The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: joer1212 on May 28, 2018, 08:53:39 PM
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My younger brother (37) is trying to convince me (48) to invest in a legal cannabis business in Massachusetts. He claims that I would be getting in on the ground floor of this flourishing field, so the profit potential is huge.
His plan is for my parents and I to go half each on the cost of a commercial property (suitable for a 5000 sq ft growing facility). We would be selling to dispensaries within the state, and maybe even open our own dispensary.
While my brother doesn't have money to invest in this business himself, his contribution is that he is providing everything needed to start the business and run it. He has done a lot of legwork in the past year, and has already set up a team in Massachusetts, including a superb grower and savvy local business manager (who will each be getting a 10% share of the net profit of the business). He's also found a property that meets the state's legal guidelines and that is perfect for our budget.
So, basically, he's done everything so far. I'll just be applying for the growers license (he's not eligible because he got a felony at 19) and contributing half the money to start the business. I will also put the real estate under my name. I can then presumably kick back and collect my share (almost one-third) of the profits, while the team runs everything.
As exciting as this sounds, it strikes me as a little too good to be true, so I'm naturally a little skittish. The total cost of getting this whole operation off the ground, including license fees and all expenses, is in the neighborhood of 350k (175k each from me and my parents), so we're not talking about a trivial amount of money. I would have to get a loan to come up with my share of the cash, because my money is all tied up in my 401(k) and other non-liquid accounts.
Should I take the plunge?
FYI:
- I've been working a civil service job in Brooklyn for over 9 years, and have accumulated a net worth of 600k. I worked hard to get to this level, so I'm not keen on spending my money foolishly
- My parents are willing to put up their half of the money in cash, which they will transfer to my bank account (they also live in Brooklyn)
- I have spoken to the manager and grower in person several times. They're both very professional and convincing. The manager, in particular, knows many important people in the area that can assist us
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The problem with investing in cannabis businesses is that if things go too far in either direction, you lose:
1) The DEA starts enforcing federal law in states that have legalized again: Potentially the property gets seized and you're out your $175,000 but still have to pay your loan. Potentially you end up with your own felony on your record.
2) Cannabis gets legalized on a federal level: suddenly you have to compete with giant multistate corporate leviathans who have much better economies of scale when it comes to production than a family owned business is going to have.
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I'd be hesitant to put up 30% of my net worth on such a risky endeavor.
Do you have any idea on the estimated time frame to earn the 175k back?
If you end up investing I would look at it more as an investment or gift to your brother. Don't plan on getting the money back. If it ends up being successful then awesome. But I would assume it's going to fold... I'm kinda a pesamis though...
Sent from my SM-G935F using Tapatalk
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Nope. No fucking way.
He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.
The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.
You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.
Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)
So yeah, that's a HARD no if it was me.
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So other thoughts, assuming you want to go forward to this.
-Sounds like your brother, the business manager, and the grower are each going to be drawing 10% of net profits. Is that their only compensation or will they also be drawing salary (which would come out before net profits are calculated)? If they're drawing salary, who sets their compensation? If they aren't drawing salary, have you had a discussion about how long they're willing to keep working without pay until the business starts turning significant profits?
-If the business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute? And if so, would it be all five of you (parents, you, brother, manager, grower) or just the ones who have put up capital (you and your parents)? If not, if the business is out of money, but your brother thinks he can turn things around and invests $20,000 of his own money, how will you value that?
-Going into business with family is delicate. You'll want to have the answers to questions like the above specifically spelled out in the operating agreement before any money goes into the company. "We all get along and we'll work it out if any problems come up" is a recipe to lose not only your investment but your positive and ongoing relationships with your brother and parents.
-You don't want to be selling a commodity, as the further the state and federal government move towards legalization the lower the barriers to entry, and the more prices are likely to drop as more competition enters the market. Consider developing your own branding (either for the grow operation as a whole or for specific marijuana strains), so that the customers who are buying your product from dispensaries will associate it specifically with you, and it'll be a higher activation energy for the dispensary to switch to another provider that offers them a slightly lower price.
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Hell no! This has bad idea written all over it.
Adding to what FG wrote (which was spot on...don't ignore it):
Do not have your parents transfer the money to your account. Why on earth?! This is bad for so many reasons. You're practically asking the feds to seize your assets. If nothing else, this could trigger a messy and expensive tax situation.
If you go against all common sense and decide to "invest" then setup a corporation owned by the investors. Let's see, you put up 50% and your parents put up 50%. Your brother put up 0%. So the owners are you and your parents. It's easy to sound professional and be convincing - talk is cheap - so if your bro and/or the manager want to be owners then they should put up or shut up. Their ownership is proportional to what they invest. Otherwise, they are nothing more than employees of the company, and the owners need to make this abundantly clear.
Which brings me to the next point. Are you (and your parents) willing to fire your brother and/or the manager if not meeting expectations? Are you willing and able to provide oversight, ensure that they are actually running the business well rather than pissing money away (it's amazing how easy it is to spend other people's money)? Also, the majority owners set employee compensation, not the other way around. What's this nonsense about them getting 10% of net profits? That's bullshit, they get a wage on par with their skills and responsibilities, any additional compensation incentives are at the discretion of the owners. This is also a terrible comp structure - an early startup needs to be reinvesting aggressively in the business but this 10% of net idea disincentivizes this. I strongly suspect your brother doesn't understand how corporate ownership and governance works in the real world, he's looking for family to bankroll his venture while he calls the shots and retains ownership - again, terrible idea.
With zero capital from your brother and his associate, you and your parents would, in essence, be starting a cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business? Do you know anything about it? What connection do you have to this industry other than being related to your brother? If your brother has a solid plan then why can't he get outside investors who already know the business, why does he have to turn to family? Ignoring the history up to this point, if you were starting a cannabis business would you even consider hiring your brother and the business manager to run it?
Finally, about the whole "ground floor" thing. Don't get caught up in this, it's all based in survivor bias. Everyone fantasizes about having invested in MSFT or GOOG in their early days so people are easily convinced that early stage companies are a sure bet. But no one remembers Wang Laboratories, Tandon Corporation or any of the many many early "ground floor" computer companies (https://en.wikipedia.org/wiki/List_of_computer_system_manufacturers) that didn't last. Every industry goes through an early stage of expansion with many small companies, followed by consolidation into a few large players. Do you honestly believe you, your parents, and your brother have the stuff to be on of the big 5 US cannabis companies? What sets you guys apart from every Tom, Dick and Harry with dreams of making it big in pot?
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So other thoughts, assuming you want to go forward to this.
-Sounds like your brother, the business manager, and the grower are each going to be drawing 10% of net profits. Is that their only compensation or will they also be drawing salary (which would come out before net profits are calculated)? If they're drawing salary, who sets their compensation? If they aren't drawing salary, have you had a discussion about how long they're willing to keep working without pay until the business starts turning significant profits?
-If the business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute? And if so, would it be all five of you (parents, you, brother, manager, grower) or just the ones who have put up capital (you and your parents)? If not, if the business is out of money, but your brother thinks he can turn things around and invests $20,000 of his own money, how will you value that?
-Going into business with family is delicate. You'll want to have the answers to questions like the above specifically spelled out in the operating agreement before any money goes into the company. "We all get along and we'll work it out if any problems come up" is a recipe to lose not only your investment but your positive and ongoing relationships with your brother and parents.
-You don't want to be selling a commodity, as the further the state and federal government move towards legalization the lower the barriers to entry, and the more prices are likely to drop as more competition enters the market. Consider developing your own branding (either for the grow operation as a whole or for specific marijuana strains), so that the customers who are buying your product from dispensaries will associate it specifically with you, and it'll be a higher activation energy for the dispensary to switch to another provider that offers them a slightly lower price.
-My brother, parents and I would each be drawing 1/3 of the net profits of the business, after the grower and manager are each paid 10% (e.g. $1,000,000 annual profit is divided as follows: 100k each to partners and ~266.6k each to my brother, parents and me).
-Yes, the partners will only be getting 10% of the net profits, nothing more.
-I haven't yet worked out the legal details of different scenarios.
-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.
One last thing. Our manager told us that this hustle will not last forever. Competition from large, well-funded enterprises are going to eventually cut into our business, along with ever-decreasing cannabis prices. He said we're going to make the bulk of our money in the first 3-5 years, after which the big boys will move in and will probably buy us out or eat our lunch. He claims, however, that, in that short time, we'll each make a couple of million, so it won't matter what happens after. Not sure if I trust his forecast; it seems like a shaky foundation on which to build a business.
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Hell no! This has bad idea written all over it.
Adding to what FG wrote (which was spot on...don't ignore it):
Do not have your parents transfer the money to your account. Why on earth?! This is bad for so many reasons. You're practically asking the feds to seize your assets. If nothing else, this could trigger a messy and expensive tax situation.
If you go against all common sense and decide to "invest" then setup a corporation owned by the investors. Let's see, you put up 50% and your parents put up 50%. Your brother put up 0%. So the owners are you and your parents. It's easy to sound professional and be convincing - talk is cheap - so if your bro and/or the manager want to be owners then they should put up or shut up. Their ownership is proportional to what they invest. Otherwise, they are nothing more than employees of the company, and the owners need to make this abundantly clear.
Which brings me to the next point. Are you (and your parents) willing to fire your brother and/or the manager if not meeting expectations? Are you willing and able to provide oversight, ensure that they are actually running the business well rather than pissing money away (it's amazing how easy it is to spend other people's money)? Also, the majority owners set employee compensation, not the other way around. What's this nonsense about them getting 10% of net profits? That's bullshit, they get a wage on par with their skills and responsibilities, any additional compensation incentives are at the discretion of the owners. This is also a terrible comp structure - an early startup needs to be reinvesting aggressively in the business but this 10% of net idea disincentivizes this. I strongly suspect your brother doesn't understand how corporate ownership and governance works in the real world, he's looking for family to bankroll his venture while he calls the shots and retains ownership - again, terrible idea.
With zero capital from your brother and his associate, you and your parents would, in essence, be starting a cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business? Do you know anything about it? What connection do you have to this industry other than being related to your brother? If your brother has a solid plan then why can't he get outside investors who already know the business, why does he have to turn to family? Ignoring the history up to this point, if you were starting a cannabis business would you even consider hiring your brother and the business manager to run it?
Finally, about the whole "ground floor" thing. Don't get caught up in this, it's all based in survivor bias. Everyone fantasizes about having invested in MSFT or GOOG in their early days so people are easily convinced that early stage companies are a sure bet. But no one remembers Wang Laboratories, Tandon Corporation or any of the many many early "ground floor" computer companies (https://en.wikipedia.org/wiki/List_of_computer_system_manufacturers) that didn't last. Every industry goes through an early stage of expansion with many small companies, followed by consolidation into a few large players. Do you honestly believe you, your parents, and your brother have the stuff to be on of the big 5 US cannabis companies? What sets you guys apart from every Tom, Dick and Harry with dreams of making it big in pot?
Good post. It pretty much summarizes everything that's crossed my mind about getting into this business since my brother first proposed it.
We came up with the 10% figure because it is roughly commensurate with the average compensation (salary) a good grower and manager receives.
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The problem with investing in cannabis businesses is that if things go too far in either direction, you lose:
1) The DEA starts enforcing federal law in states that have legalized again: Potentially the property gets seized and you're out your $175,000 but still have to pay your loan. Potentially you end up with your own felony on your record.
2) Cannabis gets legalized on a federal level: suddenly you have to compete with giant multistate corporate leviathans who have much better economies of scale when it comes to production than a family owned business is going to have.
Can the feds also retroactively seize my bank and investment accounts, should shit hit the fan? How likely is this?
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-My brother, parents and I would each be drawing 1/3 of the net profits of the business, after the grower and manager are each paid 10% (e.g. $1,000,000 annual profit is divided as follows: 100k each to partners and ~266.6k each to my brother, parents and me).
-Yes, the partners will only be getting 10% of the net profits, nothing more.
-I haven't yet worked out the legal details of different scenarios.
-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.
One last thing. Our manager told us that this hustle will not last forever. Competition from large, well-funded enterprises are going to eventually cut into our business, along with ever-decreasing cannabis prices. He said we're going to make the bulk of our money in the first 3-5 years, after which the big boys will move in and will probably buy us out or eat our lunch. He claims, however, that, in that short time, we'll each make a couple of million, so it won't matter what happens after. Not sure if I trust his forecast; it seems like a shaky foundation on which to build a business.
Thanks for the clarification. BTW - the math on how the net profits get whacked up doesn't add up. (1/3+1/3+1/3+1/10+1/10). Really, the manager and grower are getting 10% each and then the rest is split three ways, or about 27% each.
To be frank, your brother looks like extra baggage in all this, not clear what he brings to the table. He's getting an owner's share without having put up any capital. I think it's nuts, you guys may as well just gift him a big chunk of money.
If the business did actually take off then 10% of net profits (20% for both) could be quite large. Huge upside for the manager and grower but very little downside. IMO, it should be capped at some reasonable value (they are non-owners after all).
I don't think cannabis is easy money and this whole scheme is very sketchy. Honestly, if you decide you want to be in the industry then I would start with a clean slate and lead it from scratch myself on my terms. It's your money after all.
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I'd be hesitant to put up 30% of my net worth on such a risky endeavor.
Do you have any idea on the estimated time frame to earn the 175k back?
If you end up investing I would look at it more as an investment or gift to your brother. Don't plan on getting the money back. If it ends up being successful then awesome. But I would assume it's going to fold... I'm kinda a pesamis though...
Sent from my SM-G935F using Tapatalk
All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.
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The problem with investing in cannabis businesses is that if things go too far in either direction, you lose:
1) The DEA starts enforcing federal law in states that have legalized again: Potentially the property gets seized and you're out your $175,000 but still have to pay your loan. Potentially you end up with your own felony on your record.
2) Cannabis gets legalized on a federal level: suddenly you have to compete with giant multistate corporate leviathans who have much better economies of scale when it comes to production than a family owned business is going to have.
Can the feds also retroactively seize my bank and investment accounts, should shit hit the fan? How likely is this?
Happens all the time: https://www.dea.gov/ops/af.shtml
Will they ever go after pot businesses? They have in the past, who knows if they will going forward.
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Nope. No fucking way.
He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.
The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.
You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.
Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)
So yeah, that's a HARD no if it was me.
Most of your sentiments have crossed my mind at one time or another. In fact, I uttered exactly the same words to my brother in the beginning ("you have to have skin in the game"). I softened my stance with him recently because I felt that he set up the whole apparatus to make money, and all I was doing was investing. I kind of felt it was unfair to him.
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I'd be hesitant to put up 30% of my net worth on such a risky endeavor.
Do you have any idea on the estimated time frame to earn the 175k back?
If you end up investing I would look at it more as an investment or gift to your brother. Don't plan on getting the money back. If it ends up being successful then awesome. But I would assume it's going to fold... I'm kinda a pesamis though...
Sent from my SM-G935F using Tapatalk
All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.
And what do all three have in common? Oh, right, they aren't risking any of their own money.
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If you went to a financial advisor and they recommended that you put six figures into a single business of questionable legality, run by a guy who needs an investor because it's illegal for him to be the owner, you'd fire that advisor. For all the reasons given by everyone else, for the love of God, do not go near this with a ten-foot barge pole. This is a field in which a single wrong move can land you in prison for a decade, and you're effectively bankrolling a convicted felon. You're talking about putting in 50% of the capital and getting 23% of the profits, in a field that's not expected to exist in five years.
And as per your previous post: the figures you have for expected profits are being provided by the guys who need your money. Why should you assume they're being truthful, or even that they know what they're doing? Have they provided you with a breakdown? Shown you data on the rate of return for other growers? Accounted for the risk factor involved in doing something which may still count as a federal offence? Have you been keeping an eye on the sector itself? Do you know anything about the usual ownership structures involved?
Overall, this sounds incredibly high-risk, and it's set up in a way that loads the risk on you. You're applying for the grower's licence, you're getting your parents' money transferred to you, you're putting up a full third of your net worth. Your brother, however, seems to be doing very little for his 10%. You have a grower who produces good weed, and a manager who knows how to run the business. What does your brother contribute? You'll be risking a third of your net worth and your clean criminal record, and you'll only be getting a little over double what he does?
