Welcome to the next installation of our practical guide on the pros and cons, and timing of each method to maximize your entry into cannabis the ~legal~ way. Today, we’re focusing on cannabis co location.
Wikipedia defines colocation as “the placement of several entities in a single location.”
In fact, a Type S License is actually one form of colocation, since every entity that comes into our facility at MyGN is their own separate licensed entity working under one roof. In essence, you can think of it as an incubator. If we’re excluding MyGN, the issue with cannabis incubators today is that right now they don’t have the ability to provide a license and production spaces.
There are 3 types of cannabis colocation:
- Buying a cannabis colocation license from a flipper
- Type S License (MyGN Model)
- Working under someone else’s license
In this article, we’ll only focus on (1) buying a colocation license from a flipper.
To read about the MyGN model, read The MyGN Type S License.
Working under someone else’s license? We just don’t suggest it. Unless you have an incredibly good friend, these deals are complicated, high risk, and you have zero control now or in the future. Even if you have an incredibly good friend, coming under someone else’s license is like having roommates that are constantly asking to use your stuff every day and if one roommate messes up – everyone gets kicked out and sued. It’s also technically not even colocation since you are not a separate entity on paper.
What is Buying a Cannabis Co Location License from a Flipper?
As cannabis evolves, flippers flop along. A whole industry has evolved where “flippers” buy green-zoned land, divide it, then gets each space pre-approved for licenses using connections and money. Once pre-approved, they “flip” each divided space for profit to the highest bidder.
This type of colocation is in essence a more expensive version of getting your own Type S License. The key difference is that in most cases, you will have to finish the licensing process, buildout, and equipment.
Is Buying a Cannabis Co Location License from a Flipper Good for Entrepreneurs, Startups, and Small Business?
Think of it this way. You pay $500K to purchase a license that you also need to build out, buy equipment, finish licensing, etc. before being able to produce your first product.
The best time for flipping a cannabis colocation license is:
- AFTER you already have your Type S License; and/or
- Are ready to scale up your existing brand; or
- If you have a ton of money.
How can I get a Buy a Cannabis Co Location License from a Flipper?
Step 1: Look on cannabis real-estate sites, generally you will find a few places that seem to have multiple licenses for sale with one address.
Step 2: Negotiate the purchase of your license, do the legal paperwork to transfer company ownership that has license approval.
Step 3: Finish build-out and equipment purchases to finalize licensing.
Step 4: Produce and sell your product.
What are the Cons of Buying a Cannabis Co Location License from a Flipper?
A quick reminder, this is buying a cannabis colocation license from a flipper – not getting a Type S License.
Buying a license is expensive. The reason being is that most people when they are selling are doing so to “flip” the license. Just like when people “flip” houses, someone else buys low and sells to you high.
In flipping a cannabis colocation deal - you need to finish building it out. This costs time and money.
Potential Equity, Profit-Share, Etc.
In flipping a cannabis colocation deal, terms will vary. Some facilities will take equity of your company, require you to work for them, and/or take a portion of your revenue every month. Very few, if any, are like MyGN that provide a complete support network without taking equity or a share of your revenue.
Potential Burn Rate
You might have to pay money every month even if you are not producing yet as you finalize your licensing, buildout, and wait for equipment.
What are the Benefits of Flipping a Cannabis Co Location License?
- License ownership
Of course, the biggest value is being able to own your own license which provides control and freedom. Just like getting your Type S License or applying for own cannabis license, having a license equates to control over your destiny.
- Faster Ramp-Up Times
While slower than a Type S License since you have to build out and buy equipment, this is much faster than applying for your own license from scratch although it could still take months to finalize the license.
- Potentially, Community
When built with intention, cannabis colocation provides a community to bounce ideas off of and learn from others mistakes. Usually, these licenses are all put next to each other so you’ll have other companies to talk to and learn – if they want to collaborate with you.
What are Costs to Consider When Buying a Cannabis Co Location License?
Status of Cannabis co location license
Are you buying:
- An existing, production-ready cannabis colocation license; OR
- A pre-approved cannabis colocation license without any buildout;
Depending on what you’re getting, this will determine how much additional work you need to do, how much it will cost, and more.
Cannabis co location license purchase price
Evaluate the license you are purchasing SEPARATE from everything else. The average value for an approved cannabis license used to be several million dollars. Today, the price ranges from $250,000 to $1,000,000 or higher for the license alone. This is not including equipment, buildout, and other assets.
Some factors to consider when valuing the colocation license purchase price are:
- Land vs License Price – are you buying land with a license? Or just buying the license tied to the land?
- Location – are you buying in the desert or in a strategic area like Santa Ana? This matters for your distribution
- Neighborhood – are you buying in a place where crime and theft are common? Or a safer area where police will come by quickly?
- Cost for transfer – how much will it cost for someone to perform the transfer? Are there any restrictions you should be concerned about?
There are a lot of factors to consider when purchasing your colocation license when someone is flipping the license since usually their primary concern is how to turn a quick profit.
Cannabis co location license build-out
Imagine if you bought a blank warehouse with approved “plans” for $500,000 in construction costs. Even though it is “pre-approved” you still need to pay to finish the buildout and get the final license in hand. Depending on how complete the build out is, this can get very expensive. Tack on your build-out costs to the license purchase price.
Cannabis co location license equipment purchases
When flipping a cannabis colocation license, the flipper is looking to attract the greatest number of buyers – so they leave it to the final buyer to modify the space to suit their needs. For example, the needs of a gummy manufacturer packaging products into tins is vastly different than an infused pre-roll manufacturer packaging into tubes.
Additional Cannabis Co Location Deal Terms
In flipping a cannabis colocation deal, terms will vary. We’ve identified three main versions:
- The Straight Flip: it’s exactly how it sounds; you’ll pay for a pre-approved licensed location and have to finish building it. It’s clean, but expensive.
- The Equity Trade: Some facilities will take up to 49% equity in your company but provide a lower license purchase price.
- The Big Brother: You’ll buy and own the license at a discount but pay monthly rent and a percentage of your product sales. This is common in cultivation colocation licenses.
Make sure to understand the impact that this will have as you try to grow and scale your business. These terms can have long term impacts for your business.
What’s the Cost to buy a Cannabis Co Location License from a Flipper?
Be prepared to pay at a minimum $250,000 to $1,000,000+.
The price range varies so much because there’s a lot of different ways that people flip a cannabis colocation license. Generally – if you want to pay less cash up front, you’ll need to give away more equity and pay more on the back end.
An example that we have seen is that someone bought a cannabis cultivation license for $250,000, but they had to buy all the grow equipment and lights, pay a monthly rent of $20,000 and 10% of any product sales above a certain amount.
When should I consider Buying a Cannabis Co location License from a Flipper?
Buying a cannabis colocation license from a flipper is great when:
- have an existing cannabis license so you don’t “need” the license;
- You have product sales in licensed dispensaries to give you leverage in negotiations; or
- You just have a lot of money
If you aren’t at that stage, wait for it…
Then get a Type S license!
We hope this was educational and informative, if you have any questions or want to inquire about getting your own cannabis license, contact us!
Go Green the Way You Want, we do the Rest.
If you haven’t read them yet, we recommend to read more about other ways cannapreneurs enter the industry: