How to Open a Marijuana Dispensary

Pot is a hot topic, even for those who don’t smoke it.

The recent legalization of marijuana in several states has been an unprecedented process. By legalizing both recreational and medical marijuana, states have opened up a new industry—one that people are clamoring to take advantage of.

We talked with two dispensary owners from pioneering states: Mitch Woolhiser, owner of Northern Lights Cannabis Company in Denver, Colorado, and Lincoln Fish, CEO of OutCo Labs, which manages the dispensary Outliers Collective in San Diego, California. While the details of their experiences are very different, their general attitude was similar: Opening a dispensary is not for the faint of heart. It is a business that takes a lot of hard work and time before it becomes profitable.

“It’s one of the hardest things you could possibly do,” says Mitch Woolhiser. “It can’t just be this fun thing. It has to be taken seriously.” In addition to requiring a lot of effort, opening a dispensary requires careful compliance with laws and regulations, as well as a large amount of starter capital. “You’re not going to make money if you aren’t following these rules,” Lincoln Fish says. “It’s an expensive business to run.”

But if hard work, up front cash, and bureaucratic red tape don’t deter you, opening a dispensary is an opportunity for you to be a pioneer in what is soon to be a massive, national industry. Marijuana Business Daily projects revenue generated by dispensaries and retail stores to reach between $6.5 and $8 billion by 2019.

“It’s still at the ground floor of the whole thing, considering the federal illegality of it,” says Mitch. “It’s still a good time to get in.”

Read on to find out how you can open a dispensary.

1. Assess your commitment and eligibility

Lincoln Fish moved into the medical marijuana industry to challenge hypocrisy.

“I was with most people. I thought, ‘These are drugs, this is bad,’” Lincoln says. “Then you start to learn how much hypocrisy surrounds marijuana. Alcohol and tobacco are far more damaging, far more addictive. Schedule 1 Narcotics by legal definition are highly addictive, shown to have no medicinal benefits and can be harmful to the point of lethality. Alcohol and tobacco meet all three of those requirements and marijuana meets none.”

Mitch Woolhiser saw a magnificent and unusual business opportunity in the budding marijuana industry in 2010. “This is something that, as a business person, you can do that’s almost revolutionary,” he says. “It’s the opportunity of a lifetime. What product suddenly becomes legal that hasn’t been for a long time? Not since alcohol prohibition has something like this happened and it probably won’t again in my lifetime.”

But Mitch and Lincoln both warn against opening a dispensary solely for financial gain. “If the only reason you’re getting into this is money, you’re not going to have a good time,” says Mitch. “It’s not a ‘get rich quick’ scheme. It’s a long game. You have to have something more to motivate you.”

It’s also important to recognize that background checks are often required, not only for the owner of a dispensary, but also the investors and employees. If you have a criminal background, you may not be eligible to open a dispensary.

Furthermore, if medical marijuana is not legalized in your state, any dispensary is liable to be shut down by the federal government. If there are no existing laws or regulations in your area, opening a dispensary probably isn’t a good idea. “If the city or county hasn’t passed anything, then the default position of the state is that there is nothing legal there,” Lincoln says. “You have to be very careful. That could be a problem. You could get shut down.”

Considering the money you will spend opening a dispensary, trying to operate one illegally is not worth the risk.

2. Do your research

The dispensary business is rife with legislation and regulation. For example, even determining how you’ll accept payments as a cannabis business is a complicated topic, and something you’ll want to give plenty of thought.

To be successful as a dispensary owner, you must understand not only the existing laws around marijuana cultivation and sales, but also the proposed laws and changes that will go into effect in coming years.

Lincoln Fish recommends reading the Cole Memorandum, which gives guidance to U.S. state attorneys on how to prioritize the enforcement of marijuana laws. If you’re in California, he also recommends reading Proposition 215 and Proposition 420.

“In most cities and counties, it’s very easy to study and see what the legislation is,” says Lincoln. “Either it’s banned altogether, [or] if it’s not, they’ve already put out ordinances and guidance.”

The National Organization for the Reform of Marijuana Laws, or NORML, has a database of detailed marijuana laws and penalties for every state in the U.S. These tables from the National Conference of State Legislatures are also useful.

“There are a lot of rules to follow and I would strongly advise that people get help right from the get-go: a lawyer and a CPA,” says Lincoln. This will help you stay in compliance with the law and access permits and licenses. NORML has a database of lawyers from all over the U.S. who specialize in the marijuana industry.

Both Mitch and Lincoln recommend a hard study of U.S. Code 280E, a tricky tax code that can slip up dispensary owners, particularly in budgeting.

