On November 14th, we discuss our experience and first-hand knowledge on how to prepare a successful cannabis business application that will stand out from the rest of the crowd.
If you want specific help with your cannabis business license, you can contact us to get started or call 800-674-9050.
You can watch the full webinar here:
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You can download the slides here.
Full Webinar Transcript:
Hi everyone, great to have you all here. My name is Dominique Shakramy. I’m head of licensing for GreenGrowth CPAs and today we’re going to talk about how to put a cannabis business application together. The agenda for today is basically we’re going to start off with what makes an application successful and then we’re going to break it down into sections with financials, location, architects, security standard operating procedures, staffing, community benefits, labor, and a lot of other things that we’re going to tie up neatly in the end.
Just a few things to give you an idea of what we do here at Green Growth CPAs. We do tax preparation and we’ve completed over 500 annual tax returns for cannabis operators spread across all verticals, so that’s dispensary distribution, cultivation, manufacturing, delivery, and testing. We also have over 300 clients based in various states. We have clients from California, Colorado, Michigan, Oregon, and Washington.
We’ve also performed over a dozen audit related projects in the last year and we’re expected to hit seven digits in revenues in our second full business year. We do want you to know that we have a thorough and deep understanding of tax compliance and assurance related requirements for the cannabis industry and this includes cannabis licensing. We can help you with tax preparation and planning, auditing and assurance, business plans, and anything else related to operating a business in the cannabis industry.
So like I said, we’re going to start with what makes an application successful. I think what all applicants prospective and current applicants really learn along the way is that the instructions and understanding them is about 80 percent of passing a successful application. You have to understand what exactly the city or the state is looking for, how they wanted delivered. A lot of the time, you know, the headers of the requirements can be misleading.
Like I said, you know, they could say, oh, we need a business plan, but when you read the requirements are what they’re asking for. It has nothing to do with your typical idea of what a business plan really is. So half the battle or more than half of the battle is really understanding what are they asking for, how do they want me to submit this and and then submitting it. You’re going to want to thoroughly address every part of the application in detail. You want to make sure that you understand the requirements. Although most of the time applications do have the same requirements. They may want specifics that other applications don’t.
For example, let’s say Lynwood, the city of Lynwood in California. They want a cannabis business plan that requires you to demonstrate and explain your daily operations, which includes cash handling practices, a little bit of security, some inventory and record keeping where versus the city of LA that might say, oh, we want a business plan that wants you to show financials what your company’s mission and vision is, which is pretty much what you’d expect in a business plan. So just be careful and look at the descriptions of the headers because sometimes the headers can be misleading.
Next you’re going to have to surround yourself with the right people. You want to show in the application that you have the right team in place to run a successful operation. Usually they will ask for the owners or licensees to include a short writeup demonstrating experience in either the cannabis industry or related field, and if you don’t have this experience, you’re going to want to find people that do and include them in your team.
You’re also going to want to have solid financial projections and security measures to prevent fraud. As you know, cannabis is a highly regulated industry and these are the two pillars that most states, if not all of them, want you to focus on. You’re also going to want to vet all of your partners, do your due diligence. You are going to have to go through a background check and this background check is required by all cities and states.
Another really important thing that you should consider before even applying for a cannabis business license is you’re going to want to make sure you have enough money to build out and operate for at least six months to a year. We get a lot of inquiries from potential clients who want to get into the cannabis industry and they’re always blown away by how much money actually goes into building out and operating a cannabis business before it becomes profitable and you know, there’s no other way around the financials, you know, cities and states will not issue permits to people that can’t demonstrate a financial capacity to start a business and keep it running. And second, if a person. We do get a lot of clients that do not have experience in the cannabis cannabis industry.
On the other hand they have experience in business, successful business, and that is something that cities look at also because not everybody will have cannabis industry experience because it is illegal. It was illegal on a state level and is now legal. So you know, if you are able to demonstrate some sort of experience in the cannabis industry, you know that’s a self revealing, but if you don’t, then you really need to consider putting a group of people together that can show strengths in business, finance, HR, that all add up to a business.
