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How to Open a Medical Marijuana Dispensary

The medical cannabis industry is exploding. Here's how you can break in.
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In 2010, Dr. Bruce Bedrick, a chiropractor from Philadelphia, sold his practice and moved to Arizona. It wasn't for the weather (he says he can't wait to move back east) and it wasn't to retire (he's still working).

He did it, like many others in his cohort, because of what's being called the "Green Rush"—a move out west to take part in one of the most exciting, risky, and (perhaps) profitable enterprises today: the medical marijuana trade.

Within a year, Bedrick set up shop in Scottsdale and launched Kind Clinics, a full-service marketing and consulting company that helps entrepreneurs open and manage dispensaries. For Bedrick, business is booming. He reports that he's already working with about 70 dispensaries, which, by his estimation, makes him the largest medical marijuana consulting company around today.

"Absolutely, people see it [as a gold rush]," Bedrick says. "But there's more to it than that. There's a bit of freedom here. There's finally an awareness for compassion. I work with oncologists, attorneys, and pharmacists. These people truly understand the benefit of the herb."

According to See Change Strategy, a think-tank that conducted an industry-wide analysis of the medical marijuana trade, the current national market for cannabis is $1.7 billion. By 2016, the market could surge to $8.9 billion. To give some perspective, that's more than the annual GDP of The Bahamas—by about a billion dollars.

"The numbers are potentially astronomical in this burgeoning new field," Bedrick says.

See Change would seem to agree. "The growing acceptance of medical marijuana is providing business operators and investors with unprecedented opportunities," the authors note. "See Change expects these markets to enjoy 99 percent growth in the next five years just in existing markets, with more than 20 potential new markets opening."

Still, there's one giant caveat to keep in mind: it's illegal. "However, investment and business development will continue to be dampened until the federal government definitively changes its position on the legality of medical marijuana," the report notes.

Although law enforcement has largely turned a blind eye to most dispensaries, the fact remains: the sale of marijuana, for any use, is considered illegal by the federal government. So if you're considering opening a medical marijuana dispensary, you'll be dealing with plenty of hurdles: regulatory, compliance, financials, as well as the quandaries any typical business owner faces, including marketing, logistics, and human capital. A few experts weigh in on how to mitigate those risks and create a sound and profitable enterprise.

Dig Deeper: Medical Marijuana Laws Leave Employers Dazed and Confused

How to Open a Medical Marijuana Dispensary: A Bit of Background

About forty years ago, Congress officially placed marijuana in Schedule I of the Controlled Substances Act. Essentially, the government concluded that the drug had a high potential for abuse. In other words, this legislation "cemented marijuana's de facto prohibition," according to See Change.

In the mid-90's, many activists began to rally around the drug's purported medicinal benefits. The Medical Marijuana Project was founded in 1995 to "increase public support for non-punitive, non-coercive marijuana policies" and to gain influence in Congress. A number of studies, both public and private, were funded to test the veracity of marijuana's medicinal worth. One such study in 1999 found that "The active ingredients in marijuana appear to be useful for treating pain, nausea and the severe weight loss associated with AIDS," according to the The New York Times.

Slowly, states began to adopt legislation to make it easier for medical marijuana to be disseminated.

"Over the past 15 years, led by California, 15 states plus the District of Columbia have adopted laws permitting some form of marijuana consumption or distribution for medical use," notes the See Change Strategy study. "These laws have been adopted by public referendums as well as legislation."

In 2009, the Obama administration ordered federal prosecutors not to prioritize legal action against medical marijuana dispensaries that comply with state laws. This controversial decision has been critical to the growth of the medical marijuana industry.

"These conditions have combined to produce the first legal marijuana markets in modern times," the authors note. "This emerging market presents unique opportunities to entrepreneurs and investors as well as unique risks."

Dig Deeper: Medical Marijuana Retailing

How to Open a Medical Marijuana Dispensary: The Challenges of the Trade

"The largest challenge that medical cannabis faces is that it is still federally illegal in the eyes of the federal government," says Kris Lotikiar, a co-author of the Medical Marijuna Markets report. "You're going to be running a criminal enterprise."

Lotikar, whose background is in renewable energy and business strategy, explains that while there's been a drastic reduction in the prosecution and raids of dispensaries, the overarching fact is that the dispensary business poses a number of difficulties for an entrepreneur, especially in raising capital, finding investors, and setting up merchant accounts with banking institutions.

