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Startup Costs for a Cannabis Oil Extraction Business

Written by David Maher

What are the real costs of a new extraction business?

According to Nick Tennant, founding partner of Precision Extraction Solutions, which provides extraction site planning services and equipment, “The vast majority of the lab startups that we consult fall in the $400,000 – $800,000 budget range, which includes the cost of leasing a property.”

While some may have initial sticker shock with the costs of an extraction lab, the prospective upside is massive. Also, according to Tennant, “There is simply no shortcut for building a safe, compliant and efficient lab. The prudent entrepreneur is well aware of the competition, and proper planning and investment is the best way to lower risk.”

Securing a Property: Buy/Lease

If you have the ability to buy your own building and leave plenty of cash for equipment and startup costs, that’s the way to go. As with leasing, do your due diligence. Is the property properly zoned? Is the local jurisdiction cannabis friendly? Do you have enough electrical power? Talk to your local electric company. Can more power be brought in if necessary?

Depending on location, water and sewer can be an issue, especially if you plan to grow cannabis in the same location. Make your offer (for purchase or lease) subject to getting licensing approval if you can. At the very least, use the due diligence period to thoroughly research the property.

Extraction Equipment         extraction machine | extractor exchange

Your most important and expensive piece of equipment will be the cannabis extraction machine.

Extractorexchange.com is a good place to start your research. The first decision will be which extraction method you want to use: CO2, BHO or ethanol. There are pros and cons to each. Things to consider are price, throughput, reliability, customer service and compatibility with local building codes.

Talk to other extractor entrepreneurs as part of your research.  A reputable manufacturer of cannabis extraction machines will not be afraid to give you a list of previous customers. Do not rely on one or two references, as you never know what’s going on behind the scenes between companies. Ideally, get a list of 10 customers and randomly pick three to call. Your cannabis oil extractor is at the center of an extraction business; take the time now to thoroughly check it out.

Prices range from $30,000 for a smaller cannabis extraction machine to over $1,000,000 for a larger one.  The size of your operation and budget will determine the size of extraction machine you will need.

Post processing equipment includes a rotary vaporizer, freezers, distillation equipment, stir plates, glassware, etc. There are lots of online resources to research them all. Your extractor supplier will be a great resource, and in most cases will help you set up the whole lab.extraction lab | extractor exchange

Financing an Extraction Business

The usual avenues for financing a business are, for the most part, not available to the extraction entrepreneur.

The federal government is not very friendly to the cannabis industry at the moment, and our current Attorney General Jeff Sessions is putting up road blocks to progress whenever he can.

According to Paul Tomaso, CEO of MRXxtractors, “There are oceans of money sitting on the sidelines waiting for national legislation to make cannabis legal and open up the banking system to cannabis entrepreneurs.”

The federal government may move to make it harder for cannabis industry operators who comply with state laws to store their profits with financial institutions. “We are reviewing the [banking] guidance in light of the Attorney General’s announcement and are consulting with law enforcement,” wrote Drew Maloney, the U.S. Treasury Department’s assistant secretary for legislative affairs, in a letter to members of Congress in early 2018.

Leasing a Cannabis Extraction Machine

For a lot of business people, leasing equipment is a good option. There are plenty of leasing options out there, and some equipment manufacturers can set this up for you. They will ask for you for your financials and most likely a personal guarantee, a credit score of over 660 would be nice too. Expect to pay an 8-25% interest rate on the deal.

Here are a couple of companies actively seeking to finance cannabis extraction companies, courtesy of Gangaprenuer Magazine:

Private Investors

Private investors are great if you can find them. Start with family and friends, as they know you and hopefully see you as a go-getter who’s going to be extremely successful. They’ll want to be a part of it and reap the rewards.

A proforma will be useful in persuading potential investors. It’s typical to run three sets of projections on a spreadsheet showing projected future earnings: one with a low expectation, one medium and one optimistic. Note: the low one should still be attractive to investors.

While finding investors can be hard, dealing with them once you have their money can be a pain in the A**. Unless they have a skill that you need, emphasize that they are SILENT investors. You will have to report to them periodically, but you don’t want them armchair quarterbacking and questioning every purchase.

If possible, do not give up control; keep 51% for the controlling partner/partners. If family and friends are not available to you, use your network of business associates to try and find an investor. It may be tough, but this is an exciting and potentially very profitable business. There are lots of investors out there – keep looking!