• NEXUS
  • Rough Brothers, Inc.
  • Tetra Indoor
  • ThermoEnergy
  • Apeks Supercritical
  • Delta Separations

Cannabis Extraction Business Plan

Cannabis Extraction Business Plan Development

How to Plan and Build Your Extraction Business

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:

Chapter Contents:

  1. Cannabis Extraction Industry Overview
    • Mid-2020 Report:
      1. Industry Forecast +40% Growth by End of 2020
      2. California Breaks All-Time Sales Record
      3. How the Pandemic has Helped the White Market Grow
      4. Legal Cannabis Industry Revenue Potential 2020-2024
  2. Common Business Models for Extraction Companies:
    • Vertical Integration vs. Specialization: Pros and Cons
    • Which Extraction Business Model is Right for You?
  3. Future-Proofing your Extraction Business in an Uncertain World
    • Five Ways to Increase your Chances of Business Success
      1. CBD vs. THC is Old Hat: Now it’s All About Cannabinoid Manufacturing
      2. Stay Agile and Extraction-Agnostic to Market-Specific Needs
      3. Navigating Market-Specific Extraction and Processing Solutions
      4. Pivoting from Medical to Full Adult Use (Recreational)
      5. Extraction is Extraction: Don’t Forget Other Botanicals
  4. Scaling your Extraction Business:
    • Start by Asking the Right Questions
    • Scaling Your Lab: Two Strategies
    • Estimating Costs and Capital Expenditure
    • Staffing and Expertise
    • Safety and Compliance
  5. How to Write your Cannabis and/or Hemp Extraction Business Plan: Free Download Template

Cannabis Extraction Industry Overview: Mid-2020 Report

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!

Industry Forecast +40% Retail Growth by End of 2020

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:

  • “Essential Business” status: Many states kept dispensaries open and delivery services running during the early days of the pandemic—deeming them essential businesses. This status allowed the entire supply chain to remain in business while countless mainstream industries were forced to stop serving customers—many of which are still not operational at time of writing.
  • COVID-19 stay-at-home orders: In the first half of the year people were consuming and buying more cannabis and hemp products to deal with the stress of lockdown and quarantine. With almost zero outside-the-home entertainment, people spent more money on activities that could be done at home, including recreational cannabis use.
  • Consumers are buying more: In April, June, and July the average purchase per consumer sales transaction across the US increased significantly. The 2Q 2020 avg. transaction was 20-25% higher than 1Q 2020 [Sources: New Frontier CannaWeek podcast #19 & com]
  • New states opening up: New adult-use (recreational) markets in Michigan and Illinois—the first such markets in the Midwest—came online in late 2019 and early 2020, respectively. Illinois experienced 25-40% increases in sales month-over-month [Source: New Frontier CannaWeek podcast #20 & 21].
  • Black market disruption: Anecdotally, it’s looking like stay-at-home and shelter in place orders may have disrupted traditional black market supply lines and distribution channels earlier in the year, forcing legacy black market consumers to try out white market dispensaries—some for the very first time. And when presented with the larger choice and safer shopping experience many of these consumers are now switching over or utilizing both black and white markets.

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, The Largest US Cannabis Market Breaks All-Time Sales Record

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]

How the Pandemic has Helped the White Market Grow

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:

  • Due to the risks of COVID, legacy black market consumers have become wary of purchasing from illicit markets driven by in-person meetings. For the first time, these legacy consumers have dipped their toe into white market delivery services and online ordering via cashless transactions [Source: New Frontier CannaWeek podcast #19].
  • Price has always been the differentiating factor between the black and white markets. Many legal brands have come out with lower-priced options that have driven away illicit competition. 

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.

Legal Cannabis Industry Revenue Potential 2020-2024

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.  

  • The share of processed products—like derivatives and cannabis infused products—grew from ~28% in 2014 to ~55% in 2019, driven by product innovation, growing demand for potent cannabis derivatives, and increasing preference for more convenient delivery platforms, such as vape pens and edibles.
  • Vapes and edibles remain the most dominant segment, likely due to their ease of delivery.
  • Tinctures, topicals, and capsules are gaining traction owing to increasing CBD-driven demand for pain relief, relaxation, and other medicinal benefits.

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.

Common Business Models for Extraction Companies

Vertical Integration vs. Specialization

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:

  1. Cultivation/Harvest: Planting the cannabis or hemp seeds, growing plant material, and harvesting and preparing raw biomass for processing.
  2. Lab/Extraction/Processing: Owning and running the extraction equipment and lab facility to extract and refine cannabis and hemp to produce cannabinoid derivative forms.
  3. Manufacturing/Packaging: Manufacturing final cannabinoid derivative forms (e.g. recombined derivatives such as terpsolates), packaging, and distributing.
  4. Retail Sales: “Brick and mortar” adult-use or medical dispensaries, online delivery services, and/or e-commerce website sales (for less than 0.3% THC CBD and other non-THC cannabinoids).

