In this chapter of The Ultimate Guide to Cannabis Extraction, we’re taking a deeper look into building out your cannabis extraction business plan. Here you’ll find some very practical tips and tricks to ensure long-term growth and stability for your extraction business in what can be a sometimes volatile and rapidly evolving industry.
We also take a look at common cannabis business models, and show you how to successfully navigate the extraction industry by future-proofing your extraction business in an increasingly uncertain world.
There has never been a better time to be a startup in the extraction space, or to expand an existing business. While the rest of the economy has slowed to a standstill, the 2020 legal US cannabis “white” market is forecasted to grow by +40% compared to 2019. Let that sink in. In possibly the worst economic year in the last 100 years our industry is continuing its explosive growth.
So if you’re planning to start a cannabis or hemp extraction business, or you’re a startup with big plans for expansion, our aim for this chapter is to increase the probability of your business’s long-term success.
Here’s what to expect from this chapter:
The year 2020 is one that will go down in history as one of the most challenging in many peoples’ lives. And not just for the inconveniences of the seemingly never-ending pandemic, but also for the very serious challenges caused by the worst economic contraction in the last 100 years. And yet in the midst of these challenges, the cannabis and hemp retail markets are experiencing unprecedented growth!
Cannabis medical and adult use (recreational) market growth has been much better than expected in the first half of 2020. Retail sales in the US are forecasted to eclipse $15.5 billion by the end of 2020. Overall, this is an increase of approximately 40% over 2019 sales ($10.6B), according to the Marijuana Business Factbook.
Globally (including the US) this figure is forecasted to be $20 billion by the end of 2020 [BDSA & Arcview Market Research 04/13/2020].
The are several obvious (and some not so obvious) reasons for this positive growth:
Although we’re not out of treacherous waters yet, August 2020 adult-use sales figures proved resilient to the expiration of the U.S. government’s $600/week lifeline to unemployed workers. In the two weeks after the benefits ended, sales of recreational cannabis remained stable, even posting a visible increase during the first week. [Source: MJBizDaily]
California is the biggest adult use and medical market in the US, and therefore a good gauge for the health of the US cannabis industry on the whole.
In July 2020, California set a record sales month of $348 million, the biggest month since the rollout of the state’s legal market in 2018. The biggest sales up to July had been in March of this same year, when panic-buying by consumers due to the pandemic pushed sales to just under $332 million. [Source: Headset.io & MJBizDaily]
The interplay between the black market and the white market in the US cannabis industry has always been filled with various shades of grey. It’s difficult to get hard data on black market sales for obvious reasons, but anecdotal evidence suggests that one of the silver linings of the pandemic is that it has created a unique environment that allows retail white market cannabis to thrive [CWE Ep 19].
“This is the first year you’ll see the legal market wipe the floor with the illicit market in terms of growth.” [Source: New Frontier CannaWeek podcast #20 & 21].
Early signs are showing that the white market may be actually cannibalizing part of the black market, and/or that the white market has grown simply due to increased legalization. Retail (white market) sales have broken records in the last few months. California’s sales hit $348 million in July, the biggest month since the rollout of the state’s legal market in 2018.
While this might seem counterintuitive, there are several reasons for this:
In early 2020, industry experts predicted that the black market was on track to decimate the white market and that retail “bloodbath” was on the way. They couldn’t have been more wrong.
The US regulated cannabis industry is on track to grow by +40% by the end of 2020—the worst economic year in the last 100 years. Although it may be too early to call the industry “recession proof”, its resilience makes true the idiom “swimming upstream makes the strongest swimmers.”
And the good news doesn’t stop there. “Investors have shown renewed interest in U.S. cannabis companies after they were designated essential businesses during the coronavirus pandemic by most states, allowing them to keep their doors open,” report MJBiz Source: MJBiz 09/05/2020. The investment dry spell that began in late 2019 is showing signs of lifting as cannabis and hemp businesses have raised new investment dollars to the tune of hundreds of millions of dollars in the last few months.
What are consumers buying right now in this vibrant cannabinoid market?
The latest market research shows that consumer preferences may be shifting gradually more towards cannabis-infused products and while “unprocessed” flower and pre-rolls remain popular.
If you look back to 2014, it’s clear that there’s an increasing YOY trend towards more refined end-products. Cannabis and hemp consumers are trying out different concentrations and various forms of cannabinoid derivatives rather than just smoking flowers and pre-rolls.