For example. We get a lot of inquiries from people that want to become cannabis business operators that have no experience even running their own business so they could have some money, you know, that they’ve inherited or or some friends, a group of friends that, hey, you know, decide one day that, hey, we should get into the cannabis industry and if we pool our money together, then we can definitely start one end and sometimes they do have enough money.
But the question is who are the team members? And a lot of the time, you may have to pay to outsource for these qualified team members. If you’re going to do get into medical cannabis, you may want to have a doctor or a pharmacist in some way, shape or form on your staffing plan. At least for the first six to 12 months. This always strengthens your chances of being issued a permit and a license because you know even if you have the money, you need to have the staff and the members to trudge forward successfully in this industry and remain compliant because that is a really big issue…compliance. And once track and trace is fully operational and functional across the board, compliance will be one of the big determinants of whether or not cannabis business will be successful. So if I were you, the best thing to do is to go into your bank accounts or your asset portfolios and see exactly how much money you have, how much money you’re going to need to raise, and how much money you’re going to need to put into this cannabis business. Because it’s not cheap.
You’re also going to want to have a really solid understanding of state and local regulations. Most of the time, applicants will hire consultants to do this for them. Regulations can be tricky just because they’re very vague. There’s a lot of wiggle room, so you’re going to want to find somebody that can either be part of your team to help you with compliance moving forward, or you’re going to want to engage the services of a company or a consulting group that can do this for you like us.
The last thing that you’re really gonna want to think about before you apply for a cannabis business licenses is asking yourself what is going to set my business apart from everybody else’s? And a lot of the time this is done through, you know, giving back to a city, but it’s more about community integration, you know, flipping the idea of cannabis is bad into how cannabis can actually be helpful, how it can reach out and touch lives, you know, across the board, whether it’s for patients or consumers and especially for the community where you’re going to set up.
There is a lot of competition for cannabis. Consider this. Twenty percent of cultivation licenses are held by just 12 licensees or 0.7% of licensed cultivation businesses in California. As of June eight, 2018, 3,535 cultivation licenses has been issued to 1,607 unique license holders. Meaning that the average licensee holds approximately two licenses apiece. Cultivator licensees are well prepared, established operators who have mastered the art of submitting an application. So if you take that into consideration, you’re really going to want to do your research. Figure out if this is the industry you want to get into. Because there is a lot of competition and a lot of qualified, you know, operators that are in this for the long run, so if you want to be in the industry, think long term as opposed to short-term because it is going to be a big investment.
So when you’re looking at your financials, most of the time you want to get an expert or professional to help you put together some pro formas projections just to see how much you’re going to have to need to build out your business to operate it successfully for at least a couple months until you start making some money to offset your expenses.
And we can definitely help you with that. You’re going to have to prove that you can afford to start this business and keep it running. A lot of the time and applications they ask you to identify the source of your funding, whether it’s through investors, finance, you know, they call them people with financial interest. It can be anywhere between five to 20 percent of the company for individuals that are considered to be those with financial interests in the company. Sometimes they ask you to show liquid assets, and this is generally because of the nature of the industry. A lot of you know it’s obviously a cash industry and a lot of the assets will be liquid, but starting out that’s not necessarily the case. It can be tied up in your mortgage or whatever and some of the cities will require you to show liquid assets, so you might want to take that into consideration and look into that requirement, that specific header that says financials and the requirements for that part of the application.
Like I said just a little while ago that you will want to get somebody to do your pro formas and some projections. This should show your operating budgets, your build out costs and your proof of capital. Once you get this done in, this should be your first step in deciding whether or not you actually want to advance and get a license because this part is pretty much what cities and states look at to see, you know, is this person serious? Can this person survive in the industry and can we expect some responsible tax compliance on their end? Our experts estimate you will need anywhere from $300,000 to upwards of $4,000,000 to build out a cannabis business. It really depends on what kind of activity you want to get into. So there’s the retail storefront which could go up to $4 million dollars. This is the typical dispensary that you walk into.