Advantages of Vertical Integration:

 

  • Better tracking of your products’ “seed to shelf” ensures tighter quality control. Track and trace is a key differentiation for successful brands because you can monitor and control for quality of product and limit any possible contamination.
  • Saves on basic overhead costs like rent and utilities by putting extraction, refinement, packaging, and marketing services into the one building.
  • Enables the ability to rapidly create and market your own end-product consumer-facing brands
  • Reduces cost to produce end-products and creates better profit margins on sales
  • Increases ability to be agile and adapt to changing consumer demand and market changes

Disadvantages of Vertical Integration:

  • Could result in resources being spread too thin, trying to fill in every product niche, or lead to the creation of a “bland brand” that fails to excite the consumer.
  • Raising large amounts of capital to vertically integrate can be a challenge unless you have healthy backing from venture capitalists or friends and family with deep pockets. If you’re a small business this can present insurmountable challenges and specialization may be a more realistic approach for you.
  • Vertically integrated MSOs (multi-state operators) face challenges navigating various states’ rules, regulations, and requirements.

 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]

Which Extraction Business Model is Right for You?

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:

  1. White Labelling (Wholesale B2B) is when a cannabis or hemp product is manufactured by your extraction company and then packaged and rebranded to be sold by another company to the consumer (either in a dispensary or via online e-commerce). This model is a good way to get cash flow in the bank quickly, especially if you’re a new business. While it does have lower profits because you’re not making money on the sale to the consumer, it also carries less risk. Essentially, you act as a “middle man” provider of a blank, white label product.
  2. Spot Market Sales (Wholesale B2B) is when your company buys cannabis or hemp biomass, turns it into crude oil, and then sells it on the wholesale market when the price is advantageous. This approach is all about timing, a bit of luck, and understanding the vagaries of the market—just like playing the stock market. If you’ve got your ear to the ground and you’re paying attention, it’s a low risk strategy to make good revenue.
  3. Tolling (B2B: “Extraction-as-a-Service”) is when your extraction lab is paid a flat fee per gram to take a grower’s flower, turn it into oil, and return the finished oil to the grower who will sell it into the market. This model is the lowest risk but also low return. You’re guaranteed a fee per gram regardless of what happens to market.
  4. Retail (B2C) is the vertically integrated approach as described above (“seed-to-shelf”). It has the potential to deliver the highest profit margin but also carries the highest risk. You’ll need to budget for marketing to compete directly with established popular brands. Building a cannabis or hemp brand is no longer a “build it they will come” scenario. Just like with any other product, you will need either an outsourced marketing agency or in-house marketing team to help make your brand a success.

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.

Future-Proofing your Extraction Business in an Uncertain World

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.

CBD vs. THC is Old Hat: It’s now all about Cannabinoid Manufacturing

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.

Stay Agile and Extraction-Agnostic to Market-Specific Needs

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:

  1. Understanding and staying informed of the current state of your market
  2. Prioritizing the consumer and their demands
  3. Preparing for up-and-coming cannabinoid derivatives and their end-products
  4. Having processes and technologies in place to accommodate shifting needs
  5. Anticipating the next legislative changes for your state  

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.

Navigating Market-Specific Extraction and Processing Solutions

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:

  • What are my popular SKUs in my market? What’s the best extraction method to produce those?
  • How am I going to build a small platform for each of these different extraction methods? Remember you need to be agile so you can move with the market.
  • What are my state’s policies/regulations for hemp/cannabis extraction and processing today?
  • What extraction methods are allowed, which are not?
  • What’s coming down the regulatory pipeline? How likely is it that my state flips to full adult use in the near future?
  • What’s my niche? Are you focused on full-spectrum extracts or are isolated cannabinoids your thing? Are you launching your own B2C consumer brand or are you satisfied with selling your product wholesale (white labelling)?
  • What is the anticipated biomass availability to ensure that you meet demand?

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.

Pivoting from Medical to Full Adult Use

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.

Extraction is Extraction: Don’t Forget Other Botanicals!

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.

Planning and Scaling your Extraction Business

Start by asking the Right Questions

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:

 

  • Market research: What products are selling in the market now what will sell in the future?
  • How will you differentiate your brand amongst your competitors to ensure that it stands out from the pack?
  • How do you ensure that your lab will be adaptable enough to meet evolving market demands? For example, flipping from medical to adult-use?
  • What cannabinoid derivative end-products do you intend to make and sell?

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!