During the bad old days of prohibition your choices were basically limited to flower or hash smuggled in from overseas—if you were lucky. As the market opens up so do the many and varied forms of cannabis and hemp derivatives, offering consumers wider choices.
What does vertical integration mean in the context of the cannabis and hemp industry?
Being vertically integrated means that your business owns all the stages of your production process and supply chain, including cultivation, extraction, refinement operations, and everything in between. While this approach has great potential for success, there’s also a lot of capital expense upfront. So “going vertical” shouldn’t be jumped into lightly.
Vertical integration is a phrase you’ll hear used frequently. But understanding what it means takes a thorough understanding of your own state’s cannabis laws and regulations.
In some states there are no applicable rules on vertical integration. In others it’s the only model that’s allowed. And in still others it’s prohibited. Welcome to the patchwork of cannabis regulation—a serious challenge for even the most savvy MSOs (multi-state operators) to navigate!
In some states there are no applicable rules on vertical integration. In others it’s the only model that’s allowed. And in still others it’s prohibited. Welcome to the patchwork of cannabis regulation—a serious challenge for even the most savvy MSOs (multi-state operators) to navigate!
A good example of a vertically integrated cannabis or hemp company is one that has integrated “seed-to-shelf”. This means that it owns all stages of the cultivation, extraction & refinement process, manufacturing, quality and contaminant testing, and retail functions. Each stage of the process works with the others to streamline (and track) the seed-to-shelf process:
Advantages of Vertical Integration:
Disadvantages of Vertical Integration:
An alternative business model is specialization. It means starting a business in just one or a few of the parts of the supply chain mentioned above. The greatest advantage of specialization is that you have the ability to focus on what you do best and do it well without trying to be everything to everyone.
It may be more beneficial and less risky to create a niche for yourself as an extraction and refinement company—in other words a cannabinoid manufacturer—rather than creating end-market products for cannabis or hemp consumers.
If you choose not to vertically integrate, processing or extraction can actualize a high return on investment, too, said Anne van Leynseele, the founder and managing partner of 7 Point Law.
“How does an entrepreneur that wants to own a small marijuana business realize their American dream?” van Leynseele asked. “Their highest opportunity for success, in my opinion, is to process.”
[Source: MJBiz March 2019]
Ultimately, extraction and refinement companies can decide which structure is right for them by weighing the advantages and disadvantages of vertical integration and specialization. Depending on your state and/or financial backing, that choice may not be in your control.
Things change rapidly in this industry, so it’s a good idea to understand both models so that your business can be flexible and adaptable. Eventually, federal legalization will happen. And when it does you should be prepared to pivot at a moment’s notice.
Imagine, for example, that you set up a hemp/CBD (less than 0.3% THC) extraction business and then a year or two later your state legalizes full adult (recreational) use. Would your extraction business be ready to immediately transition to adult use at a moment’s notice?
COVID’s impact on the economy means that state-level recreational legalization could happen faster as states consider the massive tax revenue legalization promises.
Let’s break down some common business models that may work for you as a cannabis hemp or extraction business—or more specifically as an agnostic cannabinoid manufacturer:
Choosing the right business model could be the difference between getting an investor or not. Regardless, investors are much harder to come by than they were just a few years ago. “Gone are the days of getting huge investments just because you have a license,” says Jason Almirol, National & International Sales, Delta Separations. “You’re gonna have to bootstrap it yourself or have friends and family or venture capitalists really committed to your business plan because it’s now a very challenging industry.”
Ultimately, when it comes to choosing your business model only you will know what will work best for you. However, it pays to be agile and adaptable to market changes. Cash flow should be your number one priority. Whether it’s white labelling products for other businesses or going full “vertical,” staying flexible and in tune with market shifts is how you’ll survive and thrive.
While the future looks promising for the cannabis and hemp extraction and processing industries, in order to ensure the growth of your extraction business you need to meet consumer demand by focusing on end-products that consumers are demanding the most and change and adapt your extraction business accordingly.
To understand where the industry is heading during these tumultuous times, we tapped into the expertise of the people who are at the cutting edge of the industry: our in-house executive sales team. They speak with existing and potential new extraction business owners every day and are at the forefront of extraction business trends.
