As many people watch the cannabidiol (CBD) industry grow, they wonder how much money is needed to start a business. Starting a CBD business, whether it’s a retail dispensary or a manufacturing company, can be overwhelming for beginners.
Financial and resource needs might seem daunting, but understanding the specific business development steps and their associated costs makes the planning process manageable. This article gives information about the average costs to start a CBD business, different cost factors depending on the type of business, and steps to ensure early success.
How Much Does It Cost to Start a CBD Business?
Many factors influence the amount it costs to start a CBD business. You must consider whether your business will be a traditional storefront/brick-and-mortar retail space, an e-commerce business, or a blend of both models. Some businesses will have more expenses than others due to the size and complexity of the operational structure. Some sectors of the CBD supply chain such as manufacturing will require specific high-tech equipment. Different types of cannabis businesses have unique expenses. Cultivation facilities need to invest in lighting, irrigation, and climate control equipment. On the other hand, retail operations should allocate more funds for marketing materials and a point-of-sale system.
Many CBD industry experts estimate that it requires $50,000-100,000 to get a small CBD business up and running. This range can be higher depending on the size, business model, and products or services.
Here are some common budget items for a retail dispensary:
- Rent or mortgage
- Building renovations
- Security alarm equipment and annual services
- IT expenses (POS system, computerized sales stations, cybersecurity software, inventory software)
- Fire protection equipment
- Financial services
- Salaries and training cost
- Product liability insurance
- Property insurance
As your business grows, you can allocate more funds to support operational success. Don’t be afraid to start small and scale up as your operations become more established and efficient. Scaling up allows you to adapt and grow when the conditions are conducive to operational expansion. It is better to start small and gain confidence as a new business owner.
To understand the expenses of operating a CBD company, review these 10 critical steps in starting a business. The following section explains these steps.
10 Steps to Starting a CBD Business
Clarify your CBD business mission and vision.
First, you will determine what kind of CBD business you would love to own and run. Many people automatically think of running a dispensary, but consider businesses pertaining to cultivation, manufacturing, delivery, consumption accessories, and other services. There are many unmet niches in this emerging industry.
Some founders may start companies offering auxiliary services for the CBD industry, such as CBD-specific web development, payment processing, or insurance businesses. When you have a specific product or service, target audience, business structure, and goals in mind, planning becomes easier. Each different type of CBD business will have different startup costs, ongoing expenses, and other operational factors.
You should start to draft a business plan to compile this information. You can revise it as your plans crystallize. Spend time drafting your mission and vision so that you can clearly convey the essence of your business to potential funders.
You will also need to decide on a business structure. Some common structures for small to mid-size businesses include the following:
- A Limited Liability Company (LLC) offers limited liability protection for owners and flexible taxation options like pass-through taxation.
- An S Corporation (S Corp) allows the business income to “pass-through” to the shareholders’ personal tax returns and easier access to capital.
- A Benefit Corporation (B Corp) structure is suitable for for-profit businesses with a mission of meeting social and environmental goals.
You will also need to decide the ownership structure of the business. For example, many founders own a significant amount or all of a company while others possess different percentages of equity in the company.
It is important to analyze many economic, personal, and regulatory concerns before determining the best structure for your specific plans.
Start budget planning and the fundraising process early
This step entails determining your business site and strategy, operational costs, product inventory, and supply chain issues. Start the research process several years ahead of your intended date of operation. Research the cost of required equipment, how often you need to replace equipment and necessary supplies like packaging. Calculate employee salaries and benefits costs, insurance, utilities, and marketing needs.
Although many investors prefer to give resources to more established businesses, thorough preparation will help you get ready for more active future phases of fundraising. Sometimes, an investor may be willing to fund a new business with a promising product line even if it doesn’t have a business location or a lot of money yet.
Seek funding sources
Some common ways of funding a CBD business include personal savings, crowdfunding, angel investors, and grants. Many people invest their personal savings into their businesses if it is a small business or microbusiness. Often businesses use grants and investor funding to scale up and expand operations or upgrade and add equipment.
