9 Tips for Successful Interstate Expansion

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With the cannabis industry continuously expanding, it can be tempting to see a fresh market with potential untapped profit. But successful interstate expansion takes plenty of planning and careful strategy, if the move even makes business sense to begin with.

December 5, 2016

Cannabis Business Times talked with three companies to get their best tips on each stage of the process, from reading the market dynamics to making contacts on the ground in the new state:

  • Pete Kadens, owner, GTI. The company started in Illinois in 2014, and began the expansion process in 2015 for Maryland. Currently, GTI has licenses in Illinois, Nevada and provisional licenses in Massachusetts.
  • Matthew Huron, owner, Good Chemistry. Huron moved from California to Colorado in 2009 to find a more regulated market. Since then, Huron has expanded Good Chemistry to include a facility in Nevada, and a provisional license in Massachusetts.
  • Skip Meador and Tim McDowell, co-owners, marQaha. Meador and McDowell started the company as a cultivation operation in 2009, and transitioned to creating extract-based beverages, tinctures and sublinguals in 2010. The company is currently licensed in Colorado, Nevada, Illinois and Oregon.
“It’s going to take two times the amount of time you think it will and three times the money. This is not for the faint of heart. This is a very, very tough business.” - Pete Kadens, GTI
    Matthew Huron
  1. Understand your company strategy and market trends.

    Matthew Huron: “[Being ready to expand was] really more about our core values as a company. It’s not necessarily about the size of the company. We’re really focused on the powers of the flower, and the markets we looked at had to align with those values. We look to see: Can we be successful with our strategy and production …, the craft of cannabis? If it’s true of that market, we’ll pursue [it].”

    Pete Kadens

    Pete Kadens: “It was just studying the market nationally, watching regulatory change happen at something like warp speed, then sitting down and studying the specific markets. We don’t think every market is good for us. For example, we don’t think Colorado is a good fit for us. It’s about studying the ... dynamics, the patient counts, … what products are eligible, the … eligible qualifying conditions. We don’t have a blanket theory about capturing the entire market. Our theory is that we’re opportunistic. When we see regulatory change occurring and … opportunities that meet our thresholds in certain states, we mobilize. It’s a scientific, thoughtful approach.”

  2. Skip Meador
  3. Standardize your standard operating procedures (SOPs).

    Skip Meador: “More than anything else, it’s about your SOPs. We have to translate what we can do here in Colorado to our licensee in the other states and have it be the same product with the same standards, just based on the state regulations. We look at the SOPs on everything we do, from how you properly clean the sink area to proper temperature controls on products during different phases of manufacturing.

    Tim McDowell

    “In Maryland, they ask you to describe in massive detail how you’re doing [a particular] phase. This steps up our SOPs. The more we know in that category [through a well-defined SOP], the better.”

    Tim McDowell: “In addition to the SOPs, there are HACCPs (Hazard Analysis Critical Control Points). It’s a way to look at processes and identify critical control points. You’re identifying places within your process that there’s variance or there’s a human control, like temperature or soil pH. With record keeping of all of these points, if there’s a variance, you can see if it was a machine, if it was human error.”

  4. Match your business model.

    Huron: “For Massachusetts, for us, for example, it’s a 100-percent vertically integrated system. That’s similar to Colorado, which is a vertically integrated system on the medical side. That’s important for us [that it matches our model]. We grow 100 percent of our cannabis products.”

  5. Avoid oversaturated places.

    Huron: “We look at the market. We try to be very deliberate with our strategy … [and] look at where market dynamics are. I think, similar to any business, we model for the prospective market and make sure that our projected revenues exceed our startup costs.”

    Kadens: “It’s just like any other company. Why would you go into a market that’s already totally saturated …, where there’s already 1,000 licenses, … where there are more retail shops than Starbucks, Walgreens and CVS combined in a major city? It’s all about license saturation, production saturation and margins.