I'd run a mile from this.
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Nope. No fucking way.
He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.
The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.
You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.
Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)
So yeah, that's a HARD no if it was me.
Most of your sentiments have crossed my mind at one time or another. In fact, I uttered exactly the same words to my brother in the beginning ("you have to have skin in the game"). I softened my stance with him recently because I felt that he set up the whole apparatus to make money, and all I was doing was investing. I kind of felt it was unfair to him.
You're talking about a $175k ownership share. How long did it take you to save $175k, how many hours did that represent? Is it your honest assessment that your brother did $175k worth of work setting up this apparatus? How many hours did he put into it and what is fair compensation for his time?
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I'd be hesitant to put up 30% of my net worth on such a risky endeavor.
Do you have any idea on the estimated time frame to earn the 175k back?
If you end up investing I would look at it more as an investment or gift to your brother. Don't plan on getting the money back. If it ends up being successful then awesome. But I would assume it's going to fold... I'm kinda a pesamis though...
Sent from my SM-G935F using Tapatalk
All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.
And what do all three have in common? Oh, right, they aren't risking any of their own money.
LOL, exactly.
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Great advice from FINate.
This all sounds very sketchy. Where is the Business plan? Detailed start-up budgets and cost-of-sales projections? There is some digging to be done before this can be considered as a serious investment opportunity.
Who are the manager and grower? What is their track record in business? Are they honest? Have their backgrounds been investigated?
There are a hell of a lot of red flags here and this currently smells like a scam.
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Nope. No fucking way.
He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.
The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.
You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.
Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)
So yeah, that's a HARD no if it was me.
Most of your sentiments have crossed my mind at one time or another. In fact, I uttered exactly the same words to my brother in the beginning ("you have to have skin in the game"). I softened my stance with him recently because I felt that he set up the whole apparatus to make money, and all I was doing was investing. I kind of felt it was unfair to him.
You're talking about a $175k ownership share. How long did it take you to save $175k, how many hours did that represent? Is it your honest assessment that your brother did $175k worth of work setting up this apparatus? How many hours did he put into it and what is fair compensation for his time?
My brother would not be entitled to part of the proceeds from the eventual sale of the real estate and equipment. In other words, he's 1/3 owner of the business, but not of the physical property.
Since he's my brother, I'm willing to be more generous than I otherwise would with compensation. My only concern is that, without skin in the game, he isn't going to strive as hard to make the business successful as he would had he contributed some of his own money.
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If you went to a financial advisor and they recommended that you put six figures into a single business of questionable legality, run by a guy who needs an investor because it's illegal for him to be the owner, you'd fire that advisor. For all the reasons given by everyone else, for the love of God, do not go near this with a ten-foot barge pole. This is a field in which a single wrong move can land you in prison for a decade, and you're effectively bankrolling a convicted felon. You're talking about putting in 50% of the capital and getting 23% of the profits, in a field that's not expected to exist in five years.
And as per your previous post: the figures you have for expected profits are being provided by the guys who need your money. Why should you assume they're being truthful, or even that they know what they're doing? Have they provided you with a breakdown? Shown you data on the rate of return for other growers? Accounted for the risk factor involved in doing something which may still count as a federal offence? Have you been keeping an eye on the sector itself? Do you know anything about the usual ownership structures involved?
Overall, this sounds incredibly high-risk, and it's set up in a way that loads the risk on you. You're applying for the grower's licence, you're getting your parents' money transferred to you, you're putting up a full third of your net worth. Your brother, however, seems to be doing very little for his 10%. You have a grower who produces good weed, and a manager who knows how to run the business. What does your brother contribute? You'll be risking a third of your net worth and your clean criminal record, and you'll only be getting a little over double what he does?
I'd run a mile from this.
No. My brother would be getting about 27% of the net profit from the business (just like me), not 10%.
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My brother would not be entitled to part of the proceeds from the eventual sale of the real estate and equipment. In other words, he's 1/3 owner of the business, but not of the physical property.
Since he's my brother, I'm willing to be more generous than I otherwise would with compensation. My only concern is that, without skin in the game, he isn't going to strive as hard to make the business successful as he would had he contributed some of his own money.
Typically the business owns the property. Unless of course you and your parents are going to start a separate company that owns the property and then lease it to the cannabis business, but I can't imagine that's the case or the 3 musketeers wouldn't have come knocking at your door for cash in the first place.
Also, the whole point of the scheme is to get rich quick on the profits before the big players consolidate the business (which I think is dubious at best), but you're greatly diluting your returns by adding an additional 1/3 owner who's not really an owner and who hasn't ponied up the $175k.
From a business perspective (and this from someone with an MBA) it's nonsensical to structure a business around net profit payouts, or to try and separate property from profits. Who owns property acquired while the business is in operation, since this affects net profits? All this emphasis on whacking up the net profits is a clever scheme to hide the fact that you're financing a business that other people will effectively control.
Focus on ownership first, that's the most important part. Ultimately the owners make all decisions: who to hire, fire, purchases, marketing, and so on. Most importantly, the owners decide what to do with the assets of the company, including dividends and retained profits and property. If you "invest" in a corp that separates ownership of physical property (your capital) from the day-to-day business then you've effectively lost control of your "investment" - you've granted ownership functions to non-owners. Do not enter into a contract with an employee that limits your ability to terminate them or change their comp. After ownership is sorted out, then the owners can decide how and how much each employee should be compensated.
The current plan is setting you on a course for a bitter battle with these quasi/non-owners who I guarantee will think they are in charge and who'll believe they are entitled to their perceived percentage of the business.
I still say it's a terrible idea. You and your parents carry almost all the legal and financial risks, which are enormous. You have a lot to lose: Accounts seized, loss of job, prison time, ... not worth it.
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I'd be hesitant to put up 30% of my net worth on such a risky endeavor.
Do you have any idea on the estimated time frame to earn the 175k back?
If you end up investing I would look at it more as an investment or gift to your brother. Don't plan on getting the money back. If it ends up being successful then awesome. But I would assume it's going to fold... I'm kinda a pesamis though...
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All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.
If you do this.... Your brother should start out with no more than a 10% stake in the company.
I'd probably give him a 5-10% stake with the option to buy up to 27% in the first 2 years for the sum of 175k. IF the business will be as amazing and successful as they say, then he should easily be able to pony up the money by the end of 2 years.
Like others have said.... He doesn't have any skin in the game. At this point he shouldn't get an equal share.
I still wouldn't take the risk though.
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Leaving the legal issues aside for a moment (though they would make the answer an instant hard no, for me), have you all decided how to deal with the cash issue and whether that $1M profit figure is pre or post 280E taxes?
Non bankable:
http://www.businessinsider.com/no-1-problem-facing-legal-weed-businesses-2016-4
280E:
https://www.accountingweb.com/tax/business-tax/marijuana-and-taxes-is-there-a-way-around-section-280e
Carting around millions of dollars in armoured trucks and getting audited every year while paying up to 90% in taxes? While waiting to Jeff Sessions to decide to make an example of you, ruining your and your parents’ lives? Sounds like a real slam dunk of a business.
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-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.
Medical legal in at least 1 state since 1996. Recreational in at least 1 state since 2012. Why in the world isn't your "phenomenal" grower a multi-millionaire several times over already. Why does he need your money?
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cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business?
I think FINate has found the crux of the matter. As currently structured,* there is no incentive for the business manager or grower (or your brother) to stick around the minute the business hits a rough patch and doesn't turn a profit for the month or is turning a profit less than 10x what a good pot grower can pull down in salary at a competing business (I have no idea what that number is, but I'm guessing it's a lot?).
So do you want to know just own, but also run a cannabis business?
*If they either had their own capital on the line or were drawing a salary instead of profit sharing they'd have an incentive to try to turn the business around. But right now, if you're profit sharing is less than they could make somewhere else, why not walk away?
More technical and obscure question: if the plan is for the business to make all of its money in 3-5 years, are you and your parents going to get to depreciation your initial capital investment on a 3-5 year time frame before calculating net profits? (You obviously wouldn't get to claim the depreciation to the IRS) That could make a big difference in the payouts your brothers/grower/manager could expect to see.
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Heck yeah, just make sure you diversify and put another third of your net worth in something safe like bitcoin ;)
Seriously, it might make sense. You're buying some assets that in a liquidation you could probably recover some money from, and you and your parents hopefully 1) love weed, and 2) love risk. If 1. and 2. are correct, I say go for it. I think the notion that you're making a passive investment is a silly notion. Investing with family always becomes full frontal, and if I were in your shoes, I'd be prepared to get deeply involved, and realize that in certain situations I might have to either hire a new key staffer, or do the job myself.
At the same time, this might be the chance you get to escape the rat race.
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Many people have made good points about the legal and financial risks of this venture. Even if everything works out to bring in the millions predicted in 5 years (however unlikely that may be), making this investment will damage your relationship with your brother and your parents. For that reason alone, I say do not do it.
Once you, your parents, and your brother become co-owners of a business that will define your relationship. There will be discussions of the business, how things are run, what is coming next, etc. at every family get together. There will be information you want to know and should know and every time you go out for a nice dinner will be a convenient opportunity to get an update. This happens whether things go well or poorly.
This was the advice that convinced me not to invest in an existing family business with detailed financial records that was a great deal. But I want a sister, brother, and niece that I love and have fun with way more than a business partner.
For what it's worth, this could also be the diplomatic explanation to bow out of the deal.
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Do not enter into a contract with an employee that limits your ability to terminate them or change their comp.
This is a major concern for me. If at some point I'm not satisfied with the performance of the grower and/or manager, my ability to fire them is hampered by the fact that they're officially part owners of the business-- they're not merely employees.
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Leaving the legal issues aside for a moment (though they would make the answer an instant hard no, for me), have you all decided how to deal with the cash issue and whether that $1M profit figure is pre or post 280E taxes?
Non bankable:
http://www.businessinsider.com/no-1-problem-facing-legal-weed-businesses-2016-4
280E:
https://www.accountingweb.com/tax/business-tax/marijuana-and-taxes-is-there-a-way-around-section-280e
Carting around millions of dollars in armoured trucks and getting audited every year while paying up to 90% in taxes? While waiting to Jeff Sessions to decide to make an example of you, ruining your and your parents’ lives? Sounds like a real slam dunk of a business.
My brother told me that there are financial institutions that are not federally funded (nor insured, I presume) that will accept cannabis money. Not sure who these are or how they operate exactly. It sounds like a grey area, replete with its own risks and inconveniences.
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-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.
Medical legal in at least 1 state since 1996. Recreational in at least 1 state since 2012. Why in the world isn't your "phenomenal" grower a multi-millionaire several times over already. Why does he need your money?
He has a felony on his record (marijuana related) and he's dirt poor. He's also been taking care of his ailing mother for the past few years.
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I'd be leery of any projections on cannabis businesses right now because the prices are still very much in flux. For example, prices in Oregon have dropped by 50% (http://www.bbc.com/news/business-44237305 (http://www.bbc.com/news/business-44237305)). To make matters worse, the floor could really drop out on the market if we start to see mechanized outdoor production with interstate shipping.
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cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business?
I think FINate has found the crux of the matter. As currently structured,* there is no incentive for the business manager or grower (or your brother) to stick around the minute the business hits a rough patch and doesn't turn a profit for the month or is turning a profit less than 10x what a good pot grower can pull down in salary at a competing business (I have no idea what that number is, but I'm guessing it's a lot?).
So do you want to know just own, but also run a cannabis business?
*If they either had their own capital on the line or were drawing a salary instead of profit sharing they'd have an incentive to try to turn the business around. But right now, if you're profit sharing is less than they could make somewhere else, why not walk away?
More technical and obscure question: if the plan is for the business to make all of its money in 3-5 years, are you and your parents going to get to depreciation your initial capital investment on a 3-5 year time frame before calculating net profits? (You obviously wouldn't get to claim the depreciation to the IRS) That could make a big difference in the payouts your brothers/grower/manager could expect to see.
I'm having trouble understanding your last question.
As for your earlier points: I forgot to mention in my original post that the grower has agreed to sign a contract whereas he will ONLY work for us as long as we're in business. He cannot defect. I'm hoping I can get the manager to agree to same.
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Sadly I think the manager and the grower are trying to scam your brother. If the opportunity was that great than the manager and the grower should be able to find their own investors.
He has a felony on his record (marijuana related) and he's dirt poor. He's also been taking care of his ailing mother for the past few years.
He is an easy target, he's probably tired of being poor and told his buddies how rich his brother is.
I'm hoping I can get the manager to agree to same.
There is no "hope" in business. Either he will sign a contract or he won't. My bet is the manager is going to take the money and run.
If you really want to help your brother, give him a gift of 10k and call it a day.
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cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business?
I think FINate has found the crux of the matter. As currently structured,* there is no incentive for the business manager or grower (or your brother) to stick around the minute the business hits a rough patch and doesn't turn a profit for the month or is turning a profit less than 10x what a good pot grower can pull down in salary at a competing business (I have no idea what that number is, but I'm guessing it's a lot?).
So do you want to know just own, but also run a cannabis business?
*If they either had their own capital on the line or were drawing a salary instead of profit sharing they'd have an incentive to try to turn the business around. But right now, if you're profit sharing is less than they could make somewhere else, why not walk away?
More technical and obscure question: if the plan is for the business to make all of its money in 3-5 years, are you and your parents going to get to depreciation your initial capital investment on a 3-5 year time frame before calculating net profits? (You obviously wouldn't get to claim the depreciation to the IRS) That could make a big difference in the payouts your brothers/grower/manager could expect to see.
I'm having trouble understanding your last question.
As for your earlier points: I forgot to mention in my original post that the grower has agreed to sign a contract whereas he will ONLY work for us as long as we're in business. He cannot defect. I'm hoping I can get the manager to agree to same.
Have you ever tried to enforce a non-complete clause? From what I have heard they're basically worthless.
There are lots of red flags and this is only one.
This grower who's so fantastic, has he grown at scale before? My mom can make a damn good pie, but would she be any good at making 100 pies a day? Or, would she be great at it but be burned out in a year?
Does everyone understand the overhead involved with every step of the business? The "make it back in first year or two and the rest is pure profit" ethos seems to imply that they are underestimating that.
Your brother needs skin in the game, and you need to want this business if it turns into a headache and he (or any other key player) drops out since the incentive to stay when it gets tough is not there.
It might take a few years for you to really iron everything out. It might be too late (large multi-state growers taking over and killing your margins) by the time you get your shit together.
There's a lot to go wrong here. I say walk away.
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How much have you talked about this with your parents without your brother. I wouldn't accept the terms he's proposed and would want to make sure my parents didn't get involved on bad terms either. If brother had other investors lined up for the business, I might consider investing in the real estate and leasing it to them at a rate that takes into account the increased risk associated with the use. I would never consider a business where I was personally named in the license as a passive investment.
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This seems like a scam. Here in CO, the pot businesses have to deal with a TON of regulation, and those regulations are always changing. And, this is a state where recreational has been legal for a while.
I wouldn't touch the product (personal choice) and therefore wouldn't get into the business until the legal frameworks and protections are established and in place. Sure, you could say that by then, the large companies would price out the mom and pop shops, but the way I see it, I work really hard to provide for my family (as does my wife), and putting ourselves in a position where we could be charged with a crime?! Absolutely not. We'll take our corporate drone jobs...
OP, I'd only do this if you're truly passionate about the product and willing to involve yourself, and once the compensation for the non-owners is set up to where they're paid a normal wage, then bonuses on top of that. I wouldn't allow someone with no skin in the game a cut of any profits unless the profits were high.
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Do not enter into a contract with an employee that limits your ability to terminate them or change their comp.
This is a major concern for me. If at some point I'm not satisfied with the performance of the grower and/or manager, my ability to fire them is hampered by the fact that they're officially part owners of the business-- they're not merely employees.
Let's try thinking about this a different way. Set aside the legal concerns, and the fact that your bother is involved (family ties usually muddle objective analysis). Random Stranger approaches you with a business opportunity in industry X:
Random Stranger: "Industry X is ON FIRE right now! I have an incredible opportunity for you to get in on the ground floor. You need to strike while the iron is hot, don't let this once in a lifetime opportunity pass you by."
