecessary risk?
Are they up to date with their tax returns? Are there any outstanding legal claims or even unassertive ones that they think will come up later? How’s their HR department running? Do they have good SLPs around cash handling? All the things that come around with compliance-based systems, right? Cannabis is not just like opening a Cornerstore and selling, you know, out of a bodega. This is a very regulated industry and if they’re not taking that seriously, then I would say pass on them as a partner. One of the other aspects to look at is the size of their distribution and their reach, and this is really important for cultivators, for brands, you know, you really need to understand that when going to a new market, distribution is the most important thing. You can have a great product, but if it’s just sitting on the shelves in a warehouse and not being sold, that’s not good for you because that means no money.
And to build on this, never have your multi-state operator take over your sales of your product as a brand because they will always over promise and under deliver. So make sure you go out there, you set a street team out there and you market the brand or the product yourself or it will flop because here’s why. Your multi-state partner will probably have a couple of brands, right? Is a dispensary or distributor. They’re going to have many brands and say they’re all top shelf, so the sales guys and the sales gales at the distribution or the dispensary are going to have a clear conflict of interest. They’re going to push which one makes the most money for them or which one they identify most with. So you’re in a crap shoot. Maybe it’s a bunch of guys pushing this product and you’re a female oriented company and they’re not pushing your brand, right?
Your target market for your product is the female market does. They don’t understand it, they don’t vibe with it, they don’t push it. That means you don’t make money. So really get your street team out there to do the sales for you, people on your team, and the only time it makes sense to have a multi-state partner run sales is if you are the sole exclusive person within a price range that maybe you are the only top shelf indoor, hydroponically grown cannabis, you know the best of the best. Then you can entertain that idea. I would say make sure you have a street team out there doing that. Also in this, you need to understand what the local regulations are around a sales team and selling your product. Sometimes you can’t just take samples from a distributor and move them around as a sales team, you actually may need to actually go out and buy them from a retail location and then use that to show another dispensary.
You have to look into the regulations around them and if you find a partner with great distribution, be willing to sacrifice some revenue percentage to get that better distribution, right? If they’re in 200 or 300 dispensary’s be willing to take a few points off of your distribution percentage and move into a better deal that can help you get volume instead of unit economics. Now lastly, let’s go over some other multi-state operations considerations. These are just things that didn’t fit into any one slide perfectly, but I just want to bring them up to get your wheels turning so you think about this. So with contracts you want to start at very simple terms, something like a 12 month term, and then maybe give that partner in the first right of refusal to continue servicing you as your multi-state operator. In that same contract. Make sure you have a clear delineation of what you pay for and what the partner pays for.
Things like taxes, certain expenses, things along those lines. It also spell out who is responsible for what activities. Then you want to fix fees as much as possible. For example, during assembly, you’re going to have quantity variances, so you need to define what’s acceptable in who pays for that. In an ideal scenario, you’re going to have one product, one package, one insert, one product, one package, one insert, but if you get to a point where you’re doing production runs and the product packaging is being damaged and you’re going one product, two packages, one insert in, it’s that you know twice the amount of packaging, that’s a huge run-up cost, so who is going to be responsible for that? Another thing around fixing fees is try to fix the fee around the flour or the oil pricing or at least set up a reasonable methodology for calculation to help insulate yourself from those kinds of wild expenses.
In that same contract, you want to have easy in and out terms. You want to be able to easily dissolve the deal if things go sideways. Another thing you want to talk about is failed lab testing. What happens if their products that they’re creating for you start to fail lab tests? Who’s responsible for remedying that and making sure things get on the up and up. You want to also structure payments, settlement terms monthly is typical and try to get Cod with dispensaries and deliveries. Make sure that they’re getting paid when they go to the dispensary and drop off that product. Don’t be out there on consignment. And also you want to say, all right, well how are we settling? This is on units delivered or collected sales. For example, say a distributor distributes a hundred units of your product to dispensary, but the distribution partner only got paid on 30 of them.
How do you get paid as a brand or as a product? Do you get paid on the hundred or on the 30 and brands want to get paid on the amount delivered to the dispensary to avoid bad debts and collection issues between the distributor and that delivery service or that distributor and the dispensary. Also, I know this is a one on one tip, but you know you want to watch out for theft. Make sure that there’s clear division of duties, the person that’s accepting the cash and the person that’s counting the cash in the business and also make sure that in your contract that if two payments are missed or miscalculated, that you can dissolve that joint venture deal immediately. Like there’s no repercussions for you doing that because if people are miscalculating payments and mishandling money, you’re exposing yourself to unnecessary risk. Now, this is another thing in contracts, but I kind of laid it out as an important individual item here.
