Cannabis Compliance Budget
Budgeting for Your Cannabis Business’ Compliance
“Compliant Marijuana Business” is almost a cliche buzzword in the cannabis industry. As I’ve said before and hope one day never to have to say again: We’ve never seen a 100% compliant cannabis business. We have seen, unfortunately, million dollar businesses get lost to the overwhelming costs of non-compliance including getting shut down and even arrested. So, if the grave costs of being non-compliant can be quantified in the millions of dollars in investment and value of a marijuana license, you may be wondering exactly how much should marijuana compliance cost?
It’s a great question as it alludes to drawing out a marijuana compliance budget line item that should be anticipated and built into any serious and compliant marijuana business. The answer can be a little more complicated than a flat dollar price.
For example, a lot of marijuana businesses are in the early stages of development or entering a new marijuana market for the first time. In just a few short months, it’s not unheard of for marijuana applications to cost hundreds of thousands of dollars to develop anything competitive enough to win. Not to mention local lobbying, attorneys, real estate agents, and landlord costs that rack the bill up.
The payoff?
When these investors win a license, they have the ability to turn around and sell it or operate it and, because of their initial outlay, leverage a better cost of capital and selling price to the highest bidder. Often, competitive new licenses in limited license markets are worth millions of dollars just for the piece of paper – without any operational assets.
On the other hand, a saturated market – like Oklahoma – devalues licenses and, therefore, may not have the same budgets for compliance – because they literally have less to protect and lower barriers to entry. I see this clearly in the difference between conferences, attitudes, and compliance budgeting in various markets around the world. But, in all cases, the heavily regulated nature of the industry mandates a compliance budget distinct from the legal line item in the books.
The question marijuana operators should ask is: What’s the ideal bang for my buck when it comes to compliance?
In other heavily regulated industries such as oil and gas, pharmaceuticals, banking, and hospitals, compliance budgets compared to cannabis are substantially higher given the maturity of those industries. Compared to cannabis, industry benchmarks vary by industry and can be calculated as a spend per employee, a percentage of annual revenues, and the most recent data shows increased spending across the board as companies seek the best subject matter experts to protect their bottom line. In cannabis, as a simple measure, for what an average dispensary, manufacturing, or cultivation might make in a decent market, a marijuana business should anticipate spending 1% to 4% of annual gross revenues on proactive compliance management… For now..
A penny on the dollar to protect each dollar is really chump change to effectively manage compliance in the long run.
This is usually a combination of in house salaries and external third party support and validation such as iComply to manage an ever-changing onslaught of rules and regulations. As we’ve discussed in our regulatory clockwork blog, the rules change each year – as should the annual budget expectations for compliance. Especially as our nascent industry gets its legs underneath it and begins to toddle toward a more promising, and challenging, future. Just as the trend in other industries tends to be more regulation, tougher regulators, higher costs, and constant changes, cannabis companies should also be viewing their compliance budgets as an investment in the longevity of their business by being proactive today instead of reactive tomorrow.
If we fail to do so, we’ll never stop eating crap – pretending its sweet.