Of the 300 respondents to See Change's survey, 34 percent "cite regulatory compliance, not customer demand or securing supply, as the number one challenge," while "24 percent cite securing financing as the most pressing business challenge."

There's also difficulties in the human resources department. Namely, Lotikar says, "You reduce the number of employees who are willing to work for you."

Dig Deeper: Health Care Issues

How to Open a Medical Marijuana Dispensary: Where You Can Open and What to Do

If you're planning on opening a dispensary, first check with state officials to navigate the local laws and ordinances that will govern your dispensary's actions. Because medical marijuana dispensary laws vary so much from state to state, and there's not always one department set up to govern the medical marijuana trade, Bedrick recommends that an entrepreneur should first check with the Department of Health Services as a good starting point.

Then, you'll need to go through a licensing process. Some states, like California, don't restrict the amount of dispensaries in a certain zone, unlike other states, like Delaware, that bid out dispensary licenses sparingly.  Entrepreneurs should also check with local officials on how to incorporate the business. Some states require all dispensaries to be non-profits, while others can be registered as C-Corporations.

Considering there will be quite a high degree of competition, Bedrick says any dispensary entrepreneur must have a solid business plan, ties to the community, and a squeaky clean record.

Kris Krane, another co-author of the See Change report agrees.

"The right candidate is a business-minded entrepreneur who cares about the issue and cares about doing it right, and can handle a certain degree of risk," he says. "This is an industry that is very much in its infancy, where regulations are not clearly defined. There is the threat of federal involvement, and anybody getting involved has to be comfortable with a certain degree of risk, but recognizing that the long term rewards—both in financial and social cause—can be extremely high."

Dig Deeper: How to Start a Small Business

How to Open a Medical Marijuana Dispensary: The Costs and Revenues You Can Expect

"You better be well-funded," says Bedrick. "This is not for the faint of heart."

Considering legal and consulting fees, an entrepreneur can expect to dole out between $30,000 to $100,000 just to make an application, according to Bedrick. Then, if you are granted a license, then you'll need to do a build-out, which will run you $100,000 to $300,000. After you've built the store, then you'll need the product. And if your state also allows a cultivation location, that will run you anywhere between $200,000 to $400,000.

Though it will vary widely, start-up costs average out to around a quarter of a million dollars, according to Bedrick. Kris Krane, author of the See Change report, said that some entrepreneurs paid as little as $40,000 while others paid as much as $500,000.

"For somebody wanting to start a dispensary or cultivation center, start-up costs are going to involve getting through the regulatory structure, which can be quite complicated and quite difficult," says Krane. "If someone is going to do this right, they're going to want to hire good lawyers, a good CPA, and a good consultant."

And how much can you make?

"It's a loaded question," says Bedrick. "It can be anywhere from failing to doing very well and making $100,000 a month in revenues."

Dig Deeper: 6 Questions to Ask Before Starting a Small Business


How to Open a Medical Marijuana Dispensary: The Ancillary Benefits of Opening a Dispensary

While dispensaries are the obvious business model for those looking to break into this industry, there are perhaps less obvious altenratives.

"Demand for marijuana has produced a number of business opportunities," See Change reports. "Other entrepreneurs are providing marijuana infused products including edibles, tinctures and salves. Development and sales of smoking and non-smoking paraphernalia for consumption are on the rise."

Bedrick would agree. He says that while some patients enjoy smoking the medicine, there is a considerable move and market share toward the edibles. What started out as a couple percentage points of the market share is now up to about 15 percent. Medicinal marijuana can even be made into sodas, bars, elixirs, and lozenges. "Some people just don't like smoking," he says. "This makes it easier to take."

And where there's a growing market, there's always a few creative types lurking behind the scenes.

Russell Perry, who owns Keane, a creative advertising agency in Tempe, is working on concepts to promote medical marijuana dispensaries.

"I think what's really kind of awesome for people in our industry is the opportunity that lies ahead," he says. "Unlike opening a CPA firm, where there's a preconceived notion of what that brand is supposed to look like, it seems like this is a wild-wild-west. We're on the ground floor trying to shape it. Who knows what's going to happen in 10 to 15 years."

Dig Deeper: 10 Inspiring Success Stories

Last updated: May 27, 2011




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