Starting a Legal Cannabis Business in Massachusetts

Discussion in 'CANNABIS.COM Lounge' started by GlobeTrotter239, May 29, 2018.

  1. GlobeTrotter239

    GlobeTrotter239 Registered

    My younger brother (37) is trying to convince me (48) to invest in a legal cannabis business in Massachusetts. He claims that I would be getting in on the ground floor of this flourishing field, so the profit potential is huge. Mind you, I know very little about cannabis, and I don't even smoke myself.

    His plan is for my parents and I to go half each on the cost of a commercial property (suitable for a 5000 sq ft growing facility). We would be selling to dispensaries within the state, and maybe even open our own dispensary.

    While my brother doesn't have money to invest in this business himself, his contribution is that he is providing everything needed to start the business and run it. He has done a lot of legwork in the past year, and has already set up a team in Massachusetts, including a superb grower and savvy local business manager (who will each be getting a 10% share of the net profit of the business). He's also found a property that meets the state's legal guidelines and that is perfect for our budget.
    So, basically, he's done everything so far. I'll just be applying for the growers license (he's not eligible because he got a felony at 19) and contributing half the money to start the business. I will also put the real estate under my name. I can then presumably kick back and collect my share (almost one-third) of the profits, while the team runs everything.

    As exciting as this sounds, it strikes me as a little too good to be true, so I'm naturally a little skittish. The total cost of getting this whole operation off the ground, including license fees and all expenses, is in the neighborhood of 350k (175k each from me and my parents), so we're not talking about a trivial amount of money. I would have to get a loan to come up with my share of the cash, because my money is all tied up in my 401(k) and other non-liquid accounts.

    Should I take the plunge?


    FYI:

    - I've been working a civil service job in Brooklyn for over 9 years, and have accumulated a net worth of 600k. I worked hard to get to this level, so I'm not keen on spending my money foolishly

    - My parents are willing to put up their half of the money in cash, which they will transfer to my bank account (they also live in Brooklyn)

    - I have spoken to the manager and grower in person several times. They're both very professional and convincing. The manager, in particular, knows many important people in the area that can assist us
     
  2. Dutch Pimp

    Dutch Pimp Up in Smoke

    sometimes the ground floor is just the ground floor
     
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  3. AladdinSane

    AladdinSane Registered+

    I do wish you the best of luck whatever decision you make. BUT, I would warn you about investing with family and friends. Owning and running your own business, no matter the service or product, is stressful enough. Having the pressure of using your friends/family's money can end relationships. Never leave anything to "we'll make sure you are paid back" type of thing. Write it all down so you all know the expectations and pitfalls. And if you make it big, send me some samples. :)
     
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  4. Weezard

    Weezard Registered+

    Keep in mind the schedule one status.
    It means that the feds could waltz in, confiscate your cash, goods and property and charge you all with conspiracy to commit felonies.
    Best read up on the law. Know all the risks.
     
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  5. GlobeTrotter239

    GlobeTrotter239 Registered

    I posted this same question in another forum (not pot), and virtually EVERYONE is advising me not to invest in this business because I'll lose my shirt and potentially get jailed for running afoul of federal law. Very discouraging.
     
  6. Weezard

    Weezard Registered+

    The risks are real. And Aladdin's advice is spot on!
    There are ways to make an income from cannabis that make one less of a target.
    The potential rewards are less, but so is the cost of error and happenstance, yah?
    Suggest you look into peripheral support positions.
    For instance.
    I would not risk investing in a dispensary, but I'd be happy to design custom LED arrays for a grow op.
    I would not work as a clerk, but I'd be happy to install a security system for them.
    And, I do have enough experience to do Quality control and grow logistics.
    All I'm saying is, there are many, lucrative positions that do not put your ass on the line, yah?

    Aloha,
    Weeze
     
  7. irydyum

    irydyum Registered+

    I have personally participated in the "start-up" phase of 3 different legal cannabis businesses, 2 of which have gone publicly traded via RTO's on the TSX. Currently employed in a similar position. I can tell you that everything you are saying sounds like it works out riding off into the sunset with bags of cash....