“If you are dealing with a Schedule I narcotic, which marijuana is, you can only deduct the cost of goods sold from your revenue before you do your taxes,” Lincoln explains. “Say you buy the product for $500, put it on the shelf, sell it for $1000. You would have to pay taxes on $500 profit before you can take out your rent, employees, so forth. What is happening to a lot of dispensaries is they’re getting zinged with enormous tax bills. This is another reason that opening a dispensary isn’t necessarily as lucrative as people think.”

3. Find a rental property

“The key is really just to find a compliant property,” says Lincoln. In San Diego, a compliant property has a lot of requirements: “To be a compliant property, it has to be more than 1000 feet from a church, 1000 feet from a school, 1000 feet from a residential zone, and 1000 feet from another compliant property,” says Lincoln. “There is a map online that shows all the San Diego county compliant properties.”

It’s important to remember that, because of the ever-changing environment of the marijuana industry, a property that is compliant now might not be in two years. “Make sure that when you do access a property that it will be consistent with new laws that take effect in 2017, 2018,” Lincoln says. “Make sure you don’t open one and get shut down because it runs afoul of the new laws.”

A compliant property means different things in different places, and even if you find a compliant property, you have to be honest with the landlord about your plans to open a dispensary there, and they might not be supportive. Mitch Woolhiser dealt with this while searching for space for his dispensary back in 2010. “Some landlords just didn’t want to deal with it and still won’t,” Mitch says. “Some of that is because of the federal illegality and the liability they might have.”

Landlords are sometimes under pressure from law enforcement. Mother Earth Collective, which used to operate in the space that is now Outliers Collective in San Diego, was indirectly forced out by the DEA. “The DEA sent out letters to landlords all over country and said, ‘Hey, if we decide to come down on these guys, you can be liable if you’re renting to them.’ The landlord kicked them out and the collective closed,” Lincoln explains.

When searching for a place to open your dispensary, also consider if it is convenient for potential customers. “For planning purposes, location is the most important thing for the retail side,” says Mitch. “People are coming to you because you’re a destination or because you’re convenient.” Identifying a target market can help you choose a good location for your store.

It’s also important that most, if not all members of your community (even the non-users who won’t be your customers) are comfortable with a dispensary in their area. If your county or city has had ballot proposals on marijuana laws, Mitch recommends accessing ballot results for any area where you are considering a property.

“In Colorado, we had a vote in 2012 on Amendment 64, which is the recreational law,” he says. “I accessed the Secretary of State’s website and got the election results for Edgewater [where Northern Lights Cannabis Company is located]. In Edgewater, it passed for 70 percent. Another community, you can find out that information. You can find out the results of those ballot questions and decide, based on that information, whether the community is going to be welcoming or not.”

420 Property is also an excellent resource if you are looking to purchase marijuana-friendly property.

4. Write a business plan

When an industry is saturated in the way the medical marijuana industry is, it’s all the more important that you appear professional and prepared with a solid business plan.

Mitch, who used Bplans to write his dispensary business plan in 2010, says a business plan separates you from the crowd. “Write a business plan,” he says. “There are a lot of people who get involved in this business and aren’t very serious. Understand what you’re getting into and don’t just listen to somebody who’s all high in the sky.”

Access capital

Any good business plan will start with how to access capital, which is one of the most challenging parts of the marijuana industry because you need a lot of it.

“The barriers to getting in are still pretty high,” says Mitch. “It’s going to take a lot more money than it used to. We got into it with about fifty thousand dollars and some credit cards. Now, you wouldn’t be able to break into it without at least a half a million because of the regulations. Also, because there is so much competition.”

Because of the federal illegality of marijuana, you can’t get a bank loan for a dispensary. Lincoln recommends sticking to personal funds for your starter capital. “You’re better off right now really focusing on the angel investors, friends and family to get yourself to the point where you can acquire a property,” Lincoln says. “A lot of investors aren’t going to talk to you until you have a lot of the pieces under your belt. If you have a compliant property, it becomes easier.”

Determine your budget

Another consideration in your business plan is a clear, concise budget.

“You have to build a budget and take 280E into account,” says Lincoln. “You will not be able to do it on a shoestring. You have to be prepared for it to grow slowly.”

Consult wholesalers in your area to find out the cost of products. “For the business plan itself, you need to know your costs as far as what it will cost to get the product,” Mitch says.

Besides your product costs, there are other considerations for your budget:

• Rent cost
• Cost of license
• Licensing application fee
• Employee salary
• Transportation and storage of product
• Security

Research the competition

In addition to knowing about the licensed competition in your area, opening a dispensary requires you to think of another demographic of competition that presents more challenge: unlicensed operators.

“Understand the unlicensed competition landscape in that area,” says Lincoln. “What is law enforcement doing about it or planning to do about? The truth is, the unlicensed ones are being allowed to run rampant. Law enforcement works on shutting them down but it’s not a high priority because they can’t get any convictions.”

