By Rick Schettino • December 11, 2018

Ultimate Guide to Building a Scalable Cannabis Business, Part 3 - Financing a Business

This is Part 3 of a 5-part, in-depth series with valuable information for those who wish to start or grow a cannabis business. This post will outline some considerations for estimating costs and demand and funding a cannabis business.

In Part 1, we presented an overview of this rapidly growing industry including offering some growth statistics and breaking down the various segments of the industry. And in Part 2, we covered regulatory considerations. In future posts, we will discuss the various ways to finance a cannabis business, considerations involved in planning a successful cannabis business, the latest, cutting-edge technology in enterprise resource planning, point-of-purchase sales, and the latest seed-to-sale systems designed especially for the cannabis industry.

Financial Consideration for Scaling Your Cannabis Business

As important as regulatory considerations are the financial considerations of building and expanding a scalable business. All the planning in the world can be for nothing if the funds aren’t available to implement them.

If you haven’t properly estimated what it’s going to cost to implement your plans, and what it’s going to take to raise the funds, all your planning can amount to nothing.

One of the most disheartening things that can happen to an entrepreneur early in their career is to have big dreams and work toward making them real only to fall short of success because costs turn out to be higher than expected, and the extra funds are simply not available or securable leaving them at a dead end.

As the old saying goes, we could write a book on the subject. And there’s no sense in doing that here when there are already scores of excellent books and online resources available. We’ll just go over the basic considerations here, and try to provide you with some potential resources that might be useful.

Do You Need a Business Plan?

Many successful entrepreneurs will tell you that the business plan is an urban legend. Has anyone ever seen a business plan that ended up being implemented exactly as written? Perhaps. But it’s extremely uncommon. Does this mean you shouldn’t bother writing a business plan? Not at all. Having a working business plan is not only crucial in some cases, writing a cannabis business plan can be an important step in determining what your goals are.

People write business plans for a variety of reasons. On one end of the spectrum, you might not require any outside funding to start or grow your business, in which case you can scribble it on a napkin for all anyone cares. On the other end of the spectrum, you may be trying to get substantial business loans or attract investors in which case it’s just as important that your plan is presentable and readable as it is convincing.

A business plan is far more than a simple blueprint for your business. It’s a living, breathing, evolving, thought process that can be continually improved. It could literally start out on a napkin and end up being a thesis.

Whether or not they are presentable to others, there are two critical pieces that need to be as accurate as possible for your own benefit — estimates of all the costs involved in implementing the plan, and projections of what your sales will be once the plan is fully operational.

Underestimating sales or overestimating costs is a good problem to have to deal with. But overestimating sales and underestimating costs can be fatal.

 

TIP: The wisest thing you can do is to model your business plan after existing businesses with a track record of success.

Getting Help With Your Plan

As with regulatory considerations, don’t try reinventing the wheel — get experienced help. The only exception to this is if you’re doing something vastly innovative which simply hasn’t been attempted before.

Also, keep in mind that the more innovative the business model, the more difficult you might find it is to accurately estimate costs. Even then, it’s a good idea to get professional input.

In most cases, something close to your business model has been attempted in the past. Somewhere out there are people who have been through the process you’ll be going through and who have a pretty good idea of what works and what doesn’t. It’s important that you find these people and get some experience on your team.

We’ll stress again here that the cannabis industry is a universe unto itself — and a highly regulated one at that. Not just any old business consultant will do. Although a generic consultant might be helpful, if they’re not familiar with the cannabis industry they might also be harmful.

TIP: Hire a consultant who has already been through the process that you’re intending to go through.

At the high end of the spectrum — if you have the budget — this could be one of any number of world-class cannabis consulting firms. And on the lower end of the spectrum, it could be an experienced friend or mentor with whom you can confer from time to time to help steer you straight. 

A good resource for finding help with your financial planning is your cannabis-focused legal team. These teams often work with experienced consultants in the industry and might be able to refer you to the perfect consultancy. Conversely, if you find a consultancy that you like, they can likely recommend a good legal firm.

Another factor worth mentioning which is a relatively new phenomenon is crowdfunding. Crowdfunding means presenting your plan to the general public and offering them some kind of reward for kicking in some amount of money in advance to help you launch your project. Again, we could write an entire book on this subject. Keep in mind that many crowdfunding sites have banned cannabis businesses. 