    It won't be. I would implore you to put together a solid business plan (or have grower and manager do that), and look at what the expected burn rate of the company will be. Have someone with a working knowledge of legal commercial cannabis review the plan to ensure that you haven't missed expenditures. Many people know how to grow weed, not many know what it takes to do it legitimately as a legal business. Make sure you have liquid assets to cover operations in year 1, assume no cash flow.

    Things will absolutely go wrong. Especially with a team that has no commercial cannabis experience under their belt. Many people can grow amazing weed at the hobbyist level. Not as many can do it commercially at a manufacturing scale. Be in a position to weather that storm and you may be able to make it to where you want to be.

    Do you have any indication of what your production price per gram will be? Do you know what wholesale in the market you are entering will be selling for a year down the road? There are a million questions like this that need to be addressed before you can confidently deploy your money. Make sure the plan is on paper, and make sure your team is organized.

    I'd be happy to help in any capacity that I can. I tend to stay quiet around here for the most part, but I definitely felt like I should pipe up here and be heard. I'm not meaning to scare anyone away, just want to ensure that your expectations are tempered and that you aren't being sold a dream that can't be executed. Be careful how equity is distributed, and how much salary is being paid out. Understand that your grower is going to want what he wants because it's what he knows, not always because it's the best option for the application. It's a tough road to navigate between the operation and the investment team. Growers want the best product possible, and investors want cash flow. Sometimes you will find those two at odds with each other.

    Just one commercial growers 2 cents. Take it for what it is. Literally, any advice I can give, feel free to ask away. Happy to share email privately if you like as well.

    Cheers!
     
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  8. Weezard

    Weezard Registered+

    All of the above and timing.
    I see prices dropping due to overproduction and there are already a hell of a lot of "ducks" in this pond. Competition is fierce.
    Suggest that you take a long look at what's happening in Colorado.
    If none of this scares you off, and you actually like working 12 hour, adrenaline soaked, days, go for it. :)

    Aloha,
    Weeze
     
  9. GlobeTrotter239

    GlobeTrotter239 Registered

    Thanks for your detailed response.
    I actually compiled a list of questions (and comments) that I am going to ask the manager and my brother. I know this list is long, but maybe you can help answer some of them (and come up with questions of your own):

    (1) How are we going to avoid the damage that 280E will inflict on our profits?

    (2) How do you know that the DEA won't start enforcing federal law? My assets can get seized and I can go to prison. I don't want to play Russian Roulette with my life.

    (3) My 401(k) investment company can drop me because I'm violating federal law. I can be forced to liquidate my assets, thus incurring a 10% early withdrawal fee in addition to a 35% income tax on the lump sum. What do you say to this?

    (4) I am probably prohibited from participating in a cannabis business by my NY state civil service job. Yet, I can't ask my employer if this is the case, because then they'll have their eye on me.

    (5) I know that Jeff (the manager) runs a real estate business, but has he ever been in the cannabis business? What qualifies him to run one?

    (6) Jay and Jeff (grower & manager) are going to be part owners of the property, even though they didn't contribute capital. How do we prevent this?

    (7) Will the IRS be auditing me (business and personal) every year because of my involvement in this business? What's are the consequences of this?

    (8) Can the feds retroactively seize my assets, even years later, because I was involved with cannabis? When am I out of the woods? Do all my assets become tainted after cannabis?

    (9) How can my parents contribute money to this business without being legally involved and without tax consequences?

    (10) How on earth will I pay Jay and my brother (who have felonies)? In cash?

    (11) Who are the financial institutions that will take our money? Also, if they are not federally insured, who are they insured by?

    (12) What happens when Jay and Jeff decide to bail? I know nothing about running a pot business.

    (13) What if cannabis suddenly becomes legal at the federal level, and now our window of opportunity is much narrower?