And then there is the delivery only retail license where they just deliver, you know, you order something and they deliver the products to you. This build out a lot cheaper. Sometimes you only need $30,000 to build out a small facility. There’s a big range and you have to decide based on your financial capacity which of these you can actually see yourself getting into success and successfully running and building out a typical rundown of some of the costs you can expect in the state of California as.
Let’s start with that license and application fee. So depending on the locality like the city, it can go from anywhere between $6,000 to $60,000. So for example, we have Long Beach for adult use facilities. I believe the licensing fee is about $5,700, give or take a couple of dollars and then we have cities like the City of Commerce which has a $13,600 cannabis application fee on top of about almost $40,000 in development and permit fees after that.
So it really depends on what city you’re looking at or what state because the fees vary significantly on a state level. There is a fee schedule that varies depending on you know, how much product you’re going to be making for cultivation and the same goes for manufacturing and for distribution. It depends on how much you foresee making in the industry doing distribution. So there is a fee schedule set and it really is dependent on how much product you’re going to be cultivating, moving, processing and all that good stuff. So like I said before, you really need to sit down in the side like how much money do I have, how much money can I get, and which vertical do I want to get into. There are also again, operating expenses which vary depending on the vertical. So I’m cultivation has a pretty, a pretty high recurring set amount for operating expenses because you’re going to need to buy all the supplies you do have your HVAC machines.
If you’re doing indoor grows, I mean outdoor grows are, are a lot cheaper only because you don’t have lights to worry about. But if you are doing indoor grows, you’re going to be changing out light bulbs, you’re going to be buying nutrients, you’re going to be paying your electricity bill. So all of this you should factor into deciding, you know, do I really want to get into, is this the right vertical for me?
Another thing that you should consider for operating expenses is your rent. So a lot of the time when you’re looking at properties in green zones and green zones are areas within the city that have been zoned for marijuana or cannabis cultivation, manufacturing, distribution and retail land owners will jack up the prices. This means they’ll charge you per square foot and instead of paying, let’s say fifty cents a square foot, they will charge you $2 a square foot.
So this is a really big expanse and it’s a recurring expense, so if you are fortunate enough to own some real estate in these zones, you could with some creative business structuring, managed to use this rent and push it off into another business structure like a corporation, like a holding, a holding company that you pay the rent too, so you’re not really losing that much money in the process. So you should see a consultant or you know your attorney to see or us to see. You know how you can creatively maneuver the best way to keep your profits within your group of companies.
And then the next thing that’s probably the biggest expense and is recurring is your, your salaries for your employees. What sets the cannabis industry apart is the fact that a lot of the time cannabis businesses will or right now are required to offer living wages. This means that you know you’re paying your employees part time or full time above minimum wage. A lot of the time applicants will say that, you know, one of the biggest things that sets us apart is that we want to help improve the quality of life of the residents, of the community, but also the employees that we have. You want to make sure that this is part of your application and you want to outline how much you’re going to be paying them, what their job descriptions are, what they’re gonna do for the company, and factor that into your financials because like I said, this is a recurring expense that you should consider moving forward. Now, if you’re in cultivation, you’re going to need more employees than a dispensary and you should consider that to deciding on which vertical you want to get into.
Going back to rent. Also, applications will ask you if you are the land owner or if you’re leasing. It is the case that you are leasing. You will need generally a letter of intent from the land owners stating that you will be entering into some sort of lease agreement. He or she is aware of the nature of your business and that he or she is onboard with this. One other thing that you really need to consider when you sit to do your financials is to factor in the fact that when you start building out your not actually operating, but it is considered operating costs. So you start building out. You start paying your lease in January and you finish building out in in June. That means you’re paying your lease for six months on top of all the build out costs and then you start operating.
So by the time you actually start to make some profit, it’s almost December and you’re out a whole year with rent, utilities, salaries. So this is something you really need to think about because your expense cost is so heavy upfront and the time to make money is if you’re just catching up all the time. So it takes about a year between six months to a year to start to begin to make some profits and and thinking about financials this way. Then you will know exactly how much money you’re going to need to have to keep the business afloat before you actually start to make money.
