Becoming a multi-state operator (MSO) in the cannabis industry requires planning and adapting to regional nuances unlike almost any other business. Financial modeling is a crucial step to understanding what lies ahead, and operators have myriad state-specific factors to consider when projecting their balance sheet.
With cannabis still illegal at the federal level, companies cannot transport supply across states lines. This results in highly individualized markets that vary in regulation, pricing, competition, saturation, and just about every other business consideration. There are layers of compliance and regulations at the city, county, and state level that must be navigated for MSOs to succeed.
As you model your path into a new state, operators must dig into the local environment and shed assumptions to understand the challenges and opportunities.
Figure out the financing
The financial climate continues to be patchwork, with federal regulations turning what is routine for most organizations into a complex obstacle course.
Start-up and growth stage businesses often live and die by their cash flow. In the cannabis industry, traditional paths to financing are blocked; at the local level, banking and borrowing opportunities vary widely, as do the parameters for social equity loans and investments.
Operators are also faced with security issues that come along with tracking and moving large amounts of cash. You will need to consider the added expenses associated with secure transport and insurance.
These interconnected issues make financial statement audits significantly more onerous. A different set of risks must be examined as auditors verify cash on hand, review safeguards and processes to manage cash, and ensure employees are not skimming.
Choose your entity structure wisely
Every state has its own licensing maze to navigate, which generally requires individual corporate entities to be established to comply with local guidelines. While creating new entities for each state presents an additional administrative challenge, the selected corporate structure can also play an important role in your exit strategy and tax exposure. When implemented as part of a broader plan, it can provide tremendous benefits.
The choice for corporate structure is nuanced. Many small start-ups will default to a limited liability company (LLC) taxed as a partnership. Choosing between a C Corporation, S Corporation, or LLC should be done on a case-by-case basis, as the ramifications of entity choice will differ depending on your business goals.
Get your energy online
Energy is one of the single biggest operational expenses for cultivators. Power consumption puts a strain on both cultivators and the utilities that serve them; in Massachusetts, it has been estimated that the cannabis industry drew 10 percent of the state’s industrial electricity.
That type of need has led some utilities in legal states to pull the plug, forcing operators to consider alternatives. Solar arrays and microgrids are options, but of course such infrastructure is expensive and demands dedicated planning.
Start by assessing your power needs and forecasting the appropriate budget. Whichever solution you choose, reliable infrastructure must be in place to handle the electricity demand and guard against potential disruption – and it can take up to a year for power to be up and running.
Know your local labor
Staffing is perhaps the second biggest operational expense, just behind energy. Finding the right people takes time, money, and coordination as you consider the ebbs and flows of the business.
With the cannabis sector at different maturity levels in different states, hiring plans must be sorted out well in advance of entering a region. In some states, the agricultural and seasonal workforce may be well-established and readily available. In others, there may be limited qualified personnel, requiring deeper searches and an expanded network of contacts.
It is difficult to succeed in a new state without the right workers in place to run the operation. Know your local talent pool, the associated costs to recruit and onboard workers, and start hiring well ahead of when you need to deploy the labor.
Financially modeling your entry into an additional state can be a complicated exercise. Those who have already established operations have a leg up, as some of their experience and processes will apply to other states. Newcomers should take the extra time and steps necessary to ensure they explore all the angles and understand the regional landscape.
In either case, focusing on the financial model helps you avoid misjudging your needs and opening yourself up to significant risk. Your accounting, legal, and operational advisors should be on the same page with you about goals, timelines, and budgets. To smooth the path, get the right team together to develop reliable forecasts and coordinate the best approach.
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