Look in local publications for dispensary advertisements, both brick-and-mortar, and delivery. This will give you an idea of the unlicensed operators in your area. Additionally, research crime busts on unlicensed operations in your area. Are the unlicensed dispensaries being allowed to function freely, or is law enforcement working to get rid of them? This will be good information to inform your business plan.

“It’s very difficult to build up a patient base when you have people next door who are open 24/7, which you won’t be able to do, who are not paying taxes or social security for their employees, who are not paying federal taxes,” Lincoln says. “That will kill you. You have to play by the rules and they don’t.”

Conduct market research

Your business plan presents an important opportunity for you to identify your customers. This will help inform the marketing and pricing strategy for your dispensary. “Know your market,” says Lincoln. “Know your demographic and psychographic. Is there consumer demand? Where is it? This will also dictate some of your pricing as well.”

5. Get licensed

Getting licensed to open a medical marijuana dispensary is usually difficult and expensive. “I have known people who have spent upwards of three to four thousand dollars in legal expenses to get their license,” says Lincoln. For instance, in Colorado, the application fee for a medical marijuana dispensary can cost as much as $15,000.

“Be prepared to spend a lot of time on compliance and have a lot of resources ready for that,” says Mitch. “A lot of consolidation has been going on here because a lot of smaller operations can’t keep up with the compliance. It’s a full-time job.”

Take a look at Colorado’s Retail and Medical Marijuana License Application Process for some idea of what your application process might look like.

6. Get product

Obtaining a good product for your marijuana dispensary, and ensuring you do it legally, will be a central part of opening a successful dispensary. Many dispensaries grow their own marijuana, and in some states this is mandatory. Mitch Woolhiser has his own cultivation facility for Northern Lights Cannabis Company and says that should be on the horizon for any dispensary owner.

“Open a retail facility first and then put an eye toward having your own cultivation facility,” he says. “Get the retail off the ground with wholesale products. I would recommend that.”

Opening a dispensary doesn’t mean you have to sell marijuana in its typical form. Many patients prefer edibles, oils, dabs, and concentrates. Mitch says sellers of these forms of marijuana are easy to find and do business with. “When it comes to edibles and concentrates, those companies have sales forces,” he says. “Just reach out to them and establish contact.”

See the resources section at the end of this article for a selection of wholesale medical marijuana providers.

7. Market your dispensary

Decide what makes your dispensary competitive, and sell it.

“You can compete on price or other things, and I chose other things,” says Mitch. “We try to be more boutique. For us, you ask all the questions, you get to smell and look at each type before you decide which to buy. It creates more of a unique buying experience.”

Outliers Collective also gears their advertising toward a more mature audience. “We’re looking for longer-term customers that come to us because they want the service, quality, and consistency,” Lincoln says. “We want to get the word out to a different kind of patient, people who care about all the things that a licensed place represents.”

Your target market will inform some of your marketing choices, but Lincoln says there are some must-haves for marketing your new dispensary. “You have to be on Weed Maps and Leafly,” he says. Weed Maps and Leafly are applications that allow patients to search for dispensaries in their area. Lincoln also uses some magazine advertisements and has a billboard on California State Route 67.

Mitch recommends marketing through social media accounts like Instagram, encouraging customers to give Google reviews, and keeping your website updated with proper SEO strategies.

It’s also important to check into the regulations around marketing your dispensary. There are many methods Mitch can’t use in Colorado: “You can’t advertise on the radio, TV, billboard,” he says. “There are a lot of restrictions. You can’t market toward out of state people. You can’t do pop up ads.”

Mitch and Lincoln both use loyalty programs which help market their dispensaries by word of mouth; a program that gives customers store credit when they refer a new customer will expand your customer base.

Stay informed

With this information, you have a good chance of opening a successful, lucrative dispensary.

Lincoln Fish encourages those with the right motivations to join the relatively new industry of medical marijuana: “I would love to see more responsible, credible people get into our space and open up dispensaries and do a good job with it,” he says. “The more we do to show the general public just how important this is and how responsible we can be and how well it can be done, the more we’ll get the public opinion on our side.”

With marijuana legislation changing often, it is important to stay abreast of new information even after you’ve opened your dispensary, to ensure you are operating in a safe and legal manner. Refer to the resources below for more information.

Resources

NORML: A one-stop resource for all information about the fight to legalize marijuana nationwide.

Cannabis Business Times: A resource recommended by Mitch Woolhiser.

420 Intel: A blog recommended by Lincoln Fish.

MJ Business Daily: Recommended by Lincoln Fish, this resource provides consistent research, statistics, and coverage of the legalized marijuana business. They also provide an annual fact book, ebooks, and an industry directory.

The Green Solution: Wholesale medical marijuana supplier.