Business owners often look for venture capital to start their businesses. They need money for things like operational space, application and licensing fees, and more. Venture capital is meant to offer a short-term solution and allow the entrepreneur to grow, plan and pursue suitable funding sources as time progresses. According to a Harvard Business Review article, over 80% of the money invested by venture capitalists supports infrastructure development. This stage provides a critical foundation for scaling up and sustaining productivity.
Find out sources of potential grants and venture capitalists who might help you finance your operations. In exchange for investing in a high growth potential, venture capital investors seek equity or an ownership stake in the company. The fundraising process for business startups usually involves several rounds of funding. They include the pre-seed round, seed round, Series A, Series B, and Series C funding.
Pre-seed finances allow a business to hire staff, refine product development, and complete other key preparation steps. Pre-seed funding ranges from $100,000 to $1 million. The amount depends on factors like the stakeholders involved (funding agent and startup owner), market conditions, supply chain sector, and other considerations. The pre-seed round involves networking and making pitches to investors.
Angel investors provide funding that can range from a few thousand dollars up to roughly $500,000. Accelerator programs provide funding after the pre-seed round.
Accelerator programs help further launch businesses. Some programs include a cohort experience, mentorship, and access to education and networking opportunities for venture capital.
Later rounds such as Series D, E, and F help businesses scale up in operations. They involve larger amounts of money with more intricate terms of agreement. As a new business owner, you can focus on learning the initial funding round and then continue to learn about the more advanced funding steps. As CBD businesses grow and scale, the owners can determine when and how funding streams would be most productive to pursue.
An important step in preparing for the start-up phase is developing pitch materials. A startup owner should have a working draft of a slide deck pitch. A pitch should convey a business’s signature product or service, a specific problem and solution, and a target market. It should also include a brief but informative overview of projected revenue, marketing and sales strategy, and competition. Sometimes it is helpful to include floor plans, charts, and images so that potential investors can better understand your plans.
It is a good idea to hire a business advisor who can closely analyze your business needs and help you plan a strategy for fundraising. Find a CBD business crowdfunding and grant matching advisor who knows about financing and banking legislation. Join professional organizations that provide further opportunities to learn about fundraising, such as the Arview Group and Mindvest.
Select a compliant and strategically smart business location
Leasing or purchasing property varies depending on the location, region, and other features. It is important to consider a site with easy customer access, foot traffic, and parking. If you are focusing on e-commerce or a hybrid model, make sure you spend time selecting an experienced web designer. A designer familiar with the CBD and hemp industry will be familiar with marketing regulations and effective ways to engage your target customers.
Research state and municipality regulations that might impact your selection of physical business location and/or e-commerce site. Analyze and assess permit fees, renovation costs, and other financial and resource factors when making your budget. Policy changes regarding CBD processing and sales will continue to evolve as more U.S. States and many other countries loosen strict regulation of CBD.
Conduct ongoing market research to remain competitive
It is important that you stay aware of your target audience, competitors, and market factors. Conduct a SWOT analysis that assesses an organization’s strengths, weaknesses, opportunities, and threats. A SWOT can highlight your advantages and disadvantages given the local and state economy, collaborations, target customers, and supply chain trends. This process will strengthen your long-term planning and reveal possibilities and potential problems you may not have initially anticipated.
Also, make sure to conduct a competitor analysis regularly. Know your competitors’ products and services and study their marketing approaches. Use this information to distinguish your brand from the others.
Network with the local chamber of commerce and municipality leaders. They may reveal insights about suitable business locations and potential target audiences. CBD sales data will help you decide which products might attract potential customers and their shopping patterns.
Maintain compliance regarding all business operations.
Make sure you obtain the appropriate business licenses in your state and meet all regulatory requirements. Other key compliance issues include adhering to security, site location, operating hours, testing and packaging regulations, and marketing practices. Consult a marketing specialist about CBD marketing regulations. It is best to ensure compliance rather than run the risk of penalties or having your business shut down by the authorities. Compliant marketing and branding are critical for attracting and maintaining a customer base. Website development, packaging design, social media marketing, and other advertising materials are key ways to educate and engage your target customer audience.