First, don’t be romantic about which extraction method or technology (ethanol vs. butane vs. CO2 etc.) is your weapon of choice. If you invest exclusively in one particular method or technology, you may lose everything when the market shifts. No one wants to end up with a warehouse full of obsolete equipment.
Second, don’t be too attached to the type of products you produce, whether that be the cannabinoid you’re chasing, a specific derivative form, or an end-product. This lesson is illustrated by the huge CBD price drop in 2019. Over the course of 45 days in May 2019, the average cost of CBD dropped 30%. Now, a year later, the cost for CBD distillate has dropped from $7,500 per liter to about $700 per liter. Too many producers lost everything by creating business models that focused on CBD alone.
The trick to surviving a massive shift like this is to diversify—develop secondary and tertiary revenue streams to protect your initial plan against market fluctuations..
If everyone is getting on the bandwagon then you’re probably already too late! Do something different. Forecast where the consumer demand is heading and, most importantly, get there before your competitors.
In such a volatile and fast moving industry it pays to be agile and adaptable to ensure that your extraction business is in it for the long haul. Consumer trends come and go, so doing your homework and staying attuned to consumer demands now and in the future is critical for business success.
You don’t have to go too far back in time to remember when all everyone talked about was CBD vs. THC, or adult use (recreational) vs. medical, as if these were simple “either/or” choices. The future of the industry was, and is, far more complex than those conversations convey. You have to be prepared for the evolution of the industry to ensure that you can meet demand for a wide variety of cannabinoid derivative forms and end-products.
Nick Prystash, Apeks Supercritical’s Sales Executive, emphasizes that “what a lot of people don’t understand is it’s not just about producing vape cartridges or producing full spectrum oil or distillate. At the end of the day, it’s about using various cannabinoids derivatives to make a wide variety of end-products.”
As the cannabis and hemp extraction industry hurtles forward, most manufacturers are focused on growing as large as possible in the THC and CBD spaces. Processors and retailers, on the other hand, are finding that a more nuanced approach is required for successful cannabinoid manufacturing. Focusing on THC and CBD wastes precious time as consumers demand new cannabinoids like CBG, CBN, and Δ8-THC.
Ask yourself: “What is the hot cannabinoid right now and how can I capitalize on it?”
According to Sabin MacPhee, National & International Sales Representative from Delta Separations, a clever way to pivot when a specific cannabinoid market tanks is to “do market research to find a cannabinoid that’s gaining traction. Then get your chemists to see if they can develop a method to convert the cannabinoid you have too much of into the new cannabinoid.” That way, he continues, “you’ve got an entirely different product that’s worth a lot more!”
As an extractor—a cannabinoid manufacturer—you have to stay agile, smart, and in-tune with the market. Your end-product will often define your business model, but you have to be flexible enough to change direction when consumer demand shifts.
In the cannabis and hemp industry, adapting to market trends means being flexible.
Just look at successful MSOs (multistate operators). Most successful MSOs are not attached to a specific technology, an extraction or refinement method, or even an end-product. Instead, they remain agnostic to extraction methods, and flexible and open-minded about outputs.
Being agnostic to extraction methodology means you have the flexibility to meet consumer demand when it shifts. “We’ve been educating our team on an extraction-agnostic approach for the last nine months,” says Prystash. “To really be able to dial in on a CO2 platform, an ethanol extractor, a hydrocarbon system, or any combination of these at a moment’s notice.” That sort of flexibility allows you to “capitalize on market trends, making multiple SKUs, and really get your brand out there.” It’s the key to running a successful cannabinoid manufacturing business.
But you don’t have to be an MSO to be successful in the “green rush.” Your passion may be in wanting to make small batches of a high-quality connoisseur product rather than trying to be everything to everyone. And this is a valid niche to aim for.
“Most big MSOs are only focused on making distillate and isolate,” says Sabin MacPhee, and they’re missing a huge market opportunity. “The majority of the money in both the white and black markets is being made through various different concentrates like dabs, sauce, diamonds and other derivatives.” The perfect opportunity for smaller extraction businesses to capitalize on.
Regardless of whether you’re starting a small business or an MSO, the key to success is the same: stay flexible and adapt to the prevailing winds. This means:
If you build a business that considers all of these factors, you’ll have a competitive advantage over inflexible and hyper-specific processors. Ultimately, it comes down to understanding what the market needs and using that understanding to work backwards while still playing the long game.
