Understanding the Financial Big Picture of Entering into the “Green Rush”

Can I set up a cannabusiness that is sustainable for the long-haul?

Guest post by Joe Bagan, COO of MJardin

The Green Rush is on.  Great returns and piles of cash will be made by all.  Or will it?

If you are thinking about applying for a license in an emerging market or purchasing a license/company in an already legal market, understanding the big picture financial cash-flow of owning and operating a regulated cannabis business is imperative.  Many individuals outside the industry today are assumptive that all current participants are widely profitable.  That is far from reality.

With California and Colorado accounting for 66% of the revenues generated in the cannabis industry today, and also a disproportionate of the growth, interested participants should be asking more fundamental financial questions.

• Are we prepared to invest significant sums of capital, and fund operating losses, for a few years until the medical program in our state has enough participants, buying enough products, to sustain a few businesses?
• Do we have the financial depth to participate in this market until adult use passes in our state?
• Are we prepared to think in terms of 5 and 6 year to see returns on our capital?

On a more positive note, the cannabis industry is a real industry with real businesses, and more and more professionals are diving in every day.  A train has been put on the track and it is not going to go in reverse.  The only question about the train that is unanswered is “how fast will it move down that track in my state?”.

So what do you do if you want to be part of this industry?  First, set realistic expectations with yourself and investors by creating a real pro-forma model of the business.  Doing this work properly will help you understand the patient ramp up curves in other states, sales volumes in other states, pricing in other states, and then your own expectations for capital to build a cultivation facility, a processing facility or open a dispensary….and in some cases, all of the above.  The big mistakes we see made over and over are:

• Setting unrealistic expectations on patient volume ramp up curves.
• Raising too little capital (a common flaw in startups of all kinds) and having to raise more when the business is not yet profitable. This will certainly result in upset owners/shareholders.
• Convincing each other (on a team) of how little capital will be needed for building facilities, putting environmental controls in place, and the operating costs of raising plants and cultivating. Not investing properly in cultivation and environmental control is a sure fire way to fail microbial and CFU counts and end up not be able to sell in your state.

Too many times we have seen groups with seemingly limitless capital who over-value their company and want to build a cultivation facility that is too large to support the estimated demand of their anticipated market size/share…if they have even evaluated potential demand and market size/share.  Good questions to ask about facility size are:

• What happens if that market simply isn’t there?
• What happens if certain conditions are not covered in your state’s medical program?
• What happens if you have to wait 12-18 months or more for lawsuits to be settled over a license dispute or you are endlessly waiting for permits/approval from the city or county level?
• Or inevitably, what happens when the economics begin to level out, supply begins to outweigh demand, and the retail cost per pound drops in half from what you anticipated? Suddenly, that big cultivation facility and all of the costs associated with operating it become more of a liability than an asset.

There are many complexities and vast differences of opinions/options of this industry.  Having a sound financial model and really analyzing estimated market data, including a “worst-case scenario”, are where any entrepreneur should begin before dumping large sums of money into applying for a new license or buying an existing license.

About the author:

Joe Bagan is the Chief Operating Officer of MJardin, a turnkey cultivation management operating company based in Denver, CO.  With over 28 years of experience in company leadership, financing transactions, business strategy and program management, Joe brings a vast array of knowledge and financial expertise to the MJardin team. He was a partner at Arthur Andersen (1988-1999) where he lead the Southwest United States Communications and Media business advisory practice, and served in executive roles for Fortune 500 companies AT&T Broadband (Merger Lead and Chief Information Officer; 1999-2003), Adelphia Communications (Chief Administrative Officer; 2003 & SVP Southeast United States which included a $750 Million P&L responsibility for 7 US states ), and Clear Channel Outdoor (Chief Operating Officer; 2010-2012).  Joe has also served as an Adjunct Professor of Accounting & Finance at his alma mater, the University of Denver, and has founded two companies RevGen Partners, a data analytics and business intelligence information systems company, and Sharklet Technologies, Inc, a biotech medical device company.  Joe serves as Chairman of both companies.

Joe graduated from the University of Denver in Denver, CO with a Bachelor of Science in Accounting (1988) and a Master of Science in Accounting.

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