You: "Uh, ok. Tell me more."
Random Stranger: "We have a plan, and some people, and maybe some properties lined up. But we need capital to get started. That's where you come in."
You: "How much are we talking about here?"
Random Stranger: "We need $350k to get things off the ground."
You: "Uh, ok. So I would invest $350k in your business. What do I get in return?"
Random Stranger: "You get 50% ownership."
You: "I see. Is this business a going concern?"
Random Stranger: "No, we haven't incorporated or anything like that. That's why we need funds to get it started."
You: "So no inventory, no product, no customers?"
Random Stranger: "Correct"
You: "Do you have any of the required permits or regulatory requirements?"
Random Stranger: "No"
You: "So, um, what exactly would I be investing in?"
Random Stranger: "A great idea. And 'human capital' - there are three of us. One is an expert in producing the product. Another is good at business stuff. The third guy, well, we don't quite know what he will do yet as he has a history that limits what he can do in X. But he's super motivated, so there's that.
You: "..."
Random Stranger: "Oh, and because of some, uh, reasons we're going to need you to be the legitimate face of the business."
Let's think about this. How much is a business idea worth? Approximately $0. This is not a going concern, so there's no value in customers, supply chain, distribution channels, or anything. The business doesn't actually exist outside of the imagination of a few people. The business valuation is approximately $0. You're being asked to "invest" $350k, which means, after your investment, the company will be worth $0+$350k=$350k. However, you only get 50% ownership, so in effect you transferred $175k to these strangers. Don't be fooled, no matter how much they try to convince you that you retain full ownership of your initial investment, it doesn't work this way. If the entity (if it actually existed) were dissolved tomorrow its assets would be split 50/50 between the owners. The only reasonable amount to invest in a company worth $0 is $0. If it was already a going concern, and an independent appraisal valued it at $350k, then a $350k investment in exchange for 50% ownership could make sense (assuming everything else checks out and you think it's a good investment).
Give that, the only reasonable response to this "opportunity" is:
You: "Get off my property or I'm callin' the cops!"
Now, since this is your brother, you can be nice about it. But whatever you do, run far far away from this. You are already on a path to FIRE, this is guaranteed to derail the trajectory you're already on.
One final thing: It's worth asking what your brother brings to the table from the POV of the manager and grower. They both have skills (presumably), so why are they willing to give your brother a cut of the action, and at a percentage almost triple their own? The most likely answer is that he's your brother, he has connections to family members with money. He is being used to pull you and your parents into this scam.
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Absolutely not.
1. You are talking about borrowing against your 401K, which I assume is traditional/non-Roth. What happens if the business turns bad AND you need to or choose to change jobs? The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).
2. While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.
3. Your Bro has no skin in the game.
4. Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.
Best of luck, either way!!
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Heck yeah, just make sure you diversify and put another third of your net worth in something safe like bitcoin ;)
Seriously, it might make sense. You're buying some assets that in a liquidation you could probably recover some money from, and you and your parents hopefully 1) love weed, and 2) love risk. If 1. and 2. are correct, I say go for it. I think the notion that you're making a passive investment is a silly notion. Investing with family always becomes full frontal, and if I were in your shoes, I'd be prepared to get deeply involved, and realize that in certain situations I might have to either hire a new key staffer, or do the job myself.
At the same time, this might be the chance you get to escape the rat race.
I'm invested in a 401(k), 457(b), Roth IRA and Vanguard taxable account. The bulk of my money is in stocks, bonds, and REIT's.
Another 5% of my net worth is invested in a basket of 39 cryptocurrencies (including Bitcoin).
My reasons for even considering the cannabis business are to not only help myself escape the rat race, but also my brother to escape it. However, if my brother wasn't involved, I would simply pass.
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Heck yeah, just make sure you diversify and put another third of your net worth in something safe like bitcoin ;)
Seriously, it might make sense. You're buying some assets that in a liquidation you could probably recover some money from, and you and your parents hopefully 1) love weed, and 2) love risk. If 1. and 2. are correct, I say go for it. I think the notion that you're making a passive investment is a silly notion. Investing with family always becomes full frontal, and if I were in your shoes, I'd be prepared to get deeply involved, and realize that in certain situations I might have to either hire a new key staffer, or do the job myself.
At the same time, this might be the chance you get to escape the rat race.
I'm invested in a 401(k), 457(b), Roth IRA and Vanguard taxable account. The bulk of my money is in stocks, bonds, and REIT's.
Another 5% of my net worth is invested in a basket of 39 cryptocurrencies (including Bitcoin).
My reasons for even considering the cannabis business are to not only help myself escape the rat race, but also my brother to escape it. However, if my brother wasn't involved, I would simply pass.
This should make you stop and think.
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If you do this, Joe Pesci will be playing your brother in the movie. Di Nero will play you. It'll be like Casino but with pot.
In all seriousness...like you, I am much older than my brother. I'm like half dad, half brother. He's broke. I'd be afraid to invest in a business idea of his unless all the business planning has been done properly and put on paper. Your brother and his buddies are trying to cut corners, which seems like a bad idea starting up any business, but especially one selling pot. And even more especially since he has a previous pot felony.
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Wait, so both your brother and the grower are convicted felons?
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I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.
As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.
And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.
I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
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I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.
As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.
And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.
I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
OP, you might as well close the thread with this post. I think you owe MJseast a beer, what with saving you at LEAST $175,000.
Are you the kind of person who can walk away after dropping that kind of cash, or would you continue to throw more money in to "protect your investment"?
MJ, thank you for your insight into what seems to be a fascinating and sexy industry. Do you give tours? :)
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Run for your life.
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Echoing the thoughts of everyone else, walk away!
I’m guessing none of the 3 people grower, business manager or your brother have any track record of succeeding in business. So why trust them to use you and your parents 350k in a startup?
I doubt from the light background info given if these people would even be employees you would pick for the business but definitely not business partners and the people you choose to trust with a big chunk of your net worth.
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OP, you might as well close the thread with this post. I think you owe MJseast a beer, what with saving you at LEAST $175,000.
Are you the kind of person who can walk away after dropping that kind of cash, or would you continue to throw more money in to "protect your investment"?
MJ, thank you for your insight into what seems to be a fascinating and sexy industry. Do you give tours? :)
Haha! I am happy to help. I've seen good people lose so much in this industry because they were being hopeful (and naive) and it's really sad to see. I could probably write a book with all I've learned (and am still learning!). Hmmmm..... ;)
I have so much more I could say about it, but I'll leave it at this: If you really want to get into the industry at this point, look to ancillary businesses to the industry - real estate, business solutions, tracking and point of sales systems, etc. But even with those you should partner up with someone who has a background in the cannabis industry as it really is its own beast.
All this makes me realize that I really should get more serious with my consulting on the subject, so thanks for helping me realize that! :P
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I have so much more I could say about it, but I'll leave it at this: If you really want to get into the industry at this point, look to ancillary businesses to the industry - real estate, business solutions, tracking and point of sales systems, etc. But even with those you should partner up with someone who has a background in the cannabis industry as it really is its own beast.
This is a good tip in general. During the gold rushes, the real money is in pickaxes and the like...
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Haha! I am happy to help. I've seen good people lose so much in this industry because they were being hopeful (and naive) and it's really sad to see. I could probably write a book with all I've learned (and am still learning!). Hmmmm..... ;)
Now THAT sounds like a viable plan to make money in this field!
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If you really want to get into the industry at this point, look to ancillary businesses to the industry
My brother's plan also included possibly opening a hydroponic store (cannabis supplies). No regulations to deal with.
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Absolutely not.
1. You are talking about borrowing against your 401K, which I assume is traditional/non-Roth. What happens if the business turns bad AND you need to or choose to change jobs? The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).
2. While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.
3. Your Bro has no skin in the game.
4. Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.
Best of luck, either way!!
1. I will be borrowing from a financial institution that gives loans to cannabis businesses, not my 401(k).
2, 3. Agree on both counts. I confronted my brother with #3, and he said to me that this is why I'm getting 1/3 of the business. If he had also contributed money, I would be getting a much smaller slice.
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Absolutely not.
1. You are talking about borrowing against your 401K, which I assume is traditional/non-Roth. What happens if the business turns bad AND you need to or choose to change jobs? The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).
2. While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.
3. Your Bro has no skin in the game.
4. Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.
Best of luck, either way!!
1. I will be borrowing from a financial institution that gives loans to cannabis businesses, not my 401(k).
2, 3. Agree on both counts. I confronted my brother with #3, and he said to me that this is why I'm getting 1/3 of the business. If he had also contributed money, I would be getting a much smaller slice.
I will tell you what you already heard: don't do it.
It seems that this is about your brother (except if you are not trolling us :)), but I can't stop thinking something is wrong with the part I highlighted.
Anyway, as you asked us if we would invest in this business, I think you got a lot of responses.
If you decide to still do it please keep us posted on the progress.
I can only wish you luck, as with any business you need it.
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Wait, so both your brother and the grower are convicted felons?
My brother copped a plea bargain (never formally convicted) and got 1-3 years (non-violent crime [selling drugs]). He ended up serving only 8 months.
The grower got a felony for growing pot in Brooklyn in his apartment. One of 'friends' ratted him out.
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I'd be leery of any projections on cannabis businesses right now because the prices are still very much in flux. For example, prices in Oregon have dropped by 50% (http://www.bbc.com/news/business-44237305 (http://www.bbc.com/news/business-44237305)). To make matters worse, the floor could really drop out on the market if we start to see mechanized outdoor production with interstate shipping.
Do you realistically think that marijuana legalization at the federal level is imminent? The plan my associates have in mind is to profit before this happens. Once it does, we agree that it will be much harder to make money.
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If you really want to get into the industry at this point, look to ancillary businesses to the industry
My brother's plan also included possibly opening a hydroponic store (cannabis supplies). No regulations to deal with.
This could maybe work if there's strong home grow business in your area, but most legal, large-scale growers buy their equipment and nutrients online where its usually cheapest.
Like all new businesses, you need to evaluate the market demand before jumping in, even for ancillary businesses - Who is the customer? Where are they currently being serviced? How many of them are there in your area? What products/brands are they buying and what amount are they currently spending on these? How will you take them away from their current products/stores to buy from you? At least for ancillary businesses you can usually find real data from similar companies.
Honestly, it sounds like a lot of "half-baked" business plans that I've heard over the years. Also keep in mind that the ancillary businesses will be even more competitive because there are no regulations and lot less risk, so many more people are willing to take their chances on these.
Have you already dug through his pro formas on each of these separate business lines?
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Wait, so both your brother and the grower are convicted felons?
My brother copped a plea bargain (never formally convicted) and got 1-3 years (non-violent crime [selling drugs]). He ended up serving only 8 months.
The grower got a felony for growing pot in Brooklyn in his apartment. One of 'friends' ratted him out.
Sounds like they both have a proven track record of bad decision making. That's not a comment about whether the product should or shouldn't be legal, but it's a comment that they both have crossed that line and broken the law each in their own regard. It's one thing to jaywalk in the moment, it's another to put time and energy into trying to make a living from illegal activity. To give them access to cash to run a "business"...just seems...like a really really bad decision on your part if you do it.
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I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.
As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.
And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.
I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.
-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.
-Growing superior weed to your competitors isn't rewarded?
-Why don't you feel that there is a big risk to lose assets because cannabis is federally illegal? This is one of my major concerns.
-Are most cannabis operations getting audited every year? Can this potentially result in prison time? Lost personal assets? It sounds a bit extreme.
-My 401(k) investment company is going to drop me because I'm involved with cannabis? So, I have hundreds of thousands of dollars in my 401(k)/457(b) accounts, and they're going to force me to liquidate my assets and incur massive taxes? How does this work??
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Absolutely not.
1. You are talking about borrowing against your 401K, which I assume is traditional/non-Roth. What happens if the business turns bad AND you need to or choose to change jobs? The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).
2. While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.
3. Your Bro has no skin in the game.
4. Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.
Best of luck, either way!!
1. I will be borrowing from a financial institution that gives loans to cannabis businesses, not my 401(k).
2, 3. Agree on both counts. I confronted my brother with #3, and he said to me that this is why I'm getting 1/3 of the business. If he had also contributed money, I would be getting a much smaller slice.
No!! That's not how investing/starting a business works. What kind of work has he been doing for the last 18+ years? He sounds clueless about starting a business.
I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.
As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.
And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.
I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.
-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.
Income from all illegal activities is taxable at the federal level and you can only deduct COGS, like others have mentioned. I thought this business proposition might start to sound better as the thread continued but it sounds much worse. Your brother sounds like a bullshit artist and I would not rely on anything he says and would not go into business with him.
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-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.
For experienced business people with cannabis industry experience elsewhere, I think it's possible. From what you have written about your plans and backgrounds, no, I don't think it's likely. Maybe possible, but not likely.
-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.
OMG. I don't even know how to respond to this. You ABSOLUTELY have to pay federal taxes! You need to consult a cannabis business attorney ASAP. This comment makes me realize just how little your brother understands about this business. If you go forward with this, you are insane. Yes, that is tax evasion.
-Growing superior weed to your competitors isn't rewarded?
Not really. Depends on your market and if it's it actually willing to pay more for "good" weed. In my many years of experience, the market that is willing to pay for good weed, isn't as big as we expected or would like it to be. You can look at the data from legal states to see this.
-Why don't you feel that there is a big risk to lose assets because cannabis is federally illegal? This is one of my major concerns.
Because the government wants your tax money. I've yet to hear of a case of a legal entity in a legal state (granted, I'm talking recreational, not medical) where assets were taken. Now, if you're not planning on paying taxes, that's a whole other thing. In that case, plan to have your assets taken :).
-Are most cannabis operations getting audited every year? Can this potentially result in prison time? Lost personal assets? It sounds a bit extreme.
Not most, but many. Those who are doing shady things (like not paying taxes) and luck of the draw. Yes it's extreme, and yes it's absolutely happening.
-My 401(k) investment company is going to drop me because I'm involved with cannabis? So, I have hundreds of thousands of dollars in my 401(k)/457(b) accounts, and they're going to force me to liquidate my assets and incur massive taxes? How does this work??
Well it's not a guarantee, but it happens. Happened to me. They sent me a letter stating that they can't have clients who are in the cannabis industry. They gave me 60 days to move my assets from their accounts else they would liquidate them and send me a check (that I would've been taxed on).
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-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.
One more point on this particular topic: Just because Massachusetts recently legalized doesn't mean that experienced cannabis business owners from other legal states haven't been already getting involved in the Massachusetts market. Most people that I know in the industry already have their hands in multiple states, usually prepped before the state even legalizes. You are going to be competing against people with a lot more experience and lot more money.
Again, I'm not saying that it's not possible to succeed in this industry, just that you are not properly set up for success. You need the right people with the right experience and about 5 times the amount of money that you think you'll need.
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-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.
With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
But don't take it from a bunch of people on the internet. Take it from the new york times.
https://www.nytimes.com/2015/05/10/us/politics/legal-marijuana-faces-another-federal-hurdle-taxes.html
The country’s rapidly growing marijuana industry has a tax problem. Even as more states embrace legal marijuana, shops say they are being forced to pay crippling federal income taxes because of a decades-old law aimed at preventing drug dealers from claiming their smuggling costs and couriers as business expenses on their tax returns.
Congress passed that law in 1982 after a cocaine and methamphetamine dealer in Minneapolis who had been jailed on drug charges went to tax court to argue that the money he spent on travel, phone calls, packaging and even a small scale should be considered tax write-offs. The provision, still enforced by the I.R.S., bans all tax credits and deductions from “the illegal trafficking in drugs.”
Marijuana business owners say it prevents them from deducting their rent, employee salaries or utility bills, forcing them to pay taxes on a far larger amount of income than non-marijuana businesses with the same earnings and costs.
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I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.
As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.
And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.
I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.
-Are you saying that it's too late in the game to turn a profit even in Massachusetts, which only recently legalized recreational cannabis? The whole premise of our business is that we are getting in early, before the market gets consolidated in the state.
