5 Things You Need to Know Before Opening a Dispensary
When Colorado first legalized recreational marijuana, in 2014, a smattering of pot shops popped up. What a difference five years make. There are more dispensaries in Denver than Starbucks, McDonald’s, and 7-Eleven stores combined, and statewide the number exceeds 500. But while many dispensaries are thriving, a good handful are generating revenues far below the industry average. Why? This business presents unique challenges to entrepreneurs that you might never expect. Before diving in, a few things to know:
1. You are not an expert just because you ran a business or smoked marijuana for years.
I entered the cannabis industry with all the confidence in the world, having more than a decade of experience behind me as a successful serial entrepreneur. Because running a business was second nature to me, and I wasn’t new to smoking marijuana, I figured: How hard could it be? Answer: Pretty darn hard. Since 2009, I’ve lost millions due to costly mistakes, missed opportunities, and outright failure of some ideas. Had I sought counsel from the start, I could have avoided many of these errors.
I can’t emphasize to newcomers enough that you need to partner with people who have excellent industry contacts and who have actually owned, operated, or worked with a successful dispensary. When it comes to accounting, taxes, security, compliance, insurance, banking, legal protections, marketing, and government affairs, there are special considerations unique to the industry. You can’t hire any old accountant. You need an accountant who has already been through an IRS audit or two with a marijuana company.
2. Obtaining a dispensary license is tough.
Most applications for dispensaries are merit-based and require you to prove that you’re going to be a good operator. That means that if you apply, you should have industry experience or be able to show that you can execute a well-thought-out dispensary business plan, primed for success. Again, if you are new to the industry, you’re going to want to seek expert counsel to gain the necessary insight. Throughout the application, you are asked to demonstrate and have answers to tough questions surrounding the operation of the business. For example, you need to share how you are going to handle security and product storage. You need to have real, legitimate answers, or you won’t win the license.
3. You need both significant capital and patience.
If you are in a state that’s new to legalization, whether it’s medicinal-only or also recreational use, you need to temper your Green Rush enthusiasm. It’s cool to remain optimistic, but you also need to be realistic and pragmatic in your approach. First, let’s get real about cost. Launching a dispensary can require anywhere from $250,000 to $750,000, according to the National Cannabis Industry Association. The licensing process itself is expensive and time-consuming, at least $5,000 to $25,000 or more, plus $20,000 and up on legal fees.
A lot of people think they are going to get rich quick, but a good return on that investment is not a sure thing. This will not be an immediate cash-flow business. It may take a few years before new markets get their feet on the ground. The rollout can be significantly delayed, or enrollment of medicinal patients could be much lower than expected.
4. Finding the right bank takes work.
I just got kicked out of another bank this morning. In my 10 years in the cannabis industry, this is the ninth time a bank has dropped me. Sometimes my relationship with the bank is good for a year or two, and sometimes I’m seeking a new one every few months. You really become persona non grata to the banks when you operate in this industry.
But banking in cannabis is possible. I’ve been able to do it successfully in several states, and have operated in cash for only two years. To secure an account, you need to find those few banks that identify themselves as willing to work with cannabis businesses. Don’t bother with the big ones. You need to look for smaller credit unions and regional banks.
Once you find a promising bank, be honest with them about your business. There’s a fine line you need to walk if you don’t want to get kicked out, but it’s more important to be truthful. And go in knowing that they might accept your dispensary in the beginning but a few months later say they need to cancel your account. It happens. A bank kicked me out after deciding that it couldn’t touch our money because it would void its FDIC insurance. Hmm, got it. Now onto the next.
5. Few vendors will want to do business with you.
Since cannabis is not federally legal, many suppliers are wary of working with businesses in the industry. They fear it could hinder their reputation or get them into trouble. You’ll find this with nearly every type of vendor your dispensary could need. To combat this, you can do one of two things: Work with someone who has been in the industry for years and has vetted connections they’re willing to introduce you to, or be up front with the supplier. To run a successful dispensary, you need to be compliant and profitable—in that order. Part of compliance is being truthful. Lying is not complying.
Don’t let all these factors dissuade you from getting into the dispensary business. The momentum is on your side. More states are legalizing recreational and medical cannabis every year at an accelerating pace. You just need to be smart and seek the right partners to help you get past the hurdles so you can realize your vision.