Plan out the taxes and make sure you know what you’re liable for and you’re only liable for a specific portion of that tax. I understand who was responsible for what at the onset of the agreement. Don’t say, Oh, we’ll deal with this later. Eat with this before it becomes a problem, right? Well, you pay domestic taxes or will you pay only in your home state, right? You have to understand how taxation works in that particular state. For example, you may be paying 2.5% tax in that foreign state and then you come back to your home state. Can you claim a credit for what you’ve already paid in the other state, reducing your home state tax burden. It’s all about understanding these little nuances because taxes as you know, can kill your margins and really crushed this deal that you make with a multi-state operations partner. Another consideration is if it’s reasonable, get a bank account for that state.
If you’re doing an M and a deal, you for sure need a bank account in that state. But for white labeling, maybe you don’t. Maybe you can just allow that partner to collect the money for you and do the business through their bank account, but never have payment terms settled in cash. Cash can not be dealt with locally. You don’t want distributors holding on to large amounts of cash. You want them to deposit that cash in the bank and then payments come from headquarters. We’ve seen this time and time again where there’s large amounts of cash exchanging multiple hands and somehow some of that cash gets diverted. There’s theft. So that’s what we recommend. Getting a bank account next. I know I brought this up already, but put a person on the ground that you can trust even with white labeling because when they’re there in the beginning, that’s when most stuff can go wrong.
So you need someone there that has visual on what’s going on and it can make things work and they can work out those kinks and they can be there during the implementation and during production runs and they can even do inventory counts to make sure that what your white labeler or your producer says they’re making is actually being produced and you’re not being billed for things that are not being produced. Next, make sure you keep your books clean. Do not commingle funds. Things like sales and expenses for one line of business or for one state and the other. You want to break things out as granular as possible. If you’re going to do something simple as I’m just a multi-state white labeler, treat that as a separate department in your QuickBooks and use class tracking in QuickBooks or if using a separate entity, you have a whole new set of QuickBooks.
Would its own ledger. Just be able to break things down by state or operation and then you can roll it up into consolidated financial statements. And lastly, have strict and clear production schedules. If you’re going to be doing white labeling or manufacturing around a product, right? If they say they’re going to make a thousand edibles per week and only 300 are made, you need to be able to say, okay, well why is this happening? To peel back the layers of the onion and see, Hey, did they misrepresent their capacity during this due diligence process? And this builds on a few points earlier. Have your own personal production managers go there to oversee the process, right? It’s really important that things are structured. I know it feels kind of icky sometimes to tell someone you must do this and you must do that, right? In deal terms. But that’s how successful businesses stay successful in gain more success.
So we’ve covered a lot of ground here. I’ve been talking for like 45 50 minutes, but I appreciate you taking the time to do that. Let’s just go over a few key takeaways as you can walk away with an understand the importance of multi-state cannabis operation. So first you need to define your goal to help determine the best deal type for your business expansion. Know why you’re going into a new state and then choose the best deal type and deal structure to help you achieve that goal and make sure that your current home state operations is replicable before going to another state. Things like standard operating procedures, do you have the right team? Is your product or service up to par and able to be a competitor in that new market? Then work with a trusted well connected partner for a successful expansion of your business.
You have to do deep due diligence in the process of expanding your business. This is just par for the course. Don’t let this bog you down and make you think all this is taking too long. You want to be thoughtful about your expansion. Don’t just grow too fast because if you spread yourself too thin, your business is going to break at the seams and it could affect your home state operations, dropping confidence, dropping cashflow. You need pouring a bunch of money into a different operation and you know, left hand feeds the right hand and it just becomes a big issue. So do your due diligence and to build on that, don’t rush the process. Make sure you have the right agreements that protect you, your business and your brand. It’s very important. Contracts are the most important thing when setting up a relationship. This just dictates the rules of how businesses and how partners interact with each other.
You only typically refer back to contracts when things go bad. If things are going well and everybody’s happy, cool. You don’t need to go back to those contracts because things are going well, but when things go sideways, which happens more than you think they do, you need to be able to refer back to a contract to see how you are protected, how your brand is protected, and how to get out of that bad deal. A thank you for taking the time to join us today on this webinar and learn about multi-state operations. It’s been my pleasure teaching you today about how to expand your business thoughtfully, and if you need help with expanding your cannabis business to another state, then please reach out to GreenGrowth CPAs by giving us a call at (800) 674-9050 or visiting our website at green growth, CPA’s dot com and click that get started button on the top right.
Fill out your information and we’ll work with you to find a partner in a state that will help you expand and grow your business. At GreenGrowth CPAs, we have active clients in 12 States that we can help you get into nearly any part of the supply chain. When you become a client of GreenGrowth CPAs, you’re able to tap into our network so that we can introduce you to the right partner. Someone who we’ve done our due diligence on. We know the numbers behind their business because they’re a client of ours. We’re more than just CPAs. We can strategically help you grow your brand, grow your business, expose yourself to more people and more partners in this cannabis industry and help you grow that business. So if you need help with expanding your business to another state, please reach out to greengrowthcpas.com or give us a call at (800) 674-9050 thank you again for taking the time today to listen and learn. Have a great day, and we’ll talk to you soon.