Cannabis Industry Consultant Directories


Availability of Funds

Before you put pen to paper, so to speak, there’s no sense in planning for a business model that is simply financially out of your reach. Time and time again entrepreneurs will rush into business planning with the delusion that they’re going to find big investors who will throw money at them because their plan is so great. This is a dangerous misconception.

Investors don’t throw money at plans. They invest in people — more specifically, people with a track record of success.

If you don’t know anyone who has started a public company and has the time and money to help you do the same, then don’t plan on starting a public company. If you don’t know anyone who has successfully started and exited a private company, don’t expect to have private investors banging down your door. And if you don’t have a track record signing for and paying off large business loans, don’t expect to get a large business loan.

TIP: Having unreasonable expectations for financing is all too common. Start with a plan that you are certain you can fund with the resources that you have already.

If you, yourself, are one of those people who has a track record of business success, then you probably don’t need to be reading this post. Since you are reading this post, we’ll assume you do not have a track record of success and highly recommend that you go out and find someone who does.

Feel free to get out there and pound on doors, meet with bankers and investors, talk to experienced consultants and lawyers. You just might get lucky and find someone who is willing to take on your project and treat it as their own. But do not start planning a business that’s bigger than your proverbial britches in hopes that these people will come pounding down your door to give you money. It doesn’t happen.

The "Catch 22" is that no one really wants to give you money until you can prove that you don’t need it. The first thing a potential backer is going to look at is how much of your own money you have invested in the project. How much skin do you have in the game? How far are you willing to go? Are you willing to spend all your savings and investments? Are you willing to get another mortgage on your house if you have to?

Perhaps you have friends and family members or business associates that would be willing to partner with you or invest in you and your ideas. This always feels great when it happens, but keep in mind that if you fail, you’ve lost your friends and family’s money. That is not a good feeling at all.

At some point, you have to determine exactly what financial resources you have available to you — and to your partners, if you have any — and how much of that you’re willing to risk. Start there. Build a plan around that. But build a plan that is scalable so that as your resources increase you can expand your business.

If someone comes along throwing money at you, great! But if not, you’ll regret making any plans that go beyond your own financial resources and/or that of your partners. Because, again, if you fall short, you’re dead in the water.

 

Funding Information Resources

Articles

This should go without saying, but you should continually be refining your projections.

   Directories

Estimating Costs

How much is it going to cost to build out your plan? How much is it going to cost to keep it going? If your plan is similar to other models then someone out there already knows the amount of money involved in getting it up and running.

This should go without saying, but you should continually be refining your projections. As you work on planning, you will always be discovering new details, getting a better understanding of what’s involved, and getting a clearer picture of what’s possible and what’s not. 

You’re going to need to estimate the costs of the real estate or commercial space required, the costs of construction to design and build out your facility, the cost of production machinery, office equipment, software, human resources, utilities, marketing and sales collateral, advertising costs, required supplies and consumables, training, licensing, permits, and so on. Your list depends on your business model.

Remember back in high school, your boss at your summer job saying, “do I have to think of everything?” Yes. You do. Do not leave anything out!

TIP: It’s always better to overestimate costs than to underestimate costs. One is a joy to behold, the other can be fatal to your plan.

Cost Estimating Resources

Articles

Reports

Charts

Books

Demand Forecasting

The most common fatal mistake for any entrepreneur is to have delusions of grandeur and believe that your business is going to be a no-brainer because A) your industry is exploding, and B) everyone is going to love your products and services and you’re going to sell tons of them. 

This is an even worse mistake than underestimating the costs of getting set up and running because you won’t know if your demand projections are accurate until after you’ve spent or budgeted all the money required to build out your plan. Finding out that demand is not what you hoped it would be is a miserable position to be in.

Demand forecasting is another factor which may require working with an experienced cannabis business consultant who specializes in your particular business category.

Making reasonably accurate sales estimates can require extensive market research. If you have no experience in market research you’ll be flying blind.

TIP: It’s a good idea to compare your expectations to those of businesses that are doing the kind of sales you expect to do.

It’s always a good idea to have a worst-case scenario if things go bad, a best-case scenario if things go great, and a middle-of-the-road scenario which can be reasonably expected. It’s a good idea to be conservative here and not overestimate based on your excitement and emotional attachment to your project.

 

Demand Forecasting Resources

Articles

Wikis