    (14) The compensation structure of our business is very bad. If business is doing poorly, what's to stop our grower and/or manager to jump ship to a competitor, who will pay them more?

    (15) What if we lose a crop? We don't have the money to ride the storm out.

    (16) How low can the price of cannabis conceivably go within a 3-5 year time frame? Can we still prosper with very low prices?

    (17) Where is our detailed start-up budget and cost-of-sales projection?

    (18) What is our specific strategy for achieving efficient regulatory compliance?

    (19) Who will be our customers, and why will they buy from us instead of from other growers? How do we achieve reliable markets and distribution channels?

    (19) Assuming we find these reliable markets and distribution channels, how will they pay us? In cash?

    (20) I don't like that we're entering into a contract that limits our ability to terminate or change the compensation of our manager and grower.

    (21) If our business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute), or just those who have contributed capital (my parents and I)?

    (22) We know very little of Jeff's background (the manager). How can we do a discreet (and affordable) investigation?

    (23) Where are we going to get insurance for fire, theft, injury/death on property, or if someone that we sold pot to kills someone in a DWI?

    (24) Is it true that we will not only be liable for federal taxes (with limited deductions), but for Massachusetts AND NY state taxes as well (because I'm a resident)?

    (25) Are you sure that we are not underestimating the amount of money we're going to need to get this operation off the ground and keep it afloat?

    (26) What if the grower and/or manager get injured or even kidnapped on the property? How liable am I?
     
  10. surfing1

    surfing1 Registered+

    I cant answer any of your questions, but as Weezard mentioned the product has gotten cheaper and I dont live in a legal state. I cant speak for prices anywhere other than where Im at but the same ounce that was going for $350 a year ago is now going for $250 and this is top shelf stuff. Oil, was going for $50 a half gram,is now $50 for the whole gram. Im sure im still paying more than folks in legal states are but the prices have still dropped alot. Good luck with your decision
     
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  11. TomSawyer2112

    TomSawyer2112 Registered+

    From everything I’ve read here, I would run away as fast as possible. If you’re itching to invest in the industry, the cannabis stock market would seem to make more sense.
     
  12. GlobeTrotter239

    GlobeTrotter239 Registered

    When members of a cannabis forum advise me to stay away from a cannabis business, that's when I really know that the business sucks.
     
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  13. TomSawyer2112

    TomSawyer2112 Registered+

    Until the fed takes it off the schedule, brick and mortar startup knowing one person involved in the venture is a felon is NOT a good idea. It sucks but that’s reality. Especially considering it’s him trying to drag you and your family into it. Had it been your parents idea or your own, maybe I would get a different vibe about it. However. Felons involved in such activities is frowned upon. As for cannabis stock market investments, Canada is on the verge of going legal and there are businesses around the world and in Colorado and California and Washington State and Oregon who are now publically traded on the stock exchange. You won’t get busted for being a stock holder.
    I’m the kind of person who is going to tell you what you need to know. Not what you want to hear. It’s nothing personal. I’m looking at it through the eyes of an outsider with no emotional attachments or sentiments.
    Also. I am NOT dispensary . I’m not here to grow so I could sell. I am here solely for my own personal medical needs (cancer) and to learn tips that may help me make decisions in the bioceutical cannabis industry related stock market investment arena and to support full legalization.
    I understand your concerns. I’m just pointing out that your concerns are extremely valid and you should scrutinize every detail.
     
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  14. GlobeTrotter239

    GlobeTrotter239 Registered

    My brother will not be directly involved in this business (no growing, handling pot, being on the payroll, etc.). He will have ancillary functions.
     
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  15. irydyum

    irydyum Registered+

    I suppose my first inclination is to try to answer all these questions one at a time. However, I notice a common theme here. Lack of trust and fear. I don't know that anyone can tell you anything that is going to alleviate your fears, most of them valid btw, but most are also not specific to the cannabis industry. Risk is part of investment, and If I were you, I would spend some of the money on a retainer to legal counsel and have them start answering questions for you considering the framework of the state you intend to operate in. Happy to refer a lawyer if you like.

