If you want to break into the cannabis extraction industry, the first thing you’re going to need is a comprehensive cannabis extraction business plan. The plan can take months to develop, but there has never been a better time to get started.
The global cannabis extraction market is already valued at more than $7 billion and is expected to reach $28.5 billion by 2027 with an annual growth rate of 16.6%. According to BDS Analytics, concentrates represent the fastest-growing sector in the cannabis consumables industry.
Demand is soaring as more states open the door for recreational cannabis and more consumers seek out natural alternatives to traditional medications. In order to succeed in this rapidly growing business sector, it’s imperative that you begin with a comprehensive cannabis extraction business plan. Not only is such a plan required for licensure, but it can help you to start your business on the right foot.
Though no two business plans will look exactly alike, this guide is intended to provide a basic framework, highlighting such essential concepts as:
- The definition of an extraction business
- How to choose the right business model
- What is required for a cannabis extraction license
- How to choose the right product line
- How to estimate your startup costs
- What you’ll need to set up your lab
- How to establish a plan for long-term success
The experts at PureCannalabs can help you ensure that your plan is rock solid.
Cannabis Extraction License Requirements
Most states require a business plan (in some form) as part of the initial licensure application. But obtaining the license must be part of the plan itself, as the process can be complex and costly. Not every state offers a dedicated cannabis extraction license. In many cases, you’ll need to apply for a cannabis manufacturing license or processing license—and in some cases a cannabis distribution license.
A typical commercial cannabis license application is extremely thorough, and you may need to provide (among other things) information about:
- Your qualifications as an applicant
- Your general business plan
- Your existing capital and funding sources (depending on where you reside, you may have to prove a minimum amount of capital as a prerequisite for licensure)
- Your ownership and corporate information, including tax status
- Your property information, along with proof that the property adheres to all local laws and ordinances (e.g. distance from schools)
- Your equipment inventory
- Economic impact reports and community benefit statements
- Detailed security plans
- Detailed waste management protocols
- Detailed odor mitigation plans
- Detailed quality assurance and staffing protocols
- Detailed transportation and distribution plans
In addition, prospective applicants are usually required to provide proof of residency (in Colorado, for example, you must be able to prove at least two years’ worth of residency in the state) and pass a criminal background check.
The application processing and approval can come at a considerable cost, and the approval is not guaranteed. While the associated costs can vary significantly from one location to the next, here are a few general examples:
- In California, the licensing cost is adjusted based on your gross annual revenue. The initial, non-refundable application fee for a type 6 or type 7 extraction business is $1,000, and the state license fee can vary between $2,000 and $75,000 depending on your revenue. You may also be required to pay application and licensing fees to the city or county in which you operate.
- In Nevada, extraction companies must pay a one-time non-refundable application fee of $5,000 and (if approved) a $10,000 fee for a marijuana production license. The annual renewal fee is $3,300.
- Colorado charges a non-refundable new application fee of $4,000 and imposes annual renewal fees ranging between $1,100 and $5,300 depending on business size.
Consult with the departments overseeing cannabis licensure in your state and city/county in order to learn your specific up-front costs.
Choosing the Right Cannabis Extraction Business Model
Note: We are not lawyers, and we strongly suggest consulting with knowledgeable legal representation before finalizing your business model, partnership structure, and other pertinent details. The notes in this section and throughout the article are intended merely as a general overview.
Not all extraction businesses fit into the same mold. Before you can flesh out your cannabis extraction business plan, you must determine your business structure.
First, we must address the most basic question: What is a cannabis extraction business? In its most general sense, a cannabis extraction business is any organization that specializes in the creation of cannabis or hemp concentrates. These may include traditional extracts like butane hash oils, solventless extracts like rosin, or isolated cannabinoid preparations like CBD oil and delta-8-THC. Once the extracts are created, the business model will determine what happens to those products.
The following are the most common cannabis extraction business models:
- Tolling. The extraction company receives flower from a grower, converts it into an extract, and returns it to the grower who then sells it. The extraction company is usually paid a flat fee per gram.
- White labeling. A third-party company provides the material, which the extraction company turns into various SKUs with the original company’s branding. Then it’s sold.
- Wholesale: The company grows or purchases flower and creates unlabeled extractions to sell on the wholesale market. This is more common in the CBD markets and not very common in the primary THC-heavy spaces.
- Retail: The company purchases wholesale flower, uses it to produce extracts, and then labels and sells the extractions under its own name—either directly to consumers (online), via government distributors, or via dispensaries.
Once you know your business model, you can determine the appropriate sales channels. These channels should also be outlined as part of your initial cannabis business plan.
From BHO to Rosin Cannabis Extraction – Choosing Your Product Line
Choosing your product line is just as important as choosing your business model—maybe even more important. You can only flesh out your production costs and equipment requirements when you know which products you intend to focus your efforts on.