Develop your staffing plan
Whether you have a retail space or function online, you will need to hire staff that can perform daily activities. Research the cost of employee salaries, benefits, and training so that your budget includes these expenses. You can start with a skeleton crew and add specific job roles as needed. Train your first staff members in multiple areas, so they can handle different tasks until you have enough money to hire more people with specialized roles, like inventory managers or customer service associates.
Allocate funding for employee training to ensure they follow the best industry practices, excellent customer service, and consistent use of standard operating procedures. While employee training may seem expensive, it actually saves money in the long run and improves employee engagement and retention. Training covers security protocols, transactions, product knowledge, and customer engagement.
Develop a sales plan
To create a successful sales strategy for a CBD business, you need to understand your target market, establish your brand, and use different sales and marketing tactics. It is critical to determine your Unique Selling Proposition (USP). Emphasize what sets your CBD products apart from competitors in terms of product quality, unique formulations, or sustainability practices.
Here are some things to consider as you refine your sales strategy:
- Offer high-quality CBD products that feature competitive, yet profitable pricing based on market research, production costs, and value.
- Branding is key to your business’s success. Create a brand identity that your target audience will find instantly recognizable. Your brand name, logo, color scheme, and overall aesthetic will play a pivotal role in brand recognition. Consulting a branding specialist will make this process easier for you.
- Establish a strong online presence by developing a user-friendly and informative e-commerce website. In addition, implement search engine optimization (SEO) strategies to increase your website’s ranking in search engine results. Using blog posts, videos, and infographics to educate customers on the uses and benefits of CBD is an effective way to engage them and build trust. This trust is what contributes to increased, sustained revenue.
- Optimize the use of promotions, discounts, and loyalty programs to increase sales revenue and keep your business on the radar of customers.
- Monitor your key performance indicators (KPIs) such as website traffic, conversion rates, and sales figures.
Obtain the required licenses, permits, and insurance policies.
Some states may require specific licensing or permits. Make sure you investigate the annual cost of applying for and renewing specific licenses and permits. Research regulations about insurance requirements and several specific plans that would protect your business. Check state regulations that specify insurance requirements for a CBD business. CBD businesses commonly carry product liability insurance. This type of insurance provides coverage in the event that a customer experiences significant adverse effects from a CBD product.
Develop thorough physical security and cybersecurity plans to protect customers, employees, product inventory, physical property, and digital assets.
Physical security includes access control features such as security doors, alarms, locks, and surveillance cameras, and safety lighting. You will also need a secure storage room and equipment to store inventory.
If your CBD business offers online shopping, plan on spending some money on website security. Secure your website using SSL certificates and follow best practices for e-commerce security. You may also want to allocate funds to pay for a consultant who specializes in data protection laws to protect customer information. Investigate the use of firewalls, antivirus software, and regular software updates to protect against cyber threats and calculate these expenditures.
Final Advice on Funding a CBD Business
The financing needed to start a CBD business varies based on factors like business size, location, model, and products/services offered. Some other key issues to consider when estimating the financing include equipment and supplies and legal and professional fees.
Given the wide range of factors involved, it is best to calculate a more exact figure based on specific plans. Create a detailed business plan outlining all expected expenses and potential revenue streams. This will help you estimate the financing you’ll need more accurately and show potential investors or lenders that you have a solid plan in place. Consulting with a business advisor or financial expert can also be beneficial in determining the appropriate financing amount for your CBD business.
As you start your CBD business journey, continue to research regulations, market trends, and new products regularly. Staying informed of CBD industry news will help you navigate the commercial landscape and regulatory practices. Attend venture capital summits, craft your business pitch, and develop a customer engagement strategy. Researching how to fund a CBD business may be time-consuming, but it will ultimately strengthen your business.
How to Start a CBD Business in Ohio?
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