-As for 280e, I will have to educate myself about it. I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales. We will only be paying state taxes, since cannabis is illegal at the federal level. He reasons that we will be liable for federal taxes only when cannabis becomes federally legal. I admit, this sounds like outright tax evasion, and a recipe for disaster, but he claims it isn't.
-Growing superior weed to your competitors isn't rewarded?
-Why don't you feel that there is a big risk to lose assets because cannabis is federally illegal? This is one of my major concerns.
-Are most cannabis operations getting audited every year? Can this potentially result in prison time? Lost personal assets? It sounds a bit extreme.
-My 401(k) investment company is going to drop me because I'm involved with cannabis? So, I have hundreds of thousands of dollars in my 401(k)/457(b) accounts, and they're going to force me to liquidate my assets and incur massive taxes? How does this work??
I believe that literally every single person, before you posted this said that it's probably not a good idea. Now that your brother is clearly showing that he doesn't know what he's talking about, if you don't blow him off immediately, I really hope that you start a journal on this forum so I can revel in your crash and burn to distract me from my own shortcomings.
Dude, your original post has now become the equivalent of "What do you all think about me taking a 175k loan to go all in on Bitcoin? Oh I won't be investing it, my brother, who is a convicted felon, and his friend, also a convicted felon, will be starting a business allowing others to get in on this new thing."
See how absurd that sounds? Hopefully you do.
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Forget the taxes, quality, rent, and so forth. @mozar is right, this sounds like a scam where these “associates” disappear with all the money.
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I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales...
Oh.My.God
Nevermind all the other issues- all the owners would end up going to jail for tax evasion.
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One more point on this particular topic: Just because Massachusetts recently legalized doesn't mean that experienced cannabis business owners from other legal states haven't been already getting involved in the Massachusetts market. Most people that I know in the industry already have their hands in multiple states, usually prepped before the state even legalizes. You are going to be competing against people with a lot more experience and lot more money.
Again, I'm not saying that it's not possible to succeed in this industry, just that you are not properly set up for success. You need the right people with the right experience and about 5 times the amount of money that you think you'll need.
Bear in mind that cannabis grower licenses in Massachusetts are going to be issued by territory, just like a McDonald's franchise. It's not a free-for-all. So, if we actually did get a license, we would be the only grower/dispensary within a given area or even town. I'm not saying this will guarantee our success, but it's definitely an advantage. I wouldn't even have considered this business otherwise.
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I mentioned this tax code to my brother, and he told me that we won't be paying federal taxes on our cannabis sales...
Oh.My.God
Nevermind all the other issues- all the owners would end up going to jail for tax evasion.
Is this going to be the first thread where the OP ends up in jail?
Could be a milestone for the MMM forum....
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
YES!!!! Exactly! See above where I said that I had many years of paying more in federal taxes than I made in profit. You really need to understand what you're getting into.
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
YES!!!! Exactly! See above where I said that I had many years of paying more in federal taxes than I made in profit. You really need to understand what you're getting into.
Thank you for enlightening me to this, MJ. As I've said, I mentioned this to my brother today, yet neither he, nor the manager, had even heard of 280e. This business proposition is looking worse and worse to me by the minute, and I haven't even scratched the surface yet.
I do have one question, however. How are all these cannabis businesses surviving, with such onerous rules in place? I would think that no one would get involved in this industry if it was so bad.
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
Yes! This is standard in most countries. The IRS/Fiscal authority is agnostic to the origin of the money. It can be even drug money or prostitution or anything illegal. They are taxed! I;m not american and even I know that! It's standard in most 1st world countries.
Again the IRS is agnostic... the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
Have you met the federal government before?
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
Not so much wrong but rather that the IRS is penalizing those profits made by the sale of federally illegal goods by disallowing many deductions.
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
I am sorry but I am getting more and more convinced that you are just trolling :).
You started the thread asking us what we think and then you tried to "solve" the issues raised convincing us that you should go in.
I already said: if you go in good luck and please keep us posted.
I genuinely think that in order to succeed in business you need to have courage so this might prove that you are right and we are wrong.
Sidenote:
I lack that kind of courage, but I still tried to start a business - and failed because of not enough funding, not enough planning, not understanding our competition, plus not getting along with some of the business partners. But I planned to finance that business for 6 months to see if it takes off, had the money for it and it was a small amount. In those 6 months we even had one month when we were able to pay everything from the business income....
/Sidenote
If yo decide to go in, do your homework:
A lot of things were already mentioned but I will try to think what I would to before going in into a business:
1. Income/expenses - try to get as much detail as needed.
2. Law - see what laws govern that business. What permits do you need? What is the worst which can happen? How easy is it to get in jail?
3. People - DO NOT DO BUSINESS WITH FAMILY (from your brother's approach on "allowing" you to have 1/3 of the business I think this is already broken). I am not bringing up the felony part as I really think everyone should get a second chance. DO NOT DO BUSINESS WITH GOOD FRIENDS (work with them if you want, don't do business. I have refused doing business with 3 good friends and I can still drink beer with all of them. They had a long period where they would not drink beer with each other...). Understand the track record of people you want to hire.
-Did the grower grow only for him? Does he know to scale? Again, I am not bringing up the felony part as I believe in second chances. But do you homework because you might be liable for his actions.
-Manager - you said he "knows people". Why would those people buy from him?
4. Customers:I think you also mentioned hospitals. Why would they buy from you?
5. Time - how much time do you have to work on this business? Do you have 24 hours a day to focus on this?
Again, I wish you luck and keep us posted.
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the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.
But, it stands to reason that, if the IRS is taxing our business, then we should automatically qualify to write off our business expenses as well. They go hand-in-hand. You can't separate them. This is purely a fiscal matter, not a judicial one. The IRS is NOT being 'agnostic'; to the contrary, they're being selective and self-serving. Pure hypocrisy.
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Again the IRS is agnostic... the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.
If the IRS were truly agnostic, they would treat cannabis businesses like every other, by taxing them AND allowing deductions. Clearly, they're not.
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Not so much wrong but rather that the IRS is penalizing those profits made by the sale of federally illegal goods by disallowing many deductions.
If the IRS is "penalizing" cannabis businesses by not allowing deductions (yet at the same time taxing them), they're making a judicial assessment, and they're clearly not being agnostic, as several posters have claimed.
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Again the IRS is agnostic... the legitimacy/legality of the money and its origins is a matter for the judicial system... not the fiscal system.
If the IRS were truly agnostic, they would treat cannabis businesses like every other, by taxing them AND allowing deductions. Clearly, they're not.
Is my post about to be a comment from a late 20s dude to a late 40s dude that life is not fair?
Yep!
Life is not fair.
https://en.wikipedia.org/wiki/Taxation_of_illegal_income_in_the_United_States (https://en.wikipedia.org/wiki/Taxation_of_illegal_income_in_the_United_States)
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280e is part of the Internal Revenue Code and the IRS is enforcing it. It is congress you have a problem with. Not all business expenses can be written off and certain expenses have to be written off (depreciated or amortized) based on the rules. For example there is no deduction for penalties/fines or county club dues, you can only deduct 50% of meals & entertainment. There are further differences on expenses and income for different industries, sizes of business, accounting methods, documentation required, etc. Not all businesses are treated equally under the IRC.
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It seems to me you are spending more energy trying to convince us or yourself to go into this venture - even against most peoples advice - than to accept what the IRS states.
It does not matter if it's hypocrisy from IRS or not... it's what it is and no one in here can change it. Your brother on the other hand seems to be clueless about that, which says a lot of what he did during these past 365 days.
If indeed he had done a thourough research, analysis, SWOT and a sound business plan with numbers forecast he would have answers.
Does he actually have a little folder with a business plan? Structured data? Forecasts? Anything? Or is it mostly saying things and then approach things as they come? I would never be in business without a detailed plan and I would run if someone just pulled numbers out of their ass and without support from data or at least an attempt of crunching the numbers.
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Yup. Life isn't fair. Neither is the tax code.
And it is the IRS's job to enforce the tax code congress passes, not decide what will and won't be taxed and by how much. There are even times I would argue the IRS goes too far in "interpreting" the laws passed by congress. But in this case they are very clearly following the law exactly as it was written by congress.
So @joer1212, up to this point, it has sounded like you are intent on continuing to move forward with this business, regardless of all the feedback you've received to the contrary. ... is that still the case?
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Thanks so much to everyone who contributed their input on this thread. You've helped me immensely to reach a better understanding of what I'm getting into.
So, in light of the almost unanimous opinions here in disfavor of starting this business, I would need extremely compelling reasons to do otherwise.
Therefore, I'm going to compile a list of questions over the next few days. I'm going to call the manager and my brother. If their answers to these questions are unsatisfactory, I'm out (as they say on Shark Tank). But, even if their answers reassure me, some changes will have to be made. I will keep you posted.
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Thanks so much to everyone who contributed their input on this thread. You've helped me immensely to reach a better understanding of what I'm getting into.
So, in light of the almost unanimous opinions here in disfavor of starting this business, I would need extremely compelling reasons to do otherwise.
Therefore, I'm going to compile a list of questions over the next few days. I'm going to call the manager and my brother. If their answers to these questions are unsatisfactory, I'm out (as they say on Shark Tank). But, even if their answers reassure me, some changes will have to be made. I will keep you posted.
Exactly. Seem them as strangers. They are pitching the idea to you, they should know all the numbers by heart... they should have a business plan in place. If they do not, I would be out if it were me.
And if I learnt anything is to never do business with family. There is no authority usually between family members and the easiness of family relationships usually brings unaccountability... I know this, because my step dad, after entering business with his sister - at first everything was rosey and now they can't even see each other. She just screws things up and thinks she knows so much but doesn't know a thing... most likely it will end in court unless they reach into agreement and the 8-10M in assets at that rate probably will be split among the lawyers which is ridiculous
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With this statement your brother has moved from hopelessly naive about the world of business to actually advocating tax fraud. This stuff is not hard to miss. I have zero to do with the marijuana business and even I know how it is taxed at the federal level.
Let me get this straight: You're not allowed to deduct cannabis business expenses, yet you're still liable for taxes on that business?? I'm sorry, but this sounds like the federal government is having it both ways. It's just.... wrong. If this were a mathematical equation, it would fall flat on its face.
YES!!!! Exactly! See above where I said that I had many years of paying more in federal taxes than I made in profit. You really need to understand what you're getting into.
Thank you for enlightening me to this, MJ. As I've said, I mentioned this to my brother today, yet neither he, nor the manager, had even heard of 280e. This business proposition is looking worse and worse to me by the minute, and I haven't even scratched the surface yet.
I do have one question, however. How are all these cannabis businesses surviving, with such onerous rules in place? I would think that no one would get involved in this industry if it was so bad.
There are lots of reasons that people still get into this industry:
- Some don't do their homework and fool themselves into thinking they can get rich quick
- Some love entrepreneurship and want to take a risk and be actively involved in the "next big thing"
- Some love the plant so much that the thought of having a career in the industry is enough to keep them going
- Some are very experienced business people and know how to still make a profit despite the fact that the margin is thin
But the reality is that many cannabis businesses are actually NOT surviving. I could tell you so many heartbreaking stories, and many of them begin like your original query. From what I see, it's only the businesses that have been around for awhile and have learned from experience and/or have a shit ton of money behind them to weather the many, many storms.
Luckily for you there are many states that are already at play and much of the data is public. You would be wise to hire an experienced cannabis business attorney or consultant before you put your savings into something like this.
As for your previous comment about limited licenses - Yes, I know how that works. It's pretty much the same in every legal state.
Best of luck to you. I sincerely hope it all works out well for you.
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Joer1212,
Although you seem to be skeptical of the proposal, I am concerned that you have not yet slammed the door on this opportunity, hard, based on the super strong advice that has been shared thus far. I don't think there are any possible answers from your brother, grower, or manager, that could make this a remotely good deal. Even if you got 100% ownership and profits for your investment, it doesn't matter... it will be 100% of nothing.
Just a few highlights:
-mixing family and business: run away fast
-new industries are highly volatile (lots of businesses will go to zero) and will face quickly increased competition and falling product prices: run away fast
-you and the other owners aren't already experienced in this industry or in start-ups generally: run away fast
-the fact that your brother proposed you get 1/3rd ownership in exchange for 1/2 of the investment shows he is either trying to scam you or is clueless about business. Either way, it doesn't matter what you negotiate in the future; if this is the deal he proposed to you, run away fast
-you said you were willing to give your brother a little better deal because he is family. This is a very dangerous mindset to begin with and your generosity will be pushed to the limit: run away fast.
-Even if the opportunity were strong, the cashflow already existed, you and the other owners were experts in the field... this is still a large sum of money that you can't afford to lose 100% of and feel fine about. Maybe a sum of 5% of your liquid net worth would be better... for a great opportunity, not this opportunity.
So... I beg you to stop considering this and end discussion of the possibility. There is nothing that can be said to allay what makes it a terrible idea.
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Thanks so much to everyone who contributed their input on this thread. You've helped me immensely to reach a better understanding of what I'm getting into.
So, in light of the almost unanimous opinions here in disfavor of starting this business, I would need extremely compelling reasons to do otherwise.
Therefore, I'm going to compile a list of questions over the next few days. I'm going to call the manager and my brother. If their answers to these questions are unsatisfactory, I'm out (as they say on Shark Tank). But, even if their answers reassure me, some changes will have to be made. I will keep you posted.
I acknowledge that I've been snarky to you throughout this thread (no ragrets), but I honestly hope that you learn from this one way or the other. It seems you've learned a lot. And I hope you don't go through with it.
One of the things I value most in my life is options. I love knowing that if something doesn't go right, I can do something else. Options mean so much to me. If you end up owing a ton of money after this failed venture (since you would have to take a loan to even consider this), you won't have options. God forbid you want to help a family member going through truly hard times in the future. You won't be able to! God forbid you want to travel to a dream destination...sorry...gotta make the payment on my six figure business loan. Say there's a market dip, and you want to buy the low...sorry...no free cash to invest. Just something to think about.
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Ask this guy how taxes work.
https://en.m.wikipedia.org/wiki/Al_Capone
As for the business from what I have seen here in Colorado the companies that were in the medical side had a jump start, others were involved in the legislation years in advance and business plans were in place ahead of it becoming legal to be successful. If you are coming into it after it has been passed you are already way behind the ball.
Felons, no thank you.
Doing business with friends / family that suck at money no thank you
Risk my house, life, career no thank you
Plenty of them here in Colorado have been raided, busted for illegal stuff, broken into and robbed.
Sounds like a bunch of smokers and joker's with pipe dreams that they want you to fund...
Sent from my Pixel 2 XL using Tapatalk
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As for the taxes - remember this one fact - Al Capone went to jail for the rest of his life - not for any of his mobster activities, but for NOT paying taxes on his illegal activities.
Just food for thought...
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Great advice from FINate.
This all sounds very sketchy. Where is the Business plan? Detailed start-up budgets and cost-of-sales projections? There is some digging to be done before this can be considered as a serious investment opportunity.
Who are the manager and grower? What is their track record in business? Are they honest? Have their backgrounds been investigated?
There are a hell of a lot of red flags here and this currently smells like a scam.
This was the original proposal and business plan sent to me by the manager:
Business Models
On our own:
We will be the sole owners of the entire business including the debt. Form an LLC to protect
our personal assets. We can set up ownership percentages anyway we want to have them.
They can be scaled to go along with the debt payoff. For example, Joe would own 70% of the
total business with Jeff and Jay owning 15% each until 50% of the debt that Joe incurred is paid
off, then Jeff and Jay would increase to 20% each. When 100% of the debt is paid off it will
become 50% Joe, Jeff and Jay at 25% each. I am including Angelo in the percentage that Joe
gets. Financing the mortgage with a bank is typically 5-7% they may charge different for
marijuana businesses. Term is typically 15-20 years but again this may be shorter due to the
unknown with the business.