There are myriad cannabis extracts on the market: wax, shatter, sauce, live resin, flower rosin, hash rosin, and numerous others. When choosing a product line, there are two questions you need to answer:
- What types of cannabis extraction methods do you wish to accommodate?
- The most common extraction methods are hydrocarbon-based (the use of a hydrocarbon solvent like propane or butane), supercritical CO2-based, alcohol-based, and solventless (extracted via mechanical means rather than solvents).
- What types of end products do you wish to produce?
- Your preferred extract might dictate the type of extraction method you need. For instance, if you’re hoping to extract CBD to convert into delta-8 or delta-10-THC, solvents might be unavoidable. For most conventional cannabis extracts, though, solventless extraction is the way to go. Rosin is the #1 fastest-growing concentrate subcategory, and for good reason.
For new cannabis companies that are just starting out, we generally recommend solventless extraction for many reasons. For instance:
- Solventless extraction is more affordable for small businesses. A top-of-the-line hydrocarbon closed-loop extraction system can cost north of $100,000, and a CO2 extraction system can cost more than two to three times that amount. By contrast, a complete, commercial-grade rosin press can be purchased for around $10,000. With solventless, you can achieve an ROI much faster.
- Solventless extraction is extremely versatile. Using a rosin press, you can make extracts that are glassy, viscous, or waxy, much like the popular BHO dabs that are on the market. It’s even possible to make solventless CBD oil using CBD rosin from hemp flowers.
- Solventless extraction leaves behind fewer impurities. You never have to worry about residual solvents or other unwanted materials in your extracts. During the extraction process, everything gets left behind except for the pure resinous trichome glands and all of the cannabinoids and terpenes therein. You get the kind of top-shelf-quality product that connoisseurs demand and are willing to pay more for. With solventless, you can build a brand that people not only trust but tell their friends about.
- Solventless extraction is safer. Because solvents are highly flammable, they must be managed with tremendous care. When safety protocols are neglected, production facilities are sometimes prone to fires and even explosions. This isn’t an issue with solventless production.
- Solventless extraction has a much lower carbon footprint. Solvents like butane, propane, and ethanol are major sources of volatile organic compounds (VOCs), common ground-water contaminants that can trigger short- and long-term health effects and contribute to the formation of ozone molecules. Since solventless extraction relies on mechanical separation via heat and pressure, VOCs are less of a concern. (Note that cannabis itself is a natural VOC producer, but you can minimize your VOC output by keeping solvents out of the equation.)
Ultimately, though, it’s up to you to decide which types of extracts you want to produce and how you want to produce them.
Estimating Your Extraction Lab Startup Costs
Your extraction lab startup costs will vary depending on your location, your business size, your extraction methods, your product type, and other factors. When assembling your cannabis extraction business plan, make sure to research and factor in all of the following costs:
- The cost of licensure. This can vary widely, but you might expect to pay between $5,000 and $100,000 when you factor in the application fee and the licensing fee.
- The cost of equipment and supplies. You might expect to pay $100,000 to $450,000 for traditional lab equipment or as little as $50,000 for solventless extraction equipment (assuming you invest in a commercial rosin press, hash washing system, trichome separator, and freeze dryer). Make sure to also factor in the cost of the supplies (like solvents or processing tools) and any additional essentials required for your business.
- The cost of real estate and buildout. Your total real estate cost should account for the initial lease investment as well as any setup or renovation costs required to get your laboratory in working order and in compliance with local and state guidelines. For a standard-sized lab, you’ll need about 2,000 square feet. The construction of your lab can typically run between $60-$100 per square foot and requires a team of experts like a designer, an architect, an electrical engineer, and a mechanical engineer.
- The cost of overhead. Your overhead will include the standard monthly expenses required to keep your business up and running: rent, utilities, personnel, and any administrative costs. From a salary standpoint, you might expect to pay about $100,000 per year for both a laboratory director and grow manager, and about $40-$45k per year for each lab technician.
- The cost of insurance: In most cases, you’ll need at least $1 million in general liability coverage for your laboratory. It’s possible to find insurance for less than $200 per month, but because the cannabis market is still a high-risk industry, you may need to pay considerably more.
- The cost of inspections: Before you can be approved for licensure and begin operations, your lab must undergo final inspections and field verification. You can expect to pay $15,000 to $25,000 for the completion of these inspections, so budget accordingly.
As you compile your estimated startup costs, be sure to also identify your initial sources of funding. Is your business self-funded? Funded by venture capitalists or other assorted investors? Funded by business loans?
Estimate your initial capital and compare it to your startup costs, and then use that information to determine if you need to reduce some of your up-front investments or establish additional capital.
Cannabis Extraction Lab Setup
Your proposed cannabis extraction lab layout should be written into your brilliant business plan. This information is invaluable to state/local regulators, to the architects and engineers building your lab, and to your own team for budgeting and planning purposes.