Some other costs that are included in your financials is how much is security. Obviously security is a really big issue in this industry just because it’s highly regulated. It’s still illegal federally, so states and cities will want you to have very strict protocols to prevent diversion, theft, loss and other related illegal activities.
Sometimes security agencies will charge you, they know they will always charge you an arm and a leg just because, like I said, this is a highly regulated industry and you’re looking at costs like $20,000 or more in a month. You have security guard, security, security officers. You have trip alarms, panic alarms, duress alarms that need to be monitored 24/7. You will also need security video surveillance monitoring, and you know, a lot of the time you’re still paying costs on build out, which is your ID cards, all this stuff. Record keeping also needs to be secure. So basically your security budget should be significant in the sense that it is a recurring expense and you should definitely include it in your financial projections for operating costs and your operating budget.
There is also another white elephant in the room and it’s marketing. I’m not sure if you guys know about 280E, but that’s for another session. Basically, it just says that cannabis businesses cannot deduct expenses related to marketing and advertising, so you should definitely carve out a budget for your marketing because this could be a recurring expense depending on the type of vertical you decide to get into.
Regarding interior and equipment, depending again on the vertical you choose. If you decide to get into manufacturing your one time, big time expense is definitely going to be your equipment and your recurring expense would be typically your electricity because you know these machines need to be cool and they have to run 24/7.
Another thing to think about is inventory. If you are obviously a retailer, you’re going to need to purchase your inventory from distributors, manufacturers, and cultivators. So depending on what you want to sell, how big your shop is, how big your captured market is, you know these are all things that you need to think about.
Generally this appears as a product mix on your financial projections. So when you do talk or engage the services of an accounting firm or a cannabis business consultant, you’re going to want to see a product mix included in your financial projections.
Now, the million dollar question is always the location. Where are you going to set up shop? Some cities that we’ve seen come on board recently have actually allowed for applicants to apply with an unknown premises. This just means that they accept applications from applicants that don’t have a specific location nailed down, but typically for most cities and in California and other states, you will need to have a location nailed down. You will need that letter of intent from a landlord in the event that you do not own the property and most of the time cities and states will have zoned marijuana or cannabis areas specifically where these verticals can set up. Some of the markers of a prime location is, you know, the accessibility to freeway entrances, the driveway sizes, how many parking spots you’re going to have.
If you’re looking at the state of California, there are a ton of building codes that go into laying out your site plan and your floor plan. So you should definitely consider consulting with a civil engineer or an architect when you’re deciding on a location just because building codes can ruin whatever original plans you may have about a location. You also should expect that landlords will inflate their lease prices. So prepare for that I mentioned that in the financial section. If you have any questions about it. We do have a team that can help you find a location, plan it out, scout an area, and connect you with real estate agents that can help you close a deal.
So I told you to get an architect, and this is why every single, whether it’s a local application or a state application, is going to require you to submit extensive floor plans and sight plans. This means that you’re going to need to find someone to help you meet the regulations for the state or the locality and it’s usually an architect and a civil engineer. Most of the time you’ll be lucky enough to find an architect that can do everything for you, but there are some sections or some requirements that states or cities require such as noise studies, geological studies and whatnot, and this can be done by engineers. They must be licensed professionals and ideally you’re going to want to look for somebody with cannabis experience just so that they’re familiar with the regulations, the cannabis regulations, as well as the building codes, plumbing codes, electrical, mechanical and fire and safety codes of the state.
Another heavy hitter on any application is the security plan requirement. So security plans generally they focus on how you are going to prevent diversion, theft, loss and related criminal activity. So you will generally engage the services of a security professional who can do overlays for you, showing where all the security video surveillance cameras are, where the RFID cards are going to be located, where the trip alarms are gonna be, where the panic and the rest buttons should be…all of this good stuff as well as protocols that should go into your standard operating procedures, which is another section of the application that you should take very, very seriously.