Scaling Your Lab: Two Strategies

Here are two different strategies we’ve seen work well, and encounter most often in labs that are scaling successfully: 

  1. Organic Growth: This method involves identifying pinch points or limiting parts of your process (where material seems to build up) and investing your capital accordingly. This could mean purchasing a Falling Film Evaporator (FFE) and ditching most of your roto-evaporators, or buying large IBC totes to store solvent or solution in, or a walk-in freezer to freeze biomass or solvent. Eventually these incremental investments add up. This method allows you to grow as you experience success, and it’s low risk. If you are diligent and allocate funds each quarter towards equipment investment, you will always be upgrading and improving your lab.
  2. “Go Big or Go Home” AKA Heavy Investment to Capture Market Share: The second option is for those who are confident, have the (big) money to invest, and are willing to take on a bit more risk. You know what end-products you intend to produce, and at what scale you intend to produce them. You then spec out new equipment, buy a whole new extraction suite, and make the leap to the next level.

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.

Estimating Costs and Capital Expenditure

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~*
* NOTE: All figures are rough estimates and used for illustrative purposes only.

Estimated throughput for this extraction suite as follows, based on the assumptions:

  • 10% biomass potency, and,
  • 3:1 (biomass:ethanol) saturation ratio.

Biomass:

  • 150 lbs of biomass / hour
  • 1200 lbs of biomass / 8 hours

Crude Distillate:

  • 10 kg of crude / hour 4 kg of distillate / hour
  • 80 kg of crude / 8 hours 35 kg of distillate / day ($140,000)

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:

  • Extracting 10,000 lbs of biomass / day
  • Producing 720 kg of Crude extract / day
  • Producing 300 kg of Distillate / day

With a wholesale value of $4,000* / kg of distillate – that equates to $1,200,000* Gross Income / day

* NOTE: All figures are rough estimates and used for illustrative purposes only.

Staffing and Expertise

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:

  • 1 operator milling biomass, packing bags, and placing in freezer
  • 2 operators on the CUP-30’s and filtration skid
  • 1 operator running the FFE-60 and the Roto-Evaporators
  • 1 operator running the glass reactors for decarbing
  • 1 operator running the 2x RFD’s (most likely the highest trained and paid operator)

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.

Safety and Compliance

The two most important considerations are:

  1. Compliance: Ensuring your lab is built to be C1D2 / D1 compliant and that you understand and practice the accompanying regulations. Not only is it important that you and your staff remain safe but that you remain within compliance in your local jurisdictions—saving you money down the road by preventing costly re-builds. 
  2. Solvent Safety: How much solvent (ethanol in our case) you can have in process at any given time, and how much you can store on-site at any given time. This factor is dictated by your local jurisdiction and regulations, and plays a big role in determining your lab’s actual and realistic daily throughput of material. The limits will also inform where your capital should be invested to solve any issues that arise with this restriction. 

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. 

How to Write your Cannabis or Hemp Extraction Business Plan

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. 

Download the Cannabis Extraction Business Plan Template

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. 

Cannabis Extraction Business Plan: Table of Contents

  1. Executive Summary
    1. Company Summary
    2. State vs. Federal Laws
    3. Getting Started: Startup Plan
    4. Investment & Capital Injections
    5. Financial Projections
  2. Market Overview
    1. Global Market
    2. US Hemp/Cannabis Market
    3. [Your State] Hemp/Cannabis Market
    4. Target Market
    5. Competition
    6. Competitive Advantages
    7. SWOT Analyses
  3. Revenue Plan
    1. Revenue Benchmarks
    2. Products & Services
    3. Key Customers
    4. Branding, Marketing, Advertising
  4. Operating Plan
    1. Facility: Location and Floor Plans
    2. Equipment: Cost Projection
    3. Extraction and Refinement Processes
    4. Packaging and Labeling
    5. Sourcing, Manufacturing, Logistics / Distribution
    6. Legal, Codes, and Compliance
    7. Testing and Quality Control, Traceability (Seed-to-Sale)
  5. Organizational Structure & Management
    1. Executive Team
    2. Personnel Plan
    3. Org Chart
    4. Exit and/or Succession Strategy
  6. Financial Plan & Projections
    1. Funding Analysis
    2. Operating Expenses
    3. Profit and Loss Forecast
    4. Cash Flow Statement
    5. Balance Sheet
    6. Break-even point
  7. Assumptions, Sensitivity, and Risk
    1. Assumptions: cost, pricing, volume, competitive dynamic
    2. Sensitivity: scenario planning, worst vs. best case, anticipated
    3. Risks: regulatory changes, external forces (pandemic, economic downturn, oversupply of biomass, consumer preferences (e.g. vape crisis).
  8. Appendix
*Note: Cannabis and hemp extraction business conditions will differ from state-to-state and you must comply with the laws of your specific state. Licensing requirements will also depend on the type of extraction business you wish to start. Please ensure that you do your research with your local AHJ (Authority Having Jurisdiction) before starting your business.