Sounds simple, right? But how do you navigate market-specific extraction and processing solutions for your business without wasting money on equipment or technologies you may not end up needing?
This is really only a question you can answer. Ultimately it depends on your state’s rules and regulations. So do your homework before putting money down.
Here are some critical questions you should ask yourself:
As you’re planning your cannabinoid manufacturing business it’s wise to embrace an organic growth strategy with your production focused on what you are legally allowed to make now (re: state policy specifics). At the same time you should ensure that you don’t overproduce derivatives to avoid the risk of end-products that won’t move due to market saturation.
So far, the pattern in the US has been that states go medical first and then flip to full adult use. As cannabinoid manufacturers, we need to be adaptable to these changes and evolve along with the industry. A smart—and ultimately successful—extraction business owner will have a plan in place for if, and when, their state flips to full adult use.
If you want to start out as a hemp extractor focused solely on producing CBD products with less than 0.3% THC, consider “building the infrastructure necessary to comply with common THC regulations,” suggests Nick Prystash. “That way when policy change allows for medical or adult-use THC sales you are ready to capitalize on a new market before a majority of the competition.”
Making sure you can meet demand is only half the battle when your state flips from medical to adult use. Branding is the other half. It almost doesn’t matter what your brand is in an emerging medical market, because only a set number of licenses are released by each state government. This means if you can get your products to a dispensary they will sell.
But when your state flips to adult use, all of a sudden the dispensary is flooded with already existing out-of-state brands that have had years to build a following. The game becomes highly competitive. How do you navigate that landscape? With outstanding brand marketing. If you want to build a successful business, your brand and its marketing becomes a critical factor in its success.
A good comparison to the evolution of the cannabis industry is the microbrewing industry for beer. Small companies thrive in their local areas because the locals want to support their local microbrewer. The same approach works for cannabis. Consumers want to buy locally made and sourced derivatives. Niche processors can take the “local” approach with marketing and branding by being proud of their local heritage and culture.
So you’ve finally set up your cannabis and/or hemp extraction lab. Congratulations! Now you need to navigate the stormy seas of a highly regulated and volatile industry. A process made more difficult by the greatest economic downturn in 100 years. Just another day in the cannabis industry, right?
There’s a cliche about tough times that bears repeating: there’s always opportunity in adversity. Right now it could really pay off to think outside the cannabis/hemp box.
Your entire extraction suite—all its equipment and technology—can also extract oils from any other plant material. “Botanical extraction is botanical extraction,” emphasizes Sabin McPhee, and that means opportunities in the nutraceutical market. “Nutraceuticals represent billions of dollars a year with almost 9% year-over-year growth. It’s very stable, established, legal, and is currently thriving due to COVID-19. Everyone is taking more preventative supplements to keep their immune systems healthy.”
While everything we do is about gleaning valuable cannabinoid extracts from this wonderfully complex plant, it’s not a bad idea to diversify your approach in these unprecedented times and hedge your bets.
When planning to open a cannabis and/or hemp extraction lab, most people start by asking which extraction solvent (ethanol, CO2, or hydrocarbons) they should utilize. It’s the wrong question to start with. Your first question needs to be: “What’s my end-product?”
Some good questions to ask when starting to build your business plan are:
Answering these questions now will not only ensure future success but also reduce risk across all areas of your business. The answer to the question: “What’s my end-product/s?” will inform various decisions such as staffing, equipment purchases, budgeting, the size of the space you need, safety and compliance—just to name a few!
For example, although ethanol is perhaps one of the easiest and most affordable forms of extraction to scale and achieve high throughputs (for most end-products), this may not be the case for all cannabis or hemp derivatives. While ethanol is easy to scale to produce large volumes of things like distillate, crude extracts, and isolates, it’s not suitable for large-scale terpene isolation, or large-scale shatter or live resin production.
If the first question you ask yourself is what you want your end-product/s to be, you can avoid pigeon-holing yourself in the future. Once you’ve made that decision you can approach the all-important question of how to scale your cannabinoid manufacturing business!
Here are two different strategies we’ve seen work well, and encounter most often in labs that are scaling successfully:
The second path is riskier and costs more upfront, but it has a better chance of pushing you ahead of your regional competitors quickly if it works out.
