Skip Sanzeri, Managing Director, Multiverse Capital
As a Family Office, it is essential to understand the various types of cannabis investments from which to choose. For simplicity, we categorize these into three areas: ancillary businesses, medicinal, and recreational. In this article, we are going to discuss ancillary cannabis businesses and the different products and services they provide.
What is an ancillary business? Ancillary (in cannabis business parlance) refers to any company that provides products or services to the cannabis industry but does not directly “touch the plant.” These types of businesses do not require a country, state, or local cannabis business license to operate. In general, ancillary cannabis businesses are believed to be lower-risk investments as they are not plant-touching and therefore are not subject to the same depth of regulations, among other reasons.
Here is a partial list of ancillary businesses in the cannabis space. Keep in mind that some of these businesses can be great investments for family offices, venture, and private equity investors. In contrast, others don’t lend themselves to high multiples and are not as scalable.
- AI companies
- Building services including architects, contractors, building manufacturers (e.g., hybrid greenhouses) and more
- Cloud Services
- Cultivation products and services
- Data and analytics companies
- Extraction/manufacturing/distillation equipment
- Lab testing
- Legal services
- Marketing and Branding Services
- Non-cannabis products (paraphernalia and more)
- Real Estate and related services
- Security solutions
- Web-based services (directories etc.)
In later articles, we will provide information on how family offices should invest in ancillary cannabis businesses. Below we will discuss a sample of these types of ancillary companies.
Legal Services for Cannabis Businesses
While every business needs an attorney, cannabis businesses may need more than one attorney to ensure that they are adhering to the myriad of state and local regulations. Also, since many of these cannabis regulations are fluid, an attorney will stay on top of the most current rules. In some states, for example, new packaging regulations mean that there are many items on dispensary shelves today that will require updated packaging to be compliant with these new regulations. Patent attorneys will help businesses protect their unique cannabis strains, products, and other intellectual property (IP) via plant patents, utility patents and more. Trial attorneys represent cannabis businesses in case of a lawsuit from a customer, a competitor, or a disgruntled employee. Hiring a legal team with an extensive amount of experience in the cannabis industry is a must.
Accounting Services for Cannabis Businesses
As you may be aware, compliance is a critical factor in being allowed to continue operating legally in states which have legalized marijuana. Keeping accurate records of every expense and transaction is crucial in any business, but even more so with a cannabis business. Hiring a certified public accountant who has been working with cannabis industry clients for several years will help ensure compliance and optimize tax liability. An accountant can also do an internal audit, which will allow a cannabis business owner to detect and investigate fraud, safeguard company assets, and ensure that financial reporting is timely and accurate.
Cannabis Consulting Services
There are many types of cannabis businesses ranging from cultivation to manufacturing to dispensaries. All of these businesses can benefit from hiring a cannabis business consultant.
An experienced cannabis business consultant can help with the license application process, review and refine business plans, introduce potential strategic cannabis investment partners and other potential business partners (including other ancillary service providers), and outline the correct steps in the right order to maximize chances for success. Consulting firms also can advise on the best methods of structuring the business to maximize tax efficiency and protect assets. There are many types of cannabis consultants. Some specialize in helping growers achieve maximum yield while minimizing losses. Others specialize in extraction or manufacturing. Others specialize in raising capital or launching a new product. Some cannabis consulting companies offer an umbrella of services from seed to sale. The right cannabis consultant can increase the chances of receiving a cannabis license if they have gone through the licensure process many times with many clients. Ultimately hiring the right cannabis consultant will save time and money. It’s important to vet potential consultants. It’s best to ask any cannabis consultants to provide references and testimonials from former or current clients.
Cannabis Real Estate
Regardless of the type of cannabis business, real estate is necessary. Cannabis businesses will need either an indoor or outdoor space for cultivation, a building to operate an extraction facility, a manufacturing facility, or a testing lab and a retail space to open a dispensary. Ultimately, real estate is the foundation of any cannabis business. Even with the best product, the best team, abundant access to capital, revolutionary extraction processes, a strong brand without real estate that is appropriately zoned, and compliant with state and local laws will fundamentally fail.
Architects, Interior Designers, and Contractors
After securing real estate, the next step is to hire an architect and a contractor to build a new structure or reconfigure the existing building or retail space. A cannabis consultant (see above) can work closely with the architect and contractor to ensure that the building’s floorplan is optimized for an efficient workflow and future scalability.
Cannabis Security Services
We’re all familiar with stories (hopefully not firsthand) of dispensaries being robbed at gunpoint by criminals. It’s not just dispensaries that need to have security. It’s a requirement for every legal cannabis business to have video surveillance and an alarm system. Many cannabis businesses also employ armed security guards to protect their product and their cash, sometimes around the clock. Limited banking options in the industry increases the need for security. In addition to video surveillance, an alarm system, and armed guards, there are additional security measures that are also essential, such as safes and vaults. Some security companies offer a comprehensive solution, including electronic surveillance, cash & product tracking, cybersecurity services, armored vehicle transport, and asset protection.
Cannabis Business Insurance Coverage
Cannabis business insurance coverage is relatively new, but it’s spreading almost as quickly as legalization throughout the United States. Insurance costs vary depending on the state and type of cannabis business. According to a 2018 report in MJBizDaily, marijuana cultivator insurance policies range from $20K-30K per year in California, while dispensary insurance policies vary from $10K-$200K per year. Most cannabis businesses will need general liability insurance (to cover accidents in the workplace) and product liability insurance in case of an issue with product safety.
As a category, ancillary businesses provide family offices with the lowest risk profile in the cannabis sector when compared to medicinal and recreational “hands-on” investments. The reason is that ancillary cannabis businesses do not require a license to operate and are not plant-touching. For example, international investors may have concerns with plant-touching investments due to the liability within their own countries (investing in an operation that is federally illegal in the US). Additionally, licensed businesses have a higher risk profile because, without stringent compliance (which is amazingly involved in the cannabis industry), companies can lose their cannabis license, inevitably leading to business failure and loss of investment. Also, non-ancillary plant-touching businesses are subject to IRC 280E, a tax code that prohibits standard business deductions, outside the cost of goods sold, for any business that “consists of trafficking in controlled substances.” Cannabis meets this criterion as it is a Schedule I drug under the Controlled Substances Act. A violation of IRC 280E could mean severe tax consequences that could threaten a company’s viability. Ancillary businesses are not subject to IRC 280E.
Thus we see a lot of family offices who are specifically interested in the ancillary cannabis businesses where they can avoid much of the risks associated with licensed operations.