Rate 5% loan amount $750,000 ($1,000,0000 with 25% down)
20 year term = $4,950/month
15 year term = $5,931/month
3 year term = $22,478/month
2 year term = $32,904/month
Now we would love to have it go out as far as possible to lower the monthly amount due. We
have to be sure there is no pre-payment penalty. The biggest risk here is the months we are
not selling because it is still growing, the 4 months of set up and grow. After those months, the
company will be paying all the bills from the revenue of the sales. My plan is to take a loan out
for 20 years so we have a $5,000/month payment but pay it off in 2 years.
Loan payments not included below.
Debt total - $1,000,000
First Yr Revenue - $2,400,000
First Year Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $500,000
Profit Split - Joe $840,000
Jeff $255,000
Jay $255,000
Year 2 Revenue - $2,400,000
Year 2 Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $500,000
Profit Split - Joe $720,000
Jeff $240,000
Jay $240,000
Year 3 Revenue - $2,400,000
Year 3 Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $0
Profit Split - Joe $850,000
Jeff $425,000
Jay $425,000
These are simple estimates to show how the math would work out. Year one total back to Joe
is $1,340,000, year 2 and beyond is $1,350,000. In terms of an ROI on the investment it is
134% year 1 and 135% in year 2, year 3 and beyond is 100% profit for Joe.
Now we have to take out for other insurance (workers comp and health), taxes, annual fees,
and charitable donations. The town will require significant donations. I would like to keep
control of where the money goes, police, fire, animals, and kids. For example, buy the K9 unit a
bullet/stab proof vest, supply the force with tasers so every member has one, drop off coffee
and snacks often, buy supplies for the animal shelter, buy sporting equipment for an entire
league, and things like that. I do not want the city to put in their general fund to pad their
wallets.
Bringing in and outside investor
We use their money to do everything. How this will work is they will get either a scaled equity
position in the company along with interest on the money borrowed. Our benefit is we are not
incurring the debt directly. Personally I would rather Joe get the equity and the interest.
Assuming the investor wants 12% interest and 30% ownership to start. Joe would now be at
50% with Jeff and Jay at 10% split levels. The interest payment alone is $47,073/month.
Year 1
Debt total - $1,000,000
First Yr Revenue - $2,400,000
First Year Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $564,876
Profit Split - Joe $567,562
Jeff $113,512
Jay $113,512
Investor $340,537
Year 2 - 20% investor ownership
Debt total - $1,000,000
First Yr Revenue - $2,400,000
First Year Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $564,876
Profit Split - Joe $624,318
Jeff $141,890
Jay $141,890
Investor $227,024
Year 3 - 10% Investor Ownership
Debt total - $1,000,000
First Yr Revenue - $2,400,000
First Year Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $0
Profit Split - Joe $1,020,000
Jeff $255,000
Jay $255,000
Investor $170,000
Taking Evan as a 50% Partner
Evan will not be responsible for 50% of the expenses but he will also take 50% of the profit. In
this scenario we can grow faster. I will assume we start at 10,000 sqft not 5,000 like the
examples above. Our company will remain at the original 70-30% split and scale as if we
owned it all ourselves.
Year 1
Debt total - $1,300,000
First Yr Revenue - $4,800,000
First Year Expenses - $1,240,000
Profit - $3,560,000
Debt Payoff - $650,000
Profit Split - Joe $1,018,500
Jeff $218,250
Jay $218,250
Evan $1,455,000
Year 2
Debt total - $1,300,000
First Yr Revenue - $4,800,000
First Year Expenses - $1,240,000
Profit - $3,560,000
Debt Payoff - $650,000
Profit Split - Joe $873,000
Jeff $291,000
Jay $291,000
Evan $1,455,000
Year 3
Debt total - $1,300,000
First Yr Revenue - $4,800,000
First Year Expenses - $1,240,000
Profit - $3,560,000
Debt Payoff - $0
Profit Split - Joe $890,000
Jeff $445,000
Jay $445,000
Evan $1,780,000
Again here Joe would get the debt payoff on top of his ownership percentage. Year 1 to Joe
$1,638,500, year 2 $1,493,000.
There are many assumptions that I made to keep things simple to understand. I do think we will
expand within the 3 years and make more revenue, in doing so we will have higher expense as
we hire people to work for us.
Some basic knowledge that we have, the City of North Adams is very pro marijuana. They are
telling the dispensaries that they will have to pay a 3% City tax, and a 3% Community tax on top
of the 14% sales tax. As we are NOT selling to the public but rather wholesaling it the taxes are
less. I do not know for sure but I think the state is 10.75%, so assume the same 6% to the
town.
If we grow above 10,000sqft we will need a new state license not a city one. I have spoken to a
high end lawyer, he is my brother in laws brother in law. He is currently representing MGM for
the casino in Springfield. He knows the guys who will be buying out businesses once it is
federally legal. They will not touch under the 10,000 sqft places, just put them out of business.
He has offered to help us, not represent us, but put us in touch with the right people.
The State license is run like a liquor license. The company owns it not an individual. Joe is our
clean cut, former cop, great credit guy. Jeff is the local business end of the company, he will
run the day to day operations. Jay is our grower, without him we have nothing, he will be taking
care of the plants, not worrying about the bills being paid, maintenance, etc. Of course with any
small company we will wear different hats at different times. Jeff and Joe may be called in to
help Jay when he needs it. Jay and Joe will help Jeff when he needs it. I am hoping by the time
this all comes together we can have Angelo involved, there is legislation now to allow such
people as him to do so.
As for the property itself. I got an ok from one of the city councilors, that is one level done. Now
we need planning board approval, the town needs to hold a community meeting for the public to
ask questions and get the answers they want. Then on to the state to get the actual license.
With the shopping center, we own all the parking including the spots by the Friendlys but they
have an easement for 40 spots, leaving roughly 150+ for us. The commercial tax rate is
$38.54/$1,000 of assessed value. They have a new assessment of $950,000 so the taxes are
$36,613, the two rental cover that completely. The reason it is so far below the assessment is
they got an estimate to replace the roof for $300,000. Now when I went in during a rainstorm
there were 2-3 leaks but plenty of dry areas to grow in without replacing or even fixing the leaks.
I would patch the spots for now. Then look into doing solar on the roof to get us a better “green
rating” with the town and to possibly lower our electric costs.
I am close friends with the agent selling the property so he told me stuff he really wasn’t
supposed to tell me. They have had 2 offers on the property. One was full of contingencies and
a lot of “bullshit” at just over $600,000. The other one was just over $500,000 cash. They
turned them both down because one was too complicated, the other too low. They have plenty
of money to hold this forever. They privately own a very successful supermarket chain here in
MA and NY. They are not interested in holding a note for anyone or doing any kind of owner
financing. If we get it for $550,000, we will be looking at $137,500 in cash needed to put down.
That leaves $412,500 for the building loan. One option is to get one loan for that, a
$2,723/month payment. We then get a business loan for the equipment of $300,000, $75,000
cash $225,000 loan. This will probably be a higher rate and shorter monthly term. Figuring on
7% for 3 years it is a $6,948/month payment. All totaled up we would need $212,500 in cash to
put down and a monthly payment of $9,671/month for first 3 years and $2,723/month for the
next 17 years.
You will have to call the bank and talk with the mortgage/loan person. If you tell them they can
divulge anything and everything to me, I can then talk to them to kind of translate what they are
saying. We can schedule a conference call or an in person meeting too.
To sum all this up. We have 2 loan options. Borrow it all from one source or borrow seperately
for the real estate and then for the setup costs. We have to see what they offer and the costs of
doing it each way.
The building will pay the taxes now. There is repair work to do but I do not feel as we need to
do it as extensively as a full roof replacement yet. We can subdivide the space, roughly 30,000
sqft any way we want. This opens up the possibility to have a dispensary and/or grow shop and
still have room to expand up to around 20,000 sqft of the cultivation operation.
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This was the original proposal and business plan sent to me by the manager:
This is not a business plan - It's a documentation of someone's wishful thinking. You should google "business plan examples" and "Pro Forma examples" to see what it is that you should be reviewing. At the very least you need to understand their assumptions for the revenue and expense numbers they're using. These numbers seem way out of line to me.
Also, I'll mention this again, but I have yet to hear of a bank who will finance property to be used for a cannabis business. Here in WA state it's one of the many hurdles of getting into the industry because the building needs to be owned outright. Also, I've never heard of business loans for cannabis having that low of an interest rate. I've seen 12-17% for 5 year terms.
I really, *REALLY* recommend that you consult an experienced businessperson, cannabis entrepreneur, and/or business attorney.
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Debt total - $1,000,000
First Yr Revenue - $2,400,000
First Year Expenses - $700,000
Profit - $1,700,000
Debt Payoff - $500,000
Profit Split - Joe $840,000
Jeff $255,000
Jay $255,000
That's _it_? No breakdown of what the first year expenses are? Just "yeah let's say $700k but also there's a lot of stuff we haven't factored in to that estimate yet"? So that's red flag #1 regardless of what line of business he'd be talking about.
Now red flag #2 is even scarier, because this is the guy you're trusting to know all the numbers and run the books: in year 1, the expenses, debt payoff, and profit split sum to $2.55M, but even using his numbers (no idea where he is getting them from), you have only $2.4M in revenue.
Good rule of thumb, when the numbers don't add up, the difference is coming out of your share.
In addition, remember the tax treatment of marijuana profits. Since you own 70% of the LLC in year one, you would owe taxes on 70% of $2.4M (so $1.68M). So let's say most of that is taxed at the maximum federal rate of 37%, you'd owe $620k in federal taxes. Since you are a NY resident, but own a business in Massachusetts you'll end up paying the higher of the two tax rates (although the breakdown of which part of it you owe to which state is complicated). Let's assume most of that income is in the 6.85% tax bracket, so the combination of the NY and MA checks is going to be about $115k.
So we're up to $735k in taxes, on $840k of profits-$150k in mystery money gap between incoming and outgoing transactions means that even if his (apparently pulled out of thin air) estimates of revenue and expenses are right, and even if there are no unexpected expenses or delays or legal challenges, your $350k at risk (since it looks like he is combining your investment with your parents') is buying you a net after-tax loss of $35k/year.
Let me reiterate that: despite investing in a business area with substantial legal, technical, and biological risks* AND using extreme amounts of leverage with a giant and long term mortgage, the best case scenario your business manager has managed to present you with is a -10% a year net cash on cash return.
*For example, what happens when you've got an outbreak of whatever the pot equivalent of powdery mildew is, you have to close down and sterilize the whole grow room, and then find yourself four months away from any of your new plants maturing and bringing in new revenue?
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My $0.02 on this (and I'm an entrepreneur)... OP, you must REALLY dislike your job and REALLY love your brother. Don't make business/financial decisions based on negative feelings. I sense that you're trying to get out of a job you don't like sooner and you are worried about your brother finding his way. Not good reasons to start a business. Trust me, I speak from experience. This will not end well if you go through with it. No one on your team has shown the slightest bit of common sense about starting a business. I'm sorry to say that, but it's the truth, and I'm trying to protect you from yourself. There's no reason to have another meeting. That's only going to provide another opportunity for you to be a victim in this story.
Not liking your job and wanting to support your brother are VERY valid feelings. There are a lot of ways you can address those issues. Investing in this business isn't one of them. It will only make it worse.
FWIW, I don't think your brother (and his "team") are trying to swindle you out of $175k. If they were they would be doing a lot better job of coming up with a viable plan.
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My $0.02 on this (and I'm an entrepreneur)... OP, you must REALLY dislike your job and REALLY love your brother. Don't make business/financial decisions based on negative feelings. I sense that you're trying to get out of a job you don't like sooner and you are worried about your brother finding his way. Not good reasons to start a business. Trust me, I speak from experience. This will not end well if you go through with it. No one on your team has shown the slightest bit of common sense about starting a business. I'm sorry to say that, but it's the truth, and I'm trying to protect you from yourself. There's no reason to have another meeting. That's only going to provide another opportunity for you to be a victim in this story.
Not liking your job and wanting to support your brother are VERY valid feelings. There are a lot of ways you can address those issues. Investing in this business isn't one of them. It will only make it worse.
FWIW, I don't think your brother (and his "team") are trying to swindle you out of $175k. If they were they would be doing a lot better job of coming up with a viable plan.
This post really nailed it. Thanks for empathizing.
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Hi, guys. I just want to post an update.
I've had a rare falling out with my brother a few days ago, when we spoke on the phone. He was going on and on, trying to convince me how this cannabis business can't lose, and how everyone on MMM are "squares" that are "too dumb" for this business and giving me bad advice. I countered that not everyone on MMM can be wrong, especially since some of them are actually in the cannabis business. Long story short, I ended up offending him, when I accused him of being "simple-minded" and lacking the ability to see pitfalls. We hung up on each other and haven't spoken since.
At this point, I'm virtually sure that I won't get into this business. But, I still feel that I have to do my due diligence, just so no one can accuse me of being fickle (after all, I did make several trips to Massachusetts to look at properties, so my brother had high hopes that I was being serious).
I compiled a list of questions, which I'll show my brother once we start talking again (mind you, we haven't had a fallout in years, and this is the longest time we haven't spoken to each other in memory). Here's what I came up with (I'll probably think of more questions as time goes by):
(1) How are we going to avoid the damage that 280E will inflict on our profits?
My brother actually forwarded this question to the manager (Jeff) and got this response verbatim:
280E is for deducting business expenses from your revenue. You could pay 100% of the revenue as income tax. A good CPA and lawyer will set it up so we don't get hit quite that hard. So if the business makes $1,000,000 you pay your portion of the business as income tax. So at 70% you will pay on 700k even though profits were only 400k so 70% is 280k as income. Big difference.
Hmm. Not sure I follow, but I guess he's trying to say that we can wiggle our way out of onerous federal taxes using a good tax accountant. Does he know this for a fact? Has this been done before, or is he just speculating?
Anyway, here are the other questions and comments (which haven't been answered yet):
(2) How do you know that the DEA won't start enforcing federal law? My assets can get seized and I can go to prison. I don't want to play Russian Roulette with my life.
(3) My 401(k) investment company can drop me because I'm violating federal law. I can be forced to liquidate my assets, thus incurring a 10% early withdrawal fee in addition to a 35% income tax on the lump sum. What do you say to this?
(4) I am probably prohibited from participating in a cannabis business by my NY state civil service job. Yet, I can't ask my employer if this is the case, because then they'll have their eye on me.
(5) I know that Jeff (the manager) runs a real estate business, but has he ever been in the cannabis business? What qualifies him to run one?
(6) Jay and Jeff (grower & manager) are going to be part owners of the property, even though they didn't contribute capital. How do we prevent this?
(7) Will the IRS be auditing me (business and personal) every year because of my involvement in this business? What's are the consequences of this?
(8) Can the feds retroactively seize my assets, even years later, because I was involved with cannabis? When am I out of the woods? Do all my assets become tainted after cannabis?
(9) How can my parents contribute money to this business without being legally involved and without tax consequences?
(10) How on earth will I pay Jay and my brother (who have felonies)? In cash?
(11) Who are the financial institutions that will take our money? Also, if they are not federally insured, who are they insured by?
(12) What happens when Jay and Jeff decide to bail? I know nothing about running a pot business.
(13) What if cannabis suddenly becomes legal at the federal level, and now our window of opportunity is much narrower?
(14) The compensation structure of our business is very bad. If business is doing poorly, what's to stop our grower and/or manager to jump ship to a competitor, who will pay them more?
(15) What if we lose a crop? We don't have the money to ride the storm out.
(16) How low can the price of cannabis conceivably go within a 3-5 year time frame? Can we still prosper with very low prices?
(17) Where is our detailed start-up budget and cost-of-sales projection?
(18) What is our specific strategy for achieving efficient regulatory compliance?
(19) Who will be our customers, and why will they buy from us instead of from other growers? How do we achieve reliable markets and distribution channels?
(19) Assuming we find these reliable markets and distribution channels, how will they pay us? In cash?
(20) I don't like that we're entering into a contract that limits our ability to terminate or change the compensation of our manager and grower.
(21) If our business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute), or just those who have contributed capital (my parents and I)?
(22) Where are we going to get insurance for fire, theft, injury/death on property, or if someone that we sold pot to kills someone in a DWI?
(23) Is it true that we will not only be liable for federal taxes (with limited deductions), but for Massachusetts AND NY state taxes as well (because I'm a resident)?
