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What does it cost to start a cannabis business in New Mexico? The better question is how much should you be willing to spend to start a cannabis operation. Naturally, that depends on how much you expect to make.
Start by projecting your sales and then work backward into your projected costs. As an example, assume you are planning to apply for a cannabis producer microbusiness license, which permits the holder to grow up to 200 plants. While the wholesale and retail prices for cannabis products are not static, there is plenty of data to help estimate what New Mexico growers can expect to get for their local crop. Assuming you can yield an average of one pound per plant, and cannabis “flower” will sell for about $1,500/lb, you can estimate a potential $300K per grow. If you can get three grows per year that would be roughly $900k (if all goes well). Great, now what will it cost you to do that? You need a license, seeds, land with water rights, utilities, employees, soil, fertilizer, banking, testing, transportation, accounting, legal and a whole host of other things to make that all work. Add all that up, subtract from sales and see what you have left over.
Of course, you might say the retail price for cannabis is much higher. However, retail adds a whole other dimension and a pile of new expenses to your venture. The raw cannabis flower will need to be tested, packaged, and transported to a retail location (assuming it’s separate). If you open a retail outlet, in addition to the lease, buildout, staffing, training and security, you will probably have to buy inventory from other growers and or pay a processor to turn your flower into concentrates or edibles. Setting retail pricing is not for the faint of heart.
Since the passage of the Cannabis Regulations Act, legal and accounting professionals have been wading through a lot of business plans from enthusiastic entrepreneurs. While many of these plans do a great job articulating the strategy and position of the new business, they are often short on financial details. Savvy investors generally like to invest in a team that has a detailed financial plan rather than throw money into a hot new category like adult-use cannabis. To position your venture for success, build yourself a nice pro-forma projecting revenue and costs. You can look at this helpful example to help formulate your own estimates. You should be clear with prospective investors that these numbers are merely projections and not guarantees. Even if successful, your business will likely run into additional expenses as it gets going.
Once your numbers seem investor ready, resist the urge to share your pro forma with any potential investment connection. That information is proprietary and could be valuable to your potential competitors. Furthermore, by broadcasting investment documents you risk running afoul of securities laws, which will kill your cannabis-business buzz in a hurry.
Raising money for virtually any business requires legal and accounting professionals. For a cannabis venture that kind of help is critical. One tip you may hear from experienced entrepreneurs is to raise money from as few people as possible. A small number of high-value investors will be easier to manage than a large group of people hoping to make smaller investments.
Once your pro-forma is built, you can begin to evaluate some of your initial assumptions. For example, you may decide that you don’t have (and prefer not to spend) the money required to effectively grow more than 200 plants. You may also realize that you cannot break even on your fixed costs with a smaller operation and will need to apply for the more expansive Cannabis Producer License. Of course, more expansive also means more expensive; you might then need to look for more funding to support the needs of that larger organization. If you are taking any investment (cash or sweat equity), you need to carefully structure the ownership interests to avoid costly disputes and conflicts between future owners.
There are a lot of free business planning tools out there, including those linked in this post, which can help with building a meaningful financial model. Few people find this process fun, but it’s a lot more fun than running out of money before your business gets open. Every new business makes plenty of mistakes, but using a business plan is a great way to avoid some big ones by revealing flawed assumptions about your plan before you start spending your money.
As a way to get started, walk yourself through the whole process of starting a business, applying for a license, getting some land, planting, harvesting, selling and buying all the products and services you will need to make all that happen. This is not the time to assume your sister-in-law will do the books for free. Put in the line for bookkeeping and don’t lowball anything. Remember, your investors will not be mad if you make more money than you projected.
Seth Gardenswartz is a New Mexico native, who grew up in his family’s retail business. His legal specialties include trademarks, contracts, payment systems, e-commerce, digital media and general business management. In addition to practicing law, he’s co-developer of a tech-flex office building in downtown Albuquerque and Co-owner of Surefi.com, an ad-tech company that combines proximity marketing with media targeting. Seth has represented and advised entrepreneurs on branding-related legal issues for over 20 years. When not practicing law, developing marketing, or gathering specimens from his brewery clients, he can be found roaming the trails of the Mountain West on skis, bikes or running shoes.