Your Cannabis Extraction Lab Layout
When considering your layout, the following factors must be prioritized:
- Workflow. Consider a logical layout for your lab that maximizes workplace efficiency. Many labs operate with a linear design, with raw materials at one end of the facility and completed products at the other end. By keeping your raw materials a safe distance from your processing and post-processing operations, you not only manage a cleaner and more efficient workplace but also minimize the risk of contamination.
- Safety. If you’re working with supercritical CO2, hydrocarbon, or ethanol, it’s absolutely imperative that your lab design includes proper ventilation. Even if you’re using solventless methods, ventilation and filtration are still important to account for the naturally occurring VOCs.
- Spacing. Cluttered equipment presents safety issues and also hinders operations. Extraction equipment requires regular maintenance, and technicians should always have access to the machinery from all sides. With that in mind, try to ensure at least a three-foot perimeter of space around each piece of equipment.
- Scalability. Just because you have a 2,000 sq. ft. lab doesn’t mean you need to cover every square inch in your initial blueprint. Leave room for growth and expansion, as you’re almost certain to need additional equipment as your operation builds steam.
Your Cannabis Extraction Lab Equipment
Your equipment needs will vary based on three main factors:
- What type of extractions are you focusing on (hydrocarbon, CO2, ethanol, solventless?)
- Are you growing your own cannabis plant material or purchasing it from a supplier?
- How much product are you looking to produce in the beginning?
Once you know the answers to these questions, it’s easy to complete your inventory list. If you’re growing your own cannabis, you’ll need to opt for a quality hydroponic system or soil-based grow environment, a lighting system, an irrigation system, carbon filters, fans, and other grow equipment.
For standard butane extraction, you’ll need to invest in a complete closed loop hydrocarbon extraction system that complies with local and state laws. Depending on your goals, you may also require additional equipment like a distillation system or winterization equipment.
For the safest, most streamlined, and most cost-effective build, a solventless lab is the way to go. You can get up and running with just a few affordable pieces of equipment like:
- A hash washing system. To make the purest, highest-quality rosin, you’ll want to first extract the trichomes from your flower into a potent full-melt hash product. A Bruteless Commercial Hash Washing System makes it easy.
- A freeze dryer. A freeze dryer is the quickest, most efficient way to dry your ice water extraction and preserve maximum purity for your hash rosin.
- A rosin press. Leading commercial-grade models like the Longs Peak Rosin Press can process up to 7 pounds of flower or 14 pounds of dry sift or ice water hash per day.
For solventless extractions, you’ll also need to keep other essentials like collection tools, parchment paper, and filter bags on hand, as well as your laboratory essentials like sinks/drains and packing stations. But even when you total up the full cost of the equipment and tools, it still costs far less than you’d pay with traditional solvent-based extracts.
Your Cannabis Extraction Lab Inspections
Once your lab is set up and your equipment is installed, you’ll need to undergo a field verification inspection and a final inspection before you can officially begin operations as a business.
The exact inspection requirements will vary depending on the laws where you conduct business, but in general, you’ll be responsible for some version of the following:
- Field verification: After the equipment is installed, a state-licensed engineer must provide a field verification to ensure safety and compliance. This may be arranged by your equipment manufacturer.
- Final inspection. Finally, your local Authority Having Jurisdiction (AHJ) will review the field verification and perform their own final inspection before signing off on your facility. Depending on your jurisdiction, the inspection may be carried out by a fire marshal or other city inspector.
When creating your cannabis extraction business plan, make sure to account for the cost of the inspection and provide contingency plans in the event that an initial inspection does not pass.
Promoting the Long-Term Success of a Cannabis Extraction Business
Finally, and perhaps most importantly, your cannabis extraction business plan must include a detailed framework for success. Starting a cannabis extraction business comes with a lot of challenges and uncertainties, and you need to be ready to meet those challenges head-on. Make sure to include the following in your plan:
- A clearly defined mission statement highlighting not just the fiscal goals of the business but also the company culture and greater purpose.
- A SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis or other situational analysis that clearly identifies your standing in the market.
- A detailed market analysis highlighting your industry features and outlook, customer profiles, and competitor evaluations.
- Detailed descriptions of how your extraction business will be run: operational strategies, marketing strategies, safety measures, number of employees, hierarchy of the management team, etc…
- Financial plans and projections, including five-year revenue and growth benchmarks. This section should be completed with the help of an accountant and fleshed out as your business takes off. You’ll have a much broader picture of your financial health and potential when you’re able to review real-time cash flow statements, balance sheets, and income statements.
It can take months to complete a cannabis extraction business plan, but the process should never be rushed. The more comprehensive your plan, the more effectively you will be able to establish a foundation for success and overcome the inevitable challenges that arise.
If you’re considering solventless extraction, PureCannalabs can help you to get your business off the ground. Our team of pioneering industry experts can help you to flesh out your business plan and establish a foundation for long-term success. Contact us today to get started!