Researching into Cannabis Co-Man or Cannabis Contract Manufacturing?
You’ve come to the right place. Welcome to the next installation of our educational series on how to enter the cannabis industry where we provide a practical guide on the pros and cons, and timing of each method to maximize your entry into cannabis the ~legal~ way.
At My Green Network, we believe transparent business is the best business. After all, our members’ success is our success. Let’s dive in to a big question that new cannapreneurs often have…
What is Cannabis Co-Manufacturing?
Also known as “cannabis contract manufacturing” or “cannabis co-man,” this route is a great way for existing cannabis brands with capital to expand geographically or start new product lines.
A key difference between MyGN’s Type S License process or even getting a traditional cannabis licensing is that you will not own your own cannabis license.
Using a cannabis co man means you will be giving up control over your production, control, and formulation for someone else to do.
Is Cannabis Co-Manufacturing Good for Entrepreneurs, Startups, and Small Business?
The best time to approach a cannabis co man is AFTER you already have your own cannabis license, you are producing consistent cannabis products, and you are already in multiple stores and need to scale to hundreds of thousands of units.
Before you make any decision, you should always compare the pros and cons of getting a Type S License vs cannabis contract manufacturing as we go over in this article.
Is Cannabis Co-Manufacturing Legal in California?
Cannabis Co-Manufacturing is only 100% legal for already licensed cannabis operators.
California’s DCC Regulations, provide in Section 15001(b), “Commercial cannabis activity shall only be conducted between licensees.”
So what if you don’t own a license?
If you don’t own the license, you’ll need to find another way to justify that you are getting paid anything from the cannabis business.
How do I get into Cannabis Co-Manufacturing in California without a License?
Step 1: Find a licensed California cannabis manufacturer that is willing to take the risk to create your product for you as an unlicensed cannabis operator and has the expertise to produce your product.
Step 2: Have your product formulation and ingredients lined up and ready to go. Most likely, your co-man will have a source for the cannabis ingredients.
Step 3: Find out their costs and timeline to create the product on your behalf. This process will take a while and negotiation is a must, we go into these costs later in the article.
Step 4: If you’ve calculated out the costs to create a product through your co-man, see if it makes financial sense for you. If it does, set up the deal but we caution you to be careful how its structured.
Step 5: Have the co-man produce products on your behalf. Keep in mind additional costs and focus on sales.
Step 6: Begin selling your product. You will need to negotiate with your co-man on how to get samples to your sales outlets and the liability for license use.
What are the Cons of Cannabis Co-Manufacturing?
There are quite a few here, we’ll list our five biggest cons for cannabis co-manufacturing.
You do not own the cannabis license
Anything cannabis related you’re at the mercy of your co-man to do. From transporting, selling, or anything regarding your product to even showing investors or buyers how your product is created.
One Manufacturer, Shared-Liability
Everyone uses one license; one mistake can shut down everyone using the co-man. For example, Co Man X produces for Company A and you, Company B. Company A gets sued by consumers who say their label claims are fake, but Company A has no license which means Co Man X actually gets sued as the producer. Company B’s production, sales, is also at risk now. Once shut down, all of Co Man X’s inventory, assets, and equipment can be taken away.
Required to Share Intellectual Property
A great product is a great product. If you have a specialized production process or formulation, using a co man means you have to share it. A non-disclosure agreement can only go so far.
Situations change but your production will not. For example, you contract to produce and sell 30,000 units every month for the first 6 months and shell out $90,000 dollars. Your product doesn’t sell the way you projected and your co man starts charging for additional storage. The following month, your contract says you need to pay for production, so they produce another 30,000 units and you owe another $150,000 dollars, and then – they increase storage fees to $600.00 a day.
No Control Over Anything
Cannabis Co mans produce according to their standards but well, sh*t happens. If quality isn’t up to your standard, the co man has the control. Most likely, you’ve paid for the product already so if you’re not satisfied, you either keep paying to work with that co-man or find a new one. This can get very expensive and/or delay the launch or consistent supply of your product to retailers.