Enough of the theory. Let’s get into the numbers. We’ve created a model for you to see what it might look like to set up a basic, large-scale ethanol extraction business. There is some flexibility built into this model in order to make sure you have enough adaptability to produce a range of end-products.
The following extraction “suite” covers everything from biomass through distillate but would also be able to produce crude at scale. With a few extra steps and pieces of equipment, it could easily produce CBD isolate as well.
NOTE: The following list is non-exhaustive and all prices and potential revenues are rough estimates and are used here for illustrative purposes only.
Also, there are many small and ancillary pieces of equipment beyond this list that would be needed for a fully integrated and efficiently functioning lab. However, the example does allow us to make some rough estimates for illustrative purposes by taking into account some of the largest equipment purchases necessary.
As an example, the following will be considered one “Suite” at a budget of $1,000,000*
| Phase: | Equipment: | USD$ |
| Extraction | Ethanol Storage Tanks (300 gal.) | $3,100* |
| 2x DC-40 Direct Chiller | $130,000* | |
| 2x CUP Series Centrifuge Utility Platform | $250,000* | |
| 1x Walk in Freezer | $5,000* | |
| Filtration | Multi-stage Filtration Skid | $23,000* |
| Evaporation | 1x FFE-60 Falling Film Evaporator | $190,000* |
| 2x 50L roto-evaporator | $63,000* | |
| Decarboxylation | 3x 50L Glass reactor vessels | $11-50,000* |
| Distillation | 2x RFD-27 Rolled Film Distillation | $300,000* |
| Total (approx.) | $975,000~* |
Estimated throughput for this extraction suite as follows, based on the assumptions:
Biomass:
Crude Distillate:
With a lab operating 24 hours a day, and with 3x of these suites (estimated $3,000,000* investment of equipment), this lab could potentially be:
With a wholesale value of $4,000* / kg of distillate – that equates to $1,200,000* Gross Income / day
Continuing with our ethanol example and using the extraction suite as described previously, each operational “suite” would need approximately six staff distributed roughly as follows:
One of the great advantages to scaling your production with ethanol extraction instead of other extraction methods is that no matter the scale at which you’re operating, the process will be roughly the same, while remaining relatively easy and safe.
This allows your lab to reduce overhead by not needing to immediately hire highly educated staff. The process is simple enough to bring in operators with minimal extraction experience and train them quickly.
However, it should also be emphasized that investing in your people—whether it be through hiring more well-paid and educated staff, or by implementing a professional development program for all employees—is a vital, and often overlooked, component to a highly efficient and successful lab.
The two most important considerations are:
Solvent storage is incredibly important. You could sink an immense amount of time and money into designing a lab that achieves your throughput goals, only to find that your local regulations may not allow you to hold the necessary amount of ethanol on-site or in-process to achieve those throughputs. Knowing these restrictions in advance of purchasing equipment can save you time, money, and regulatory hassles.
Above all, when building your lab, and especially when attempting to scale to industrial sizes, it is imperative that you work as closely as possible with your local AHJ (authority having jurisdiction) inspectors and your fire marshal to ensure you are proceeding as compliantly and safely as possible.
You may also want to consider working with a trustworthy consultant with a solid reputation and referrals from industry peers. Consultants may seem like an extra expense in the short term but in the long run they may save you from making incorrect and expensive strategy decisions with regards to your facility layout and set up (plumbing, electrical, systems etc.).
Designing and building out your facility is the costliest step after your initial equipment investment. Laws and regulations change between countries, from state-to-state, and from county-to-county, so make sure you do it right the first time. It pays to work closely with those who are inspecting and regulating your lab, this way you understand the regulations clearly and make as few mistakes as possible during build out—saving you lots of capital and mitigating business risk.
If your hemp and/or cannabis extraction business is in the startup phase, you may also consider writing up a business plan. Why do you need a cannabis business plan? While it’s not mandatory, it’s an essential tool to have in case you’re seeking investment from friends and family, or from co-founders or venture capital firms.
What is a business plan? It’s a summary of your overall extraction business strategy. You can write a short one or a much longer, more detailed one, but regardless of length, it will help you strategize your project and bring your business to life.
To organize your business plan we’ve outlined the essentials below. You can also download our Cannabis and/or Hemp Extraction Business Plan template and fill in the blanks with your own company-specific details.
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