(24) Are you sure that we are not underestimating the amount of money we're going to need to get this operation off the ground and keep it afloat?
(25) What if the grower and/or manager get injured or even kidnapped on the property? How liable am I?
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(1) How are we going to avoid the damage that 280E will inflict on our profits?
My brother actually forwarded this question to the manager (Jeff) and got this response verbatim:
280E is for deducting business expenses from your revenue. You could pay 100% of the revenue as income tax. A good CPA and lawyer will set it up so we don't get hit quite that hard. So if the business makes $1,000,000 you pay your portion of the business as income tax. So at 70% you will pay on 700k even though profits were only 400k so 70% is 280k as income. Big difference.
Hmm. Not sure I follow, but I guess he's trying to say that we can wiggle our way out of onerous federal taxes using a good tax accountant. Does he know this for a fact? Has this been done before, or is he just speculating?
I don't quite see where you think he's saying that. To me it sounds like he's explaining that yes, you'll owe taxes on $700k in "income" even though your share of the business's actual profits is only $280k. However, he thinks a good accountant can probably reduce that $700k of apparent taxable income a small amount (although obviously not anything like all the way down to $280k).
I'm sorry to hear about your falling out with your brother. Hopefully with a little time to cool off he'll realize that you're not judging his lifestyle and you did indeed investigate this business extremely seriously.
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The original post had you and your parents combined putting up $700k, but this "business plan" has you putting "down" $250k to borrow $750k. So which is it?
Also, extremely unlikely to get a 20 yr $1MM loan for a business w/o a proven track record, even more so in the pot industry. Seriously, what bank is going to want pot (inventory) and/or funds derived from pot (drug money) as collateral? Yeah, they're not going to allow a loan to be secured by assets tied up in an illegal trade because the Feds regulate banks.
The whole idea of borrowing 20 yr term (for lower monthly payment) with the plan of paying off in 2 years indicates that the numbers are BS. Shorter term loans typically have lower rates, so why extent it dramatically if brining in enough to pay off much sooner? They answer is that they have no idea, really, what the numbers will be, so keep the monthly loan payment as low as possible. Oh, and 5% is very unrealistic, as the prime rate is currently 4.75% and new businesses have a risk premium.
There's no breakdown of anything backed by detailed estimates. For example, if you have a 5000 sqft operation: what are the capital expenditures to build out (broken down into line items for each element of the build...facility, tables, lights, irrigation, ventilation, security, transportation, etc.), fixed costs (lease, utilities, insurance, interest, etc.), variable costs, how much can an operation that size produce (how many plants, how many crops/year, and how much is each plant worth wholesale), what are the taxes, and what is the break even point (how many plants do you have to sell before covering your fixed costs)?
These guys are playing fast and loose with numbers - wishful thinking.
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The original post had you and your parents combined putting up $700k, but this "business plan" has you putting "down" $250k to borrow $750k. So which is it?
The original post had my parents and I each contributing 175k (350k total). The manager's proposal was an earlier plan to purchase a shopping center for 520k, and borrow up to 1 million to fund the business. Alas, that plan fell through. Way too expensive.
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For question #24, it's a little more complicated than that, and it helps to separate out that the business (as a passthrough entity) isn't going to be paying state or federal income taxes, although it may pay other kinds of taxes.
On your personal taxes, you'll need to file in both MA and NY. MA will tax you on all your income derived from the state. Because you are a resident of NY, they will tax you on all your income from anywhere in the world. However you'll probably get to deduct taxes payed in MA (up to the amount of tax you would have paid on that same income in NY) from your tax liability to the state of NY. That's why I said it generally works out that you pay the higher of the two state tax rates.*
If your brother lives in MA, he wouldn't have to worry about filing in NY, just in MA when it comes to paying taxes on his 10% of the profits.
*Disclaimer. I am not a tax attorney or accountant and could very well be wrong about this stuff. What I'm describing above is the best I've been able to figure out from my own experience with passthrough entities, and maxing out at having to file income tax returns five states in a single year. Fortunately one of the LLCs had an extremely well paid accounting firm who did the actual tax filing, and I'm now back now to only two state returns a year.
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For question #24, it's a little more complicated than that, and it helps to separate out that the business (as a passthrough entity) isn't going to be paying state or federal income taxes, although it may pay other kinds of taxes.
On your personal taxes, you'll need to file in both MA and NY. MA will tax you on all your income derived from the state. Because you are a resident of NY, they will tax you on all your income from anywhere in the world. However you'll probably get to deduct taxes payed in MA (up to the amount of tax you would have paid on that same income in NY) from your tax liability to the state of NY. That's why I said it generally works out that you pay the higher of the two state tax rates.*
If your brother lives in MA, he wouldn't have to worry about filing in NY, just in MA when it comes to paying taxes on his 10% of the profits.
*Disclaimer. I am not a tax attorney or accountant and could very well be wrong about this stuff. What I'm describing above is the best I've been able to figure out from my own experience with passthrough entities, and maxing out at having to file income tax returns five states in a single year. Fortunately one of the LLCs had an extremely well paid accounting firm who did the actual tax filing, and I'm now back now to only two state returns a year.
Thanks for clarifying.
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The original post had you and your parents combined putting up $700k, but this "business plan" has you putting "down" $250k to borrow $750k. So which is it?
The original post had my parents and I each contributing 175k (350k total). The manager's proposal was an earlier plan to purchase a shopping center for 520k, and borrow up to 1 million to fund the business. Alas, that plan fell through. Way too expensive.
You're right, my bad.
I'm still not clear on are the precise definitions for things like "interest," "owner," and "partner." It sounds like he's describing multiple classes of equity for a multimember LLC, but not clear who gets what (e.g. in the case of liquidation, profits) and who is passive vs. active in running the LLC. IMO you need an attorney to draft an operating agreement that spells these things out in fine detail.
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The original post had you and your parents combined putting up $700k, but this "business plan" has you putting "down" $250k to borrow $750k. So which is it?
The original post had my parents and I each contributing 175k (350k total). The manager's proposal was an earlier plan to purchase a shopping center for 520k, and borrow up to 1 million to fund the business. Alas, that plan fell through. Way too expensive.
You're right, my bad.
I'm still not clear on are the precise definitions for things like "interest," "owner," and "partner." It sounds like he's describing multiple classes of equity for a multimember LLC, but not clear who gets what (e.g. in the case of liquidation, profits) and who is passive vs. active in running the LLC. IMO you need an attorney to draft an operating agreement that spells these things out in fine detail.
I agree, but that's assuming that the whole premise of this business is even sound, which I don't think it is from the feedback I've gotten on this forum. So, I don't feel inclined to pursue it any further, unless I can purchase the property and start some kind of ancillary pot business.
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It's still generally good advice when it comes to starting businesses, particularly with multiple investors and owners. If you are unhappy with your present position, it seems quite possible you'll eventually go through that process, regardless of what kind of business you ultimately find yourself in.
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If you ever want to start a business, I think it is smarter to invest into a business that doesn't require many investments, like selling your own knowledge. Big investments put a large pressure on a business to make profits soon.
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Pardon me if I'm reading this wrong, but your brother's business plan calls for you to sell $2.4 million in weed in its first year of operation? That's a fucking shit ton of weed for an established operation, but you're expecting to grow and move that much in your business's first year, with no name brand recognition, no industry contacts apart from a Brooklyn dealer and your brother, and no experience in large-scale manufacture or logistics. Just the mechanics of labelling and packaging that much green is a nightmare.
You have said that you would not be involved in this if your brother wasn't in on it. That means that you already recognise that the business is a bad idea financially, but the emotional ties with your brother have got you dragging your feet. If you're worried about your relationship now, imagine how bad that relationship's going to be after he's lost six figures of your and your parents money?
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Pardon me if I'm reading this wrong, but your brother's business plan calls for you to sell $2.4 million in weed in its first year of operation? That's a fucking shit ton of weed for an established operation, but you're expecting to grow and move that much in your business's first year, with no name brand recognition, no industry contacts apart from a Brooklyn dealer and your brother, and no experience in large-scale manufacture or logistics. Just the mechanics of labelling and packaging that much green is a nightmare.
You have said that you would not be involved in this if your brother wasn't in on it. That means that you already recognise that the business is a bad idea financially, but the emotional ties with your brother have got you dragging your feet. If you're worried about your relationship now, imagine how bad that relationship's going to be after he's lost six figures of your and your parents money?
I think the plan was to focus on wholesale. But yeah, even very basic back-of-the-envelope estimates are missing. I know next to nothing about the pot business but was able to find useful numbers for estimates in just a few minutes.
Yield per harvest per sqft: About 40g (0.0881849 lbs) seems like a reasonable estimate. (http://www.cannabisbusinesstimes.com/article/measuring-yield/)
Harvests per year: 4 (http://www.ilovegrowingmarijuana.com/marijuana-cannabis-yield-how-much/)
Wholesale price per pound (2017): $1500 (Mean) (https://www.vaildaily.com/news/marijuana-index-wholesale-cannabis-prices-at-all-time-low-in-colorado-good-for-consumers-bad-for-growers/)
This is the type of thing best done in a spreadsheet (see attached).
So on the surface the revenue estimates are roughly in the ballpark. But the value of drilling down into the numbers like this is that it immediately becomes clear that a lot hinges on the local wholesale price. The 2017 prices alone have a stddev of 258 (http://www.calculator.net/standard-deviation-calculator.html?numberinputs=1800%2C1600%2C1400%2C1200&x=27&y=14), and if you look at the bottom of that link you can see the confidence intervals based on the sample of whole prices in 2017. So 95% confidence that prices will be 1246.9650880478 - 1753.0349119522 and 99% 1167.4398300057 - 1832.5601699943 based on last year's prices in different states. That's a pretty large range that puts them between undershooting and overshooting their goals.
This also assumes the operation hits the ground running and actually has 4 harvests the first year and every year after. Which seems... optimistic. Getting permits, build-out, and working out the bugs always takes longer than expected. And once things are up and running, no idea how often a crop fails. This should all be factored into the estimates.
And no idea how accurate my sources are, do your own homework :) But if I were investing in a business this is one of many types of due diligence I would do before pulling the trigger.
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You have said that you would not be involved in this if your brother wasn't in on it. That means that you already recognise that the business is a bad idea financially, but the emotional ties with your brother have got you dragging your feet. If you're worried about your relationship now, imagine how bad that relationship's going to be after he's lost six figures of your and your parents money?
I actually thought that this was a good business idea that could not only help my brother, but also myself. The reason I stated I wouldn't get involved if it wasn't for my brother is not because I thought it's a bad business idea, but because I don't know anything about the business.
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I'm planning to email Jeff (the manager) the following. What do you think?
Hi, Jeff,
I've been mulling over your cannabis business proposal over the past few weeks. As you know, I've been very serious and passionate about it. But, while the prospect of becoming successful in this business excites me, I can't shake the nagging feeling that I may be overlooking some potential pitfalls.
So, I posted on a couple of online forums recently to get the opinions and insights of other people. Some of these forum members are already in the legal cannabis industry, while others have a background in business, so I value their input.
I was shocked when they almost unanimously advised me to stay away from this business. I was expecting them to encourage me and offer advice on how I can become successful at it. Here are the links:
XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXX
After reading all the negative feedback I received on these forums, I came up with a list of questions and concerns that I need answers to in order to proceed with this business. There are serious financial and legal consequences for me if I make a wrong move, so it's critical that I know what I'm getting into.
I had this discussion with my brother, and he is very upset, because he was counting on me to dive into this venture headfirst. He is so upset that we haven't spoken for a week. But, I will be the one taking 100% of the financial and legal risks in this business, not him. It's very easy for him to be gung ho when he has nothing to lose. In fact, I am the only member of our team who has skin in the game, and that's very troubling to me.
Anyway, here are some of the questions and concerns I have:
(1) I am probably prohibited from participating in a cannabis business by my NY state civil service job. But, I can't confirm this with my employer because this will cause him to keep an eye on me. Is there any way around this? What are the chances that my employer will find out that I'm involved in a federally-illegal business in another state?
(2) How are we going to avoid the damage that the 280E tax law will inflict on our profits? How do you know that a CPA can mitigate the damage? Has he done this before? Shouldn't we consult with a CPA before I invest capital into this venture?
(3) How do you know that the DEA won't start enforcing federal law? My assets can get seized and I can go to prison. I don't want to play Russian Roulette with my life.
(4) My 401(k) investment company can drop me because I'm violating federal law.
(5) Jeff, I know that you run a real estate business, but have you ever been in the cannabis business? What qualifies him to run one?
(6) If you and Jay each own 10% of the company, then you will also be owning 10% of the real estate (because when we form a corporation, it owns the property, and you're part of the corporation). This wouldn't be fair, since neither of you have contributed capital for the purchase of the real estate. We need to address this issue.
(7) Will the IRS be auditing me (business and personal) every year because of my involvement in this business? What's are the consequences of this?
(8) Can the feds retroactively seize my assets, even years later, because I was involved with cannabis? When am I out of the woods? Do all my assets become tainted after my involvement with cannabis?
(9) How can my parents contribute money to this business without being legally involved and without tax consequences?
(10) How on earth will I pay Jay and my brother (who have felonies)? In cash? Is this even legal?
(11) What are the financial institutions that will take our money? Also, if these institutions are not federally insured, who insures them?
(12) What happens if and when you and Jay decide to leave the company? I know nothing about running a pot business.
(13) What if cannabis suddenly becomes legal at the federal level, and now our window of opportunity is much narrower?
(14) The compensation structure of our business is very bad. If business is doing poorly, what's to stop you and Jay from jumping ship to a competitor, who will pay you more? You have no incentive to stay during bad times.
(15) What if we lose a crop? We don't have the money to ride the storm out. It seems that we are greatly underestimating the cash reserves we will need to stay afloat in this business.
(16) How low can the price of cannabis conceivably go within a 3-5 year time frame? Can we still prosper with very low prices?
(17) Where is our detailed start-up budget and cost-of-sales projection? We seem to be guesstimating and pulling numbers from our asses. NOT a good way to start a business. We need to be more accurate.
(18) What is our specific strategy for achieving efficient regulatory compliance?
(19) Who will be our customers, and why will they buy from us instead of from other growers? How do we achieve reliable markets and distribution channels?
(20) Assuming we find these reliable markets and distribution channels, how will our clients pay us? In cash?
(21) If you and/or Jay underperform, for whatever reason, I have no ability to change your compensation or terminate our business relationship, if necessary, since you will be part owners of the business.
(22) If our business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute), or just to those who have contributed capital (my parents and I)?
(23) Where are we going to get insurance for fire, theft, injury/death on property, or if someone that we sold pot to kills someone in a DWI?
(24) Is it true that I will not only be liable for federal taxes (with limited deductions), but also for Massachusetts AND NY state taxes as well (because I'm a resident)?
(25) What if you or Jay, God forbid, get injured or even kidnapped on the property? How liable am I?
Jeff, I understand that we are in a time-sensitive business, but I can't afford to rush into something without knowing what I'm getting into. Therefore, when you have time, could you, please, address the above questions and concerns by email? When you're finished, you can also follow up by calling me at XXX-XXX-XXXX, if you wish to discuss further. I look forward to hearing from you.
Joe
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The fact that your brother is throwing a temper tantrum when you---someone risking nearly 1/2 of his entire savings--are asking perfectly legitimate business questions is enough--if I didn't have enough already--to tell me he is not someone with whom I would do business. If you say no to an additional investment when he decided you need X new growing tool or marketing strategy or whatever, will be tantrum again? If his 1/3 (I CAN'T BELIEVE you would give 1/3--or 27% to a guy putting up $0!--isn't enough to live on and he asks for an advance, what then? Clearly, he is not a business guy and not a professional. So why would you enter into professional business with him?
And if this is the AMAZING OPPORTUNITY!! he swears it is, people should be champing at the bit to invest with him. Why doesn't he find those people instead of trying to use familial guilt? (HINT: Because those people have all the same reservations you do. And because your brother clearly hasn't done an actual business plan or research into similar ventures, and has virtually no business knowledge at all.)