At some point, almost every licensed operator realizes that most co-manufacturers just won’t create the product the way they want it to be done or at the level they want. As the old adage goes:
“If you want something done right, do it yourself.”
What are the Benefits of Cannabis Co-Manufacturing?
The timeframe will be similar to starting with us at MyGN. Since you will not have to apply for any license, you need to hire attorneys, negotiate and structure the deal, identify COGS, do test runs, etc. before starting full production.
Cheaper than Traditional Licensing
While it won’t be as affordable as MyGN, expect to pay around $100,000 to $200,000 for capital expenditures, raw ingredients, labor, etc. This is not including your marketing and sales expenses.
High Production Output
A big benefit is that with high MOQs, a co man deal will generally have high production output. So, co-man is great for companies that know they can sell tens of thousands of units or have big money behind them.
What are Costs to Consider for Cannabis Co-Manufacturing?
Cannabis Contract Manufacturing Formulation Costs
Though estimated costs for all of those vary, depending on how many of the components you can manage well yourself, at a minimum you can expect to pay $5,000+ to $50,000 to professionally formulate your products.
Cannabis Contract Manufacturing Minimum (MOQ)
Co-Man MOQs will vary based on production capacity, equipment, etc. and are generally – very high in order to make it worthwhile. Generally, co mans are to scale – not for brand new companies with no sales lined up.
Cannabis Contract Manufacturing Cost of Goods Sold (COGS)
The basic consideration is your COGS. How much does it cost to produce your product including labor, opportunity cost, and ingredients? While the ingredients are relatively simple to quantify, shipping to the co man and any upcharges for labor are a serious consideration. For example, a co man’s labor costs aren’t just limited for production, they need to charge for packaging, assembly, stickering, labeling, sourcing, intaking your ingredients, compliance, and more.
Cannabis Contract Manufacturing Storage
One of the biggest hurdles to overcome is licensed cannabis storage because it is very valuable. Think of it this way, normal storage might be $5 sqft/month, a cannabis business will generally 5x the cost to $25 sqft/week.
In most cases, co mans will set a time limit for you to move your product after already building this storage fee into your cost. A standard time frame is 3 days. So, if after 3 days, your product hasn’t moved out of their storage, you might start paying additional fees like $700/day until your product is sold.
Cannabis Distribution Fees and Network
Cannabis distribution is key. Just because your co man can produce, doesn’t mean they can also distribute your product.
The cannabis distribution license is a separate license and in order to transport your product, you need to use a distribution license. Normal cannabis industry rates vary from 10% to 33% of gross value with minimums of $200-$1000. Weight, volume, distance, and time will affect the cost as well.
Cannabis Contract Manufacturing Taxes
As a cannabis company, many times the co man will also need to calculate cannabis manufacturing taxes (city and state) and cultivation taxes which are passed down. This can get complicated and expensive.
Cannabis Contract Manufacturing Profit Margin
Cannabis co man profit margins will vary. In most cases, 5% is low, 10% is average, 25% is high. They’ll build this into the deal with you.
Cannabis Contract Manufacturing Contract Length
Co mans will want a commitment from you so they don’t waste their time, such as a long-term contract to ensure that if they are putting in resources - they won’t lose money. Any good co man will want long-term revenue where they can be guaranteed business and therefore even if you don’t sell your product – they still earn money producing your product. A single mistake can cost tens of thousands, if not hundreds of thousands of dollars for a co man. So, just as there is a risk on your side, the co man takes the risk of producing a product that they don’t know will sell.
A standard time is around 6 months for these types of deals and they might ask you to also put down a deposit up front.
So What is the Cost for Co Manufacturing?
Be prepared to pay at a minimum $250,000.
In a cannabis co man deal, your mileage will vary, aggressively.
Before starting any co-manufacturing, you should understand cannabis co mans will receive inquiries all the time by people looking to “launch their dream product.”
Much like back in the legacy market where everyone touted “my sh*t is fire”, everyone believes they have a great product. Approaching a cannabis co man means you are already the weaker party in negotiations 99% of the time.
If you approach a co man to produce for you, you should be prepared to pay at a minimum $250,000 for formulation, production, capital outlay, and to cover any issues that could arise – not