A lot of the time the cities will ask specifically for your security plans. Sometimes they don’t even ask for other parts of the standard operating procedures. Just because this is such an important topic that does address the biggest issue in the cannabis industry, which is, you know, it’s theft, diversion and loss of products. Nobody wants anything to go missing and everything always needs to be accounted for. So your security plan should address these issues.
Another very important section of your application is the standard operating procedures, requirements, standard operating procedures, details, all the policies, procedures and processes that go into running your business, so it describes in detail how you perform tasks. Generally you should cite local and state regulations and the process descriptions and these operating procedures, cover security, quality assurance and testing, packaging and labeling, inventory control, storage, cash handling, track and trace.
You may think that standard operating procedures are cut and paste. I generally, you know they, they should include best industry practices, standard industry practices, but you know each business is different. Make sure you comb through the SOPs is that your consultant provides you with or whatever you buy. A lot of the time they do not include the authority for that section and generally you should include like which regulation, which section is being quoted or used for guidance. It really helps to strengthen your knowledge and your compliance moving forward on both local and state levels. Generally what we do is we include at the end of each section the part of like the business code or the BCC regulations.
It is very helpful to include, you know, the guidance, the particular part of a regulation where you got the information that directed or guided, how the SOP was written out. And sometimes it would be wise to include an employee handbook only because you know, they, they would like to see typically what your employees will be doing, what are their responsibilities, how they will be carried out and in the event of a crisis or some some significant circumstances such as like an adverse recall and stuff. You will want to have that included in your standard operating procedures. Just because you know, cities will want to know or the state will wants to know if something goes wrong with a product that you are selling or that you have grown or processed. How are you going to rectify the situation? How do you report it? How are you going to collect the defective products and how are you going to remedy the situation basically. So your standard operating procedures should be able to detail every step of a task or process that will rectify, remedy, or run your business.
Don’t forget the people side of things. The state obviously hasn’t forgotten. They usually ask for a staffing plan. This means listing down all your employee requirements, job descriptions, the hours your employees are going to be putting in, their compensation and be sure to include a small portion like maybe a staffing plan narrative that addresses the development agreement that usually comes with an application. Development agreements are not necessarily new, but they are more common now with local applications. These are agreements that the city requires cannabis business operators to enter into with a city to support the community, and sometimes this means assigning a percentage of the employees as local hires. You’re going to want to make sure you leave a portion of your staffing plan to address this issue of local hiring and compensation.
Another thing that’s closely related to your development agreement is a community benefits plan. Now, this is asked often on the local level. It addresses how your cannabis business will give back to the community. Basically it’s a narrative version of the development agreement. So what is your company going to give to the city in return for being able to operate there? And most of the time what we recommend is that you know, you can donate a portion of the profits to support the annual salary of one local police officer. You would, you know, employ people from an underserved portion of the community. Create a scholarship fund maybe for some of the high school students entering into college. It could be an early education kind of promise or initiative that you could start. You could offer if you’re, if you’re going to be producing, cultivating or selling medical cannabis and medical cannabis products.
You could offer to support, you know, some medical cannabis patients or you could initiate local drives or programs for education, employment or a specific service that company can provide at little or no cost. So for example, if you’re a group of, let’s say CPAS and you’re looking to open a cannabis business in a particular city, you could say, oh, we’re going to offer free tax services for people that have income lower than $45,000 a year. This is something that cities like because you’re not just giving money, but you’re offering a service. You’re teaching people how to fish as opposed to giving them the fish frame, something sustainable that will help individuals of their underserved communities kind of improve the quality of their lives. Or recently we’ve been noticing that a lot more cities are requiring development agreements, which means they’re putting a lot of importance on how involved cannabis businesses, business operators want to be in the community, how integral they feel their business will be in supporting the growth and improvement of their city.