    “It’s going to take two times the amount of time you think it will and three times the money. This is not for the faint of heart. This is a very, very tough business.”

  6. Start with licensing.

    Meador: “Just because it has cannabis in it doesn’t mean it will sell. In an emerging state, everyone just sees dollar signs. If you take cannabis out of it, you can have a much clearer idea of what it’s going to take to run a successful business.

    “Be ready to educate. If you’re in cultivation, educate [the community you’re looking at] on what a good plant looks like, and what good genetics are. If you’re in products, talk about why these ingredients are going together, why cannabis is in it. The more you have things dialed in, the less opponents will be able to say, and you’ll be able to show you can talk intelligently about what you’re doing.”

  7. Bank locally.

    Meador: “It’s typically local banks that are going to be open to working with you. Start there versus the big, multinational banks. Use a company name that’s not cannabis-related. Make it a generic name, and have a dba [doing business as] outside that. Don’t lie to the bank, but don’t go with a cannabis-related name first. Smaller banks are good to have a relationship with, but they want to interact with folks who have been in the area for a long time. So you want a relationship with someone outside the bank with a good reputation that ties them in locally.”

  8. Find good partners and a good team.

    Meador: “We want groups that understand that not only is this not a green rush, it may be two to three years before you have enough customer base to keep the lights on. What are their skill sets, and do they have properly defined roles? If they’re missing something like sales, for example, who are they bringing in to address that? They have to understand what they’re getting into, as real groups looking at the long game. ... It’s not the money that will determine how successful they are. It’s the other things.”

    McDowell: “The employees behind the business are important. A lot of people jump in because the marijuana industry is exciting, and they think it’s going to be all fun and games. But it’s not. It’s really a lot of highly regulated, hard work. We’ve seen it where people are months away from even having a product on the market and they’re cycling through employees already. Get a really strong team together first.”

    Kadens: “After studying the regulatory landscape, the second steps were figuring out which communities were the best for us. We always say there [are] three winners in licensing: one is the organization who wins the license, second are the patients, and third is the community that supports that license. The No. 1 thing we look for is a willing, able and supportive community partner. That can be the mayor, ... a police chief, ... economic development folks or ... a local non-profit. The last thing you need in a business that’s already controversial, that’s already got a bunch of ‘not-in-my-backyard’ folks, is a lack of political support. You run into challenges in this business, and you need a community that backs you up. That is unequivocally what we look for in every case.

    “The No. 1 red flag is that you simply cannot do business with bad people. … I come with questions. I want references, not just for someone who’s going to provide me with a service, but also when we bring on a partner or an investor. We do due diligence. In these applications processes, you can’t be associated with anyone who’s done anything nefarious of any kind. You just can’t. You’ll be bounced. Anyone who has anything to do with us is fact-checked, data-checked and reference-checked.”

  9. Be ready for compliance challenges.

    Meador: “It feels like each of these states are changing the rules almost daily. You have to be able to address it and roll with those punches. You’re going to have to deal with the state and local community defining this and figuring it out. We thought we knew everything, but we’re being surprised by the local ability to redefine [the programs]. Be completely open about [your process], and get dosing and testing in place in the beginning, and that’s going to solve a lot of those problems.”

    Huron: “Regulations are a friend to the company. When it comes to regulations, we take them very seriously. We hired a director of compliance; the first thing we do when we’re looking at a market is have her and her team … learn the rules and regulations, and make sure we’re doing everything in a compliant fashion.”

  10. Don’t try to do everything.

    Meador: “The products need to be ... built with a purpose. Don’t try to do everything. You can think, ‘We’re going to be the experts in 10 different product categories.’ But the companies that do that are being challenged by the groups like us, who focus on one or two product lines and make our name on those. Focus on those one or two product lines: build it, know it, live and breathe it, build SOPs around it. Then it deserves to have [in other states] the brand that you worked so hard to establish in your own backyard. It’s not the other way around.”