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I think you will get one of two answers to this e-mail.
1) The equivalent of "screw you" worded either more or less politely depending on Jeff's personality.
2) A series of answers that sound plausible at first pass, but won't hold up to scrutiny, in which case you'll be in the uncomfortable position of saying bluntly "no I don't believe you."
I guess for completeness option #3 is that he answers all of your questions convincingly.
Could you still be convinced to invest in this business? If you cannot, sending the e-mail seems fruitless as the only two probably outcomes are just unpleasant for both you and Jeff and don't change anything about either of your circumstances.
Fortuitously, only a couple of days after you started your thread, I had a chance to review a combined research/business plan for a cannabis business (in Canada, not MA). It was educational. Business plan wasn't that convincing because they'd built in assumptions about the price per kilogram growing 15%/year once recreational legalization is complete. But I can now state with confidence that the "whatever the equivalent of powdery mildew is for pot" is, in fact, powdery mildew. And apparently it's a big pain to control in any large scale grow operation because lots of fungicides used in other horticultural production cannot be applied to plant tissue which is going to be smoked and inhaled.
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And if this is the AMAZING OPPORTUNITY!! he swears it is, people should be champing at the bit to invest with him. Why doesn't he find those people instead of trying to use familial guilt? (HINT: Because those people have all the same reservations you do. And because your brother clearly hasn't done an actual business plan or research into similar ventures, and has virtually no business knowledge at all.)
Last I heard, he's going to sell one of his 2 houses in Massachusetts to fund the purchase of the industrial property for growing cannabis. Not sure how he's going to get paid, without escaping the scrutiny of the IRS, though. If the business is wildly successful, we're talking hundreds of thousands of dollars a year that he will have to take in cash (he's not allowed to be involved in the cannabis business because of his felony). When he starts buying cars and homes with this mystery money, I find it hard to believe the IRS isn't going to notice.
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I think you will get one of two answers to this e-mail.
1) The equivalent of "screw you" worded either more or less politely depending on Jeff's personality.
2) A series of answers that sound plausible at first pass, but won't hold up to scrutiny, in which case you'll be in the uncomfortable position of saying bluntly "no I don't believe you."
I guess for completeness option #3 is that he answers all of your questions convincingly.
Could you still be convinced to invest in this business? If you cannot, sending the e-mail seems fruitless as the only two probably outcomes are just unpleasant for both you and Jeff and don't change anything about either of your circumstances.
Fortuitously, only a couple of days after you started your thread, I had a chance to review a combined research/business plan for a cannabis business (in Canada, not MA). It was educational. Business plan wasn't that convincing because they'd built in assumptions about the price per kilogram growing 15%/year once recreational legalization is complete. But I can now state with confidence that the "whatever the equivalent of powdery mildew is for pot" is, in fact, powdery mildew. And apparently it's a big pain to control in any large scale grow operation because lots of fungicides used in other horticultural production cannot be applied to plant tissue which is going to be smoked and inhaled.
You're right, it would take a lot to make me reconsider at this point. But, I still feel that I have to do my due diligence and get answers to these questions.
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And if this is the AMAZING OPPORTUNITY!! he swears it is, people should be champing at the bit to invest with him. Why doesn't he find those people instead of trying to use familial guilt? (HINT: Because those people have all the same reservations you do. And because your brother clearly hasn't done an actual business plan or research into similar ventures, and has virtually no business knowledge at all.)
Last I heard, he's going to sell one of his 2 houses in Massachusetts to fund the purchase of the industrial property for growing cannabis. Not sure how he's going to get paid, without escaping the scrutiny of the IRS, though. If the business is wildly successful, we're talking hundreds of thousands of dollars a year that he will have to take in cash (he's not allowed to be involved in the cannabis business because of his felony). When he starts buying cars and homes with this mystery money, I find it hard to believe the IRS isn't going to notice.
Does his felony prevent him from being involved in the pot business in any way, or just prevent him from getting the license? If it's the former, then if you invest in this plan, at best you are facilitating your brother breaking the law, and at worst you could even be committing some sort of crime yourself by helping him do something he is legally barred from doing.
To me, this also creates a very easy explanation for your "no". You love your brother and you would no more set him up to do something illegal than you would put him in a car and hand him the keys while he's drunk. No need to make someone jump through hoops to answer questions for which you don't actually care about the answers, given that your mind is made up anyway. If your mind is made up, your "due diligence" is pointless, and is asking this guy to do a bunch of work, if he takes it seriously, when you have no intention of following through regardless of what his work finds.
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I'm planning to email Jeff (the manager) the following. What do you think?
Hi, Jeff,
I've been mulling over your cannabis business proposal over the past few weeks. As you know, I've been very serious and passionate about it. But, while the prospect of becoming successful in this business excites me, I can't shake the nagging feeling that I may be overlooking some potential pitfalls.
So, I posted on a couple of online forums recently to get the opinions and insights of other people. Some of these forum members are already in the legal cannabis industry, while others have a background in business, so I value their input.
I was shocked when they almost unanimously advised me to stay away from this business. I was expecting them to encourage me and offer advice on how I can become successful at it. Here are the links:
XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXX
After reading all the negative feedback I received on these forums, I came up with a list of questions and concerns that I need answers to in order to proceed with this business. There are serious financial and legal consequences for me if I make a wrong move, so it's critical that I know what I'm getting into.
I had this discussion with my brother, and he is very upset, because he was counting on me to dive into this venture headfirst. He is so upset that we haven't spoken for a week. But, I will be the one taking 100% of the financial and legal risks in this business, not him. It's very easy for him to be gung ho when he has nothing to lose. In fact, I am the only member of our team who has skin in the game, and that's very troubling to me.
Anyway, here are some of the questions and concerns I have:
(1) I am probably prohibited from participating in a cannabis business by my NY state civil service job. But, I can't confirm this with my employer because this will cause him to keep an eye on me. Is there any way around this? What are the chances that my employer will find out that I'm involved in a federally-illegal business in another state?
(2) How are we going to avoid the damage that the 280E tax law will inflict on our profits? How do you know that a CPA can mitigate the damage? Has he done this before? Shouldn't we consult with a CPA before I invest capital into this venture?
(3) How do you know that the DEA won't start enforcing federal law? My assets can get seized and I can go to prison. I don't want to play Russian Roulette with my life.
(4) My 401(k) investment company can drop me because I'm violating federal law.
(5) Jeff, I know that you run a real estate business, but have you ever been in the cannabis business? What qualifies him to run one?
(6) If you and Jay each own 10% of the company, then you will also be owning 10% of the real estate (because when we form a corporation, it owns the property, and you're part of the corporation). This wouldn't be fair, since neither of you have contributed capital for the purchase of the real estate. We need to address this issue.
(7) Will the IRS be auditing me (business and personal) every year because of my involvement in this business? What's are the consequences of this?
(8) Can the feds retroactively seize my assets, even years later, because I was involved with cannabis? When am I out of the woods? Do all my assets become tainted after my involvement with cannabis?
(9) How can my parents contribute money to this business without being legally involved and without tax consequences?
(10) How on earth will I pay Jay and my brother (who have felonies)? In cash? Is this even legal?
(11) What are the financial institutions that will take our money? Also, if these institutions are not federally insured, who insures them?
(12) What happens if and when you and Jay decide to leave the company? I know nothing about running a pot business.
(13) What if cannabis suddenly becomes legal at the federal level, and now our window of opportunity is much narrower?
(14) The compensation structure of our business is very bad. If business is doing poorly, what's to stop you and Jay from jumping ship to a competitor, who will pay you more? You have no incentive to stay during bad times.
(15) What if we lose a crop? We don't have the money to ride the storm out. It seems that we are greatly underestimating the cash reserves we will need to stay afloat in this business.
(16) How low can the price of cannabis conceivably go within a 3-5 year time frame? Can we still prosper with very low prices?
(17) Where is our detailed start-up budget and cost-of-sales projection? We seem to be guesstimating and pulling numbers from our asses. NOT a good way to start a business. We need to be more accurate.
(18) What is our specific strategy for achieving efficient regulatory compliance?
(19) Who will be our customers, and why will they buy from us instead of from other growers? How do we achieve reliable markets and distribution channels?
(20) Assuming we find these reliable markets and distribution channels, how will our clients pay us? In cash?
(21) If you and/or Jay underperform, for whatever reason, I have no ability to change your compensation or terminate our business relationship, if necessary, since you will be part owners of the business.
(22) If our business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute), or just to those who have contributed capital (my parents and I)?
(23) Where are we going to get insurance for fire, theft, injury/death on property, or if someone that we sold pot to kills someone in a DWI?
(24) Is it true that I will not only be liable for federal taxes (with limited deductions), but also for Massachusetts AND NY state taxes as well (because I'm a resident)?
(25) What if you or Jay, God forbid, get injured or even kidnapped on the property? How liable am I?
Jeff, I understand that we are in a time-sensitive business, but I can't afford to rush into something without knowing what I'm getting into. Therefore, when you have time, could you, please, address the above questions and concerns by email? When you're finished, you can also follow up by calling me at XXX-XXX-XXXX, if you wish to discuss further. I look forward to hearing from you.
Joe
I would make a few changes. I took the liberty to modify a few lines. Please feel free to quote me:
Dear Jeff,
No.
Joe
In all seriousness, if you are a set "no", anything else really is not fair to him. He needs to know now that you are out so he can move on and look for financing. Leave out the stuff about your brother. The long list of questions would only be useful if he follows up after your firm no. I would also refrain from putting the blame on others(like,us on this forum). Your money. Your decision. Period. Nothing wrong with that.
While we are being serious, if you are NOT yet a definite "no" after reading this thread, then just give him the money now. You are going to lose it eventually.
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My younger brother (37) is trying to convince me (48) to invest in a legal cannabis business in Massachusetts. He claims that I would be getting in on the ground floor of this flourishing field, so the profit potential is huge.
His plan is for my parents and I to go half each on the cost of a commercial property (suitable for a 5000 sq ft growing facility). We would be selling to dispensaries within the state, and maybe even open our own dispensary.
While my brother doesn't have money to invest in this business himself, his contribution is that he is providing everything needed to start the business and run it. He has done a lot of legwork in the past year, and has already set up a team in Massachusetts, including a superb grower and savvy local business manager (who will each be getting a 10% share of the net profit of the business). He's also found a property that meets the state's legal guidelines and that is perfect for our budget.
So, basically, he's done everything so far. I'll just be applying for the growers license (he's not eligible because he got a felony at 19) and contributing half the money to start the business. I will also put the real estate under my name. I can then presumably kick back and collect my share (almost one-third) of the profits, while the team runs everything.
As exciting as this sounds, it strikes me as a little too good to be true, so I'm naturally a little skittish. The total cost of getting this whole operation off the ground, including license fees and all expenses, is in the neighborhood of 350k (175k each from me and my parents), so we're not talking about a trivial amount of money. I would have to get a loan to come up with my share of the cash, because my money is all tied up in my 401(k) and other non-liquid accounts.
Should I take the plunge?
FYI:
- I've been working a civil service job in Brooklyn for over 9 years, and have accumulated a net worth of 600k. I worked hard to get to this level, so I'm not keen on spending my money foolishly
- My parents are willing to put up their half of the money in cash, which they will transfer to my bank account (they also live in Brooklyn)
- I have spoken to the manager and grower in person several times. They're both very professional and convincing. The manager, in particular, knows many important people in the area that can assist us
There are a lot of complexities here. There are a couple things you should look into, but I don't know the answer to:
-how state/federal level laws may change an impact this industry
-the possibility that (like craft beer) the optimal time to get into this industry is passing
With those aside, I think this can be boiled down to your risk tolerance, your trust in your brother, and your proper rational evaluation of his capabilities:
-the old adage is generally true - don't invest what you aren't comfortable losing. Make no mistake; you'd be taking a gamble here.
-is your brother reliable? is he going to put everything he has into making this work? If the answer here is 'no' or 'probably', or anything other than 'he sure will work insanely hard at making this work, including giving up vacations and his own income', then I would absolutely not invest in him. Because you need to understand that this is what he is competing with: people who have their skin in the game and will give anything to succeed. Being savy or interested is not enough; you have to be all-fucking-in, and if there is even a shred of doubt then you are taking on very large risk.
-is your brother competent? Do you know him the type to be clever and aggressive at figuring out an solving problems, especially pertaining to money? Because again, his competition will be.
The short answer is that no, this is probably a bad idea, but only you know your brother and whether you truly trust him (and not just a I-support-him-because-we-are-brothers sort of way; he is risking your livelihood).
You also say you have 600k saved (a decently large amount) but that you have a civil service job, which I'm guessing is not terribly high paying. This makes the risk even higher for you. Additionally, you'd have to get a long (AHHHH!!!) in order to get him the money... do then you would be indebted a lender and be paying interest.
Sorry man, probably a bad idea, but if your brother is truly a miracle worker then go for it.
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I recently heard someone in a podcast say that many Americans (or other western people) have a lottery mentality. They do things because they think it will win them the lottery.
The fact that OP considers this project is also lottery thinking. IF it works, I will be rich and can retire in a few years.
General rule in life: if things sound too good to be true, they usually are not.
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And if this is the AMAZING OPPORTUNITY!! he swears it is, people should be champing at the bit to invest with him. Why doesn't he find those people instead of trying to use familial guilt? (HINT: Because those people have all the same reservations you do. And because your brother clearly hasn't done an actual business plan or research into similar ventures, and has virtually no business knowledge at all.)
Last I heard, he's going to sell one of his 2 houses in Massachusetts to fund the purchase of the industrial property for growing cannabis. Not sure how he's going to get paid, without escaping the scrutiny of the IRS, though. If the business is wildly successful, we're talking hundreds of thousands of dollars a year that he will have to take in cash (he's not allowed to be involved in the cannabis business because of his felony). When he starts buying cars and homes with this mystery money, I find it hard to believe the IRS isn't going to notice.
Does his felony prevent him from being involved in the pot business in any way, or just prevent him from getting the license? If it's the former, then if you invest in this plan, at best you are facilitating your brother breaking the law, and at worst you could even be committing some sort of crime yourself by helping him do something he is legally barred from doing.
To me, this also creates a very easy explanation for your "no". You love your brother and you would no more set him up to do something illegal than you would put him in a car and hand him the keys while he's drunk. No need to make someone jump through hoops to answer questions for which you don't actually care about the answers, given that your mind is made up anyway. If your mind is made up, your "due diligence" is pointless, and is asking this guy to do a bunch of work, if he takes it seriously, when you have no intention of following through regardless of what his work finds.
My brother is not allowed to be involved in the legal cannabis business at all.
Also, if I get very good answers to my questions that make sense, sure, why wouldn't I invest in this business?
I do admit, however, that I raised the bar very high. Some of my questions are so hard to answer, they might as well be rhetorical. But, anything less, and I risk losing my hide, while everyone else walks away whistling.
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Because one of your key employees (your brother) isn’t allowed to be a part of it. You know, the person whop pitched you the idea in the first place.
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Also, if I get very good answers to my questions that make sense, sure, why wouldn't I invest in this business?
Wow. Really? The business manager didn't even know about 280E! And you're going to trust his answers why?
If you really want to be in this industry, go seek out people with actual experience and business savvy and place your bet on them, and not an uninformed, inexperienced team who doesn't even get the basics.
The business manager did not even give you a business plan or pro forma for you to validate on your own. I cannot believe you are even still entertaining this.
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MJeast's point is an important one. Right now you are confounding "should I trust all of my money to these particular people?" and "should I invest in starting a business (potentially involving marijuana?"
If you find that you really want to put $175,000 of your own money into launching a business, you can certainly find a number of options ranging from businesses you'd create and run yourself to being an investor/silent partner in a business run by a team with proven track records and everything in between. If you specifically want to invest in the field of marijuana, that whole range of options is probably still open to you as well.
So try to separate out those two questions in your head.
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Dude, you came into this hoping to get some good support, but discovered that your brother/friends of your brother are actually just spitballing the idea of starting up a successful business - literally thinking because they partake or have grown a few plants over the years, that this makes them not only qualified, but destined for greatness if they could only find startup capital (suckers) to front the business.