Sometimes you know a lot, a lot of the time when they look at these applications, they’re all the same. How different can a dispensary be from another dispensary? We’ve noticed that these community benefit plans offer applicants to make their application stand out. This is what makes your application unique to a city that is going to be issuing a permit. What are you willing to give, how involved are you willing to be and you know, how long do you want to be part of the community? A lot of the time now they have social equity programs or you know, a small business incubation programs that they want cannabis business operators to get involved with and a lot of the time this is what will set your application apart.
A couple of loose ends that are included in applications that most people overlook is the requirement of a Labor Peace Agreement. If your company will have more than 20 employees, you will need to enter into a Labor Peace Agreement. There are several unions that cater to or are involved with the cannabis industry. One of them is the United Food and commercial workers union. You should talk to a cannabis consulting firm or a Labor attorney who can help you put a lever peace agreement together. In the event that you do exceed 20 employees. Essentially, a labor peace agreement is an agreement you enter into with a union that promises you will be a good employer that offers living wages and benefits to full time and part time employees.
There is also a portion of the application that requires a limited waiver of sovereign immunity. Basically what this says is that cannabis business owners do not belong to or identify with any tribes that have sovereign immunity, and in the event that a tribe does say that an owner or a member is part of that tribe, they cannot use sovereign immunity to block out governing authority such as the FBI or the DEA or the IRS
The owners will also have to go through background checks. Some states and cities will have requirements regarding convictions. They cannot be recent. They can not be violent convictions, things like that. So if you or one of your co-owners does have a record, you may want to revisit local laws or state regulations to make sure that they can be an owner.
You will want to make sure that the application gets in on time and is complete. Sometimes states and cities will have requirements regarding font size, how to submit it if it’s digital or print or if it’s both, paper size. Sometimes they’ll even have formatting and tabbing requirements, so you want to make sure that you’ve read the instructions really, really well because a lot of the time they will turn down applications because they are incomplete or they’ve been turned in the wrong format.
Can you imagine submitting your application and being told that it is incomplete or it’s in the wrong format and having put in so much money to put it together, it will save you a lot of heart ache to make sure that you’ve done everything right. Also, you’re going to want to make sure you pay the application fees. I’m pretty sure no city or state will accept your application without paying the application fees in the proper medium. Sometimes they will only accept checks or money orders, cashier’s checks, sometimes they will allow for credit card payments, so you really need to read the instructions again and make sure you’ve checked everything off the list. Everything is accurate, complete and right. There are people that help you do this, consultants or firms. We do this so we can offer our services to you if you at any point in the process of deciding on a city or a state or what kind of vertical we do offer roadmaps and action plans that we designed specifically for our clients starting out in the industry or you could be towards the end and already have a location and want to apply for a specific city or a state. We can also provide you with a complete application that you can submit to a city or a state.
So at any point or any step of the process that you find yourself and you need help. We’re here to help you. When you think about getting into the cannabis industry and you get wind of a city dropping an application in a week or so. Generally these submission periods are only 30 days. Generally, there are a lot of deliverables on the side of the consultant that you could be working with on your application. But a lot of the little things are supposed to come from the client. So this means you’re getting together your social security number, the background check forms, all the other forms that are really time consuming on top of your financials, being able to provide proof of capitalization. So this is definitely not for someone who’s just deciding on the fly. You know, the application process is arduous and time consuming and highly detail oriented and it’s something that you should be giving a lot of thought to before you actually decide to do it.
If you or someone you know has any questions or you need help with your cannabis business application or you would like to just, you’re at the beginning of the process and just want to see, you know, an estimate of like, how much money do I need, what business is right for me? Which cities are coming on board within the next three to six months that I could potentially be looking to applying to. You can contact us, we are Green Growth CPAS and you can reach us through our website at www.greengrowthcpas.com. That’s one word. Or by calling us at 1-800-674-9050. Thank you for your time today. I really enjoyed speaking with all of you. Like I said, if you guys need any help at any point in time along the way, your process of deciding whether or not the cannabis industry is right for you, we’re here. Give us a call or send us an email. My name is Dominique Shakramy. I’m the licensing head and I can’t wait to work with you. Thanks and have a great day.