    All that being said, there are safer ways to invest in cannabis other than being an operator. What is your goal with this investment? If it is to get rich quick and cash out, probably not the best way to do it. I'd look at the TSX and venture capital markets in Canada, do some diligence, and deploy my money there for now. It is as safe as any US based investment from a legal stance, though you still get the volatility and excitement of being invested in a ground level business.

    I think most of your questions are centered around wether this is a good idea or not, and unfortunately no one can answer that for you. I don't know how to reconcile your fears about the manager and grower, I have seen more than one investor burnt by not doing their diligence on the people running their business. How do you reference check them? Aside from the standard local and state background checks, that's a tough one. I usually work with well financed start ups who will literally pay me to come in and have conversations with people to vet their cannabis knowledge and write reports back to them. That's one way is hire a consultant to fact check your crew.

    All of this being considered, I would certainly be hesitant if it were my capital as well. I'm sorry I don't have the time to write a detailed response to all of the questions, if I can find time later, I may start to. The one thing I would definitely try to do is find a way to use capital other than my own. It's never a good idea to risk your security in the world, for anything really. If you have a solid business plan and applications written and all, and you happen to get through the application process to be awarded a license, there will be people late to the party with more money than sense that will be happy to finance your business with loans. That's my reader's digest version. $600k net worth, and deploying almost 30% of that into a risky operational investment.... Any financial advisor or fiduciary worth their salt wouldn't let you do something like that. Not trying to be insulting or presumptuous here but as an investment vehicle it doesn't sound like the right choice.
     
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  16. irydyum

    irydyum Registered+

    Duplicate, apologies....
     
  17. GlobeTrotter239

    GlobeTrotter239 Registered

    Thanks for the reply.
    I won't lie. My goal with this investment was to make maybe 500k to 2 million each for my brother and I within 3-5 years. Then, perhaps sell the business/property to the big players once they swoop in. A pipe dream, I know, but that's the scenario I've heard repeated by those in this industry. I am a skeptical person by nature, and feel that all markets are highly efficient. But, a small part of me still believes in magic and fairies and unicorns.

    The 10-year returns for the TSX venture composite index appears to be dismal. This index has been trounced by the S&P 500 in the past decade:

    https://us.spindices.com/indices/equity/sp-tsx-venture-composite-index

    My high risk play has been to invest in a basket of about 40 cryptocurrencies. I have about 3% of my net worth invested in them. I've doubled my money since June, 2017, but at one point, I was up 5 times my initial investment. I'm holding for the long term.

    In summary, I don't like investments where there are too many moving parts and infinite variables. It overwhelms me, and I fail to grasp how anyone can deal with the multitude of uncertainties. It's just not for me. I am a passive investor. The most I want to do to manage my investments is rebalance my portfolio once a year and go fishing.
     
  18. irydyum

    irydyum Registered+

    You literally just defined what investing in cannabis is. Moving parts, infinite variables, and multitude of uncertainties. Nailed it.

    As far as the TSX V, I wasn't suggesting investing in the index, but that's where the majority of LEGAL cannabis companies in the world trade heavy volume. I was suggesting to put your money into a particular company with a solid go-to-market plan, and then you can go fish and collect your rewards.

    Just my 2 cents. Doesn't sound like this is the play for you. Even as an investor in this space, passive won't work. Especially if your name is on ANY paperwork pertaining to the business. That'll mean your presence, even if only at certain functions.
     
  19. GlobeTrotter239

    GlobeTrotter239 Registered

    These are some of the cannabis companies in the index. It seems like they've already had crazy run-ups. Not sure if now would be a good time to invest, but it's anyone's guess:

    https://www.investopedia.com/investing/10-canadian-marijuana-stocks/
     
  20. Dutch Pimp

    Dutch Pimp Up in Smoke

    you should invest in guide dogs...for people using a smartphone :rolleyes:
     
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