You've had absolute, concrete proof that they don't know what they're doing. And that there are so many red flags that this thread looks like a flag convention where they've invited the president of flags and he brought his entire red flag collection with him. Which is my round about way of saying there are A FUCKTON OF FUCKING RED FLAGS.
It's almost at this point where I kind of wonder if you aren't the stoner brother trying to figure out all the possible arguments and angles that someone rationally would say this is a Bad Idea, so you can come up with a good smokescreen (lol) to avoid the truth. He can't even legally be an employee. Neither can the dank pot grower dude. The two guys that want to run this little enterprise legally can't be even present in the property or take on any legal responsibilities and expect you to be the front and risk your name, reputation, job, money and possibly freedom. And your brother's reaction to you being concerned in the face of all of that is to throw a fucking tantrum? /END OF STORY. THERE'S YOUR ANSWER/
I keep thinking no one could be this desperate to be taken in as you seem to be. You're just asking for one tiny little reason to believe that despite the Mount Everest of evidence against, one little nugget of "maybe this could work in some alternate dimension" will swing you enthusiastically into going ahead with this absolute shitpile of an idea.
If you keep giving them chances to talk you into it, you know what's going to happen? They're going to talk you into it.
But they will fail, and you will lose your investment, and likely end up with a host of other headaches besides. All because you can't tell your lazy, stoner, felon of a brother, "I love you, I'll be glad to give you a few bucks to help you out for a month or two while you find a job that you can stick with and earn your own way, but I'm not comfortable with giving you half or more of my very hard earned money and hitting up our parents for the same so you can go play Weed Wizard™ with your friends."
Seriously, for your own sake and your parents, say no and move on. If you want to give them your money, do it and realize it likely would have been more profitable to have just set it on fire because at least for the few minutes it burned, it would provide some heat and light. But don't expect this scenario with your brother and his buddies to play out in your favor at all.
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Awesome post @Frankies Girl!
This thread is really the gift that keeps on giving: I can hardly wait to see what Smokey and the Bandit(s) come up with next...
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That was an epic post, FG. Love it.
OP one more thing: in the state where I live, people in the business have to deal with frequent, unnanounced visits from regulators. About the time a regulator visits your grow operation and sees two felons working the crops is about the time you'll see your investment dry up instantly, and you'll probably be charged with a crime right then and there.
THIS IS A HORRIBLE IDEA WITH LITERALLY NO REASON TO KEEP GOING.
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...
Should I take the plunge?
FYI:
- I've been working a civil service job in Brooklyn for over 9 years, and have accumulated a net worth of 600k. I worked hard to get to this level, so I'm not keen on spending my money foolishly
...
I've read through this whole thread and been following along and will add my voice to the group as a strong NO.
Run, and run fast in the other direction if you do not want to spend your money foolishly. Your brother has spent the last 18 months coming up with a dream, not a real business plan. Of course it will hurt him for you to not back his dream, but for yours and your parents sake do not consider this.
https://www.sba.gov/offices/district/az/phoenix/resources/sba-recommended-business-plans-length
To quote a little:
From SBA’s point of view, a business plan needs to be whatever length is required to excite the financing source, prove that management truly understands the market, and detail the execution strategy. From various surveys done by many different organizations, it has been stated that 25 to 100 pages of information is the minimum length in which to accomplish this, depending on various factors. These include targeted markets (1 to 2 pages), difficult assumptions or non-industry data (1 to 3 pages), industry risk (1 page), poor credit factors that require additional explanation or documentation (2 to 4 pages), and financing source (1/2 to 1 page). Using the SBA model below on page two, a business plan can range in size from 38 to 50 pages for a basic plan to as high as 80 to 100 pages for complex plans.
Why does SBA care? We are concerned that any less than this may cause the capital source to think the business model has not been fully thought through, or they simply did not have enough information to make a good credit decision.
A “start-up” business plan should be a realistic view of the expectations and long-term objectives for the new venture. It should provide the framework within which it must operate and, ultimately, succeed or fail. For entrepreneurs seeking external support such as financing, the plan is the most important sales document that they are ever likely to produce, as it could be the key to raising funds. Preparation of a business plan will not guarantee success in obtaining a loan or mobilizing support, but the lack of a sound plan that cannot tell the story will undoubtedly fail.
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OP, it's almost hard to believe you're being genuine at this point. If so, it's pretty clear at this isn't a business decision and it's not a financial decision. This is an emotional decision and whatever you decide to do you're going to need some emotional support beyond what you can get from internet strangers. Please, please, please go talk to a therapist (or 3) before you make any decision here. Consider it part of your "due diligence" before investing in this business.
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OP, have you spoken to a criminal defense attorney and an attorney experienced in tax/business law? Your questions about liability and tax/business structure would be better geared towards professionals in those areas. Trust the experts and don't rely on representations from someone who benefits by giving you answers that you want to hear.
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"Look Bro, I love you and I want to see great things for you. But there is no way I can risk $300k on a completely unflushed out business model, and one at which you legally aren't even allowed to work. That could get both of us in massive trouble and we both risk prison time and asset forfeiture. This us just not a good idea, and I wont' do it ti myself, our parents, or you. I'm sorry, but that's my final answer."
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Guys, you may think I'm naive (or crazy) to have even considered the cannabis business, but my reasons were as follows:
(1) Recreational marijuana in Massachusetts is brand new; so new, in fact, that they haven't even handed out licenses to growers and dispensaries yet. My brother and I would be among the first to get in on this gold rush.
(2) According to Jeff (the manager) and several other sources I spoke with, there will be a cannabis shortage in the first couple of years in Massachusetts. That's when we establish ourselves and make our money.
(3) The cost of breaking into this industry in Massachusetts is considerably low than in mature markets, such as California or Colorado. For example, we can get a 5,000 sq ft. commercial property for about 70k. The same property in other cannabis-legal states would go for over 300k.
(4) https://www.washingtonpost.com/news/powerpost/wp/2018/06/07/republican-senator-confident-trump-will-back-bill-to-protect-states-rights-on-marijuana/?noredirect=on&utm_term=.f08ed3bf879e
Anyway, this is all moot at this point. I emailed Jeff (the manager) the letter with my questions, and this is the reply I got an hour later:
14) The compensation structure of our business is very bad. If
> business is doing poorly, what's to stop you and Jay from jumping
> ship to a competitor, who will pay you more? You have no incentive
> to stay during bad times.
Jeff
--
Jeff Smith
Smith Jr Real Estate
46 Main St Box 9
AnyTown, MA 01773
555-555-5555
RE Lic # 99999999999
www.JeffSmith88*.com
jeff@JeffSmith.com
Is he trying to tell me that he can only answer question #14 by calling him? What about the other 25 questions??
I'm out.
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I don't think you are crazy for considering the cannabis business, but I think you are crazy for considering entering into it with people who are clearly ill-prepared, have no business experience and *ARE LEGALLY BARRED FROM BEING IN THE CANNABIS BUSINESS*!!
I don't know what the email means, and I don't think it matters. If you continue to waste his time, knowing that you have no intention of entering in to this business regardless of his answers, you become the villain in this piece.
"Jeff, on further reflection, I'm just not comfortable with too many aspects of this plan. I wish you all the best going forward, but unfortunately, I can't be a part of this endeavor".
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Is he trying to tell me that he can only answer question #14 by calling him? What about the other 25 questions??
He's saying your concerns are unimportant, except that he agrees it is very important that he can take as much of your money as possible regardless of how the business goes.
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OP, I think you should remove Jeff's personal data from your post. It is not relevant for us.
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--
Jeff Smith
Smith Jr Real Estate
46 Main St Box 9
AnyTown, MA 01773
555-555-5555
RE Lic # 99999999999
www.JeffSmith88*.com
jeff@JeffSmith.com
I enjoy that you took the time to anonymize all the data in his signature rather than omitting it.
Glad you're finally out.
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Anyway, this is all moot at this point. I emailed Jeff (the manager) the letter with my questions, and this is the reply I got an hour later:
14) The compensation structure of our business is very bad. If
> business is doing poorly, what's to stop you and Jay from jumping
> ship to a competitor, who will pay you more? You have no incentive
> to stay during bad times.
Jeff
--
Jeff Smith
Smith Jr Real Estate
46 Main St Box 9
AnyTown, MA 01773
555-555-5555
RE Lic # 99999999999
www.JeffSmith88*.com
jeff@JeffSmith.com
Is he trying to tell me that he can only answer question #14 by calling him? What about the other 25 questions??
I'm out.
Guessing he was too baked to respond.
https://youtu.be/OJM8yJTn_I0
Probably good that you did not invest. All of your profits would go up in smoke
https://youtu.be/CWxgfTMLtc0
Sent from my Pixel 2 XL using Tapatalk
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Wow, what a ride. I am so glad you are out. Keep us posted if you hear anything further about this wild dream!
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OP, I think you should remove Jeff's personal data from your post. It is not relevant for us.
It's not his real data.
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Not to further extend this discussion, but I'm curious, guys. What do you think is going to happen if my brother starts this business without me? What exactly is going to cause him to fail, in your opinion? Be detailed and specific.
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Wow, what a ride. I am so glad you are out. Keep us posted if you hear anything further about this wild dream!
Will do, but one of 2 things are likely to happen: a) my brother makes a killing in this business, and I'm going to kick myself for the rest of my life (and curse this forum forever :)), or b) he's going to fail, and I will be relieved that I didn't make the same mistake (and forever worship the wisdom of the MMM members).
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Not to further extend this discussion, but I'm curious, guys. What do you think is going to happen if my brother starts this business without me? What exactly is going to cause him to fail, in your opinion? Be detailed and specific.
1. He’s not legally allowed to work there.
2. He has no relevant skills.
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Not to further extend this discussion, but I'm curious, guys. What do you think is going to happen if my brother starts this business without me? What exactly is going to cause him to fail, in your opinion? Be detailed and specific.
I'll go with A) his start-up times will take longer than he expects, B) his production costs will be higher than he expects, and C) his sales will be less than he expects. Nothing really specific to the marijuana business.
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The fact that neither the brother, the manager not the grower is able to put up 100k would be of too much concern to me.
3 guys in their thirties that can't put 300k together surely aren't the best managers around.
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Wow, what a ride. I am so glad you are out. Keep us posted if you hear anything further about this wild dream!
Will do, but one of 2 things are likely to happen: a) my brother makes a killing in this business, and I'm going to kick myself for the rest of my life (and curse this forum forever :)), or b) he's going to fail, and I will be relieved that I didn't make the same mistake (and forever worship the wisdom of the MMM members).
As others have said, your brother isn't legally allowed to even be involved in the business. But let's put that aside.
If someone else puts up the money on the same terms you were asked for, and your brother still gets 10% of profits (before taxes), and doesn't pay any taxes himself because legally he's not an owner or employee:*
1) The business will take longer to get up and running and cost more than budgeted. It may not get past specific legal hurdles. If it gets past the legal hurdles it may run out of money before it ever sells an ounce of marijuana.
2) If it gets past the legal and financial hurdles and starts selling marijuana, it will find that every month unexpected expenses pop up (because they always do, and there was no budget for contingencies), so it may never turn a profit.
3) If the business turns a profit, your brother gets his 10% right off the top. Over time there is downward pressure on the price of marijuana, like there has been in every state. Some businesses (the ones with access lots of capital) try to expand production to increase economies of scale and stay profitable. This drives the price down even faster and more and more businesses are driven into operating at a loss or closing up shop.
But the most important thing to remember is that, from the way your proposed business was structured, even if the business defies all of the odds and makes enough profit to pay your brothers a few $10,000 or even a few $100,000, the person who put up all the original capital could still end up losing money (particularly after taxes).
It's important to remember this, because you seem to be thinking that if your brother finds another investor and goes ahead and makes money, it means you would have made money. But the real question is, would the investor have made money? And if so, were they offered a deal similar to the one offered to you or something more reasonable?
*This is tax fraud, but he can tell himself he never got a W-2 or 1099 form, which will work right up until he and/or the business is audited, at which point it'll blow up in his face.
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Wow, what a ride. I am so glad you are out. Keep us posted if you hear anything further about this wild dream!
Will do, but one of 2 things are likely to happen: a) my brother makes a killing in this business, and I'm going to kick myself for the rest of my life (and curse this forum forever :)), or b) he's going to fail, and I will be relieved that I didn't make the same mistake (and forever worship the wisdom of the MMM members).
An important thing I got out of my decision analysis classes is the concept that a good or bad decision is independent of a good or bad outcome. You can make good decisions and get unlucky and make bad decisions and get lucky. You need to judge the decision by what was the best information available at the time.
If your brother makes money then he will have gotten lucky, pure and simple. It is still a bad decision for him and for you to pursue this.
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Wow, what a ride. I am so glad you are out. Keep us posted if you hear anything further about this wild dream!
Will do, but one of 2 things are likely to happen: a) my brother makes a killing in this business, and I'm going to kick myself for the rest of my life (and curse this forum forever :)), or b) he's going to fail, and I will be relieved that I didn't make the same mistake (and forever worship the wisdom of the MMM members).
An important thing I got out of my decision analysis classes is the concept that a good or bad decision is independent of a good or bad outcome. You can make good decisions and get unlucky and make bad decisions and get lucky. You need to judge the decision by what was the best information available at the time.
If your brother makes money then he will have gotten lucky, pure and simple. It is still a bad decision for him and for you to pursue this.
That's a very important point.
If someone takes their entire life savings into a casino and puts it all on 33 on a roulette wheel and walks out with 35x their net worth, that doesn't make it a good decision.
If you paid for health insurance last year, and didn't ever have to visit a doctor of fill a prescription, that doesn't make your decision to buy health insurance a bad decision.
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My brother is standing next to me right now. He wants to know how much experience any of you guys have in the cannabis business, and if you're directly involved in it, or just know a friend in the business?
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This fucker is a troll.
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This fucker is a troll.
No, I'm not. My brother was actually here, and he asked me to post that question. I've already decided that I'm not going to invest in the cannabis business, because there are just too many variables and uncertainties (and because I didn't like the vague response the manager gave to my email. It made me lose faith in his abilities. A more professional response would have been "you would need to seek the advice of a lawyer to answer some of your questions"). Despite the fact that I'm out, I think my brother asked a valid question.
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I believe if you scroll up the thread someone already posted about his involvement in the industry over several posts. I don’t remember which user it was though.
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Looks like MJseast was the one posting from a position of experience
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Not to further extend this discussion, but I'm curious, guys. What do you think is going to happen if my brother starts this business without me? What exactly is going to cause him to fail, in your opinion? Be detailed and specific.
1) he gets arrested, or some of his partners get arrested because they are doing something illegal. a( and no, i'm not referring to federal pot laws).
2) They screw up the tax filings, because the don't seem especially thorough on concerned with the minutia of running a business.
3) They open a store but don't bother with marketing, branding, customer service, creating a professional vibe, or all the other things that will drive business, so they don't have many customers.
4) They can't get past the start up phase during which a vast, vast majority if businesses lose money before the few that are successful actually see that success and they either quit before they get to that point, when their unrealistic dreams of rolling in cash from month 1 fail to materialize, or they can't sustain their lives with no income and they have to move on.
5)They grow tired of it all when they realize that running a business means doing payroll and managing employees and checking inventory and contacting suppliers and cleaning store counters and doing accounting and creating mailing lists.
6) I'm not really going to continue, but certainly I could go on.
Look, by continuing to indulge your brother, you are giving him false hope and allowing the conversation to continue. I guess you are talking again??, assuming you aren't a troll, but every time you go past a hard "no", you simply allow this conversation to continue. If your brother wants more info, he should work to find it. That's part of being a business owner. If he can't be bothered and has to have his brother do it, that yet another sign he's just not prepared or dedicated enough. He wants the glamour and imaged riches of this, but not the hard work. Or at least not the hard work that doesn't interest him, like, you know... actually looking at how small businesses work and figuring it out. He wants someone to hand it to him. He doesn't want to work to answer all the questions you created, and more. He's hoping to fly by the seat of his pants and dreaming that this will lead people to hand their money to him hand over fist. And you are enabling that every time you don't tell him to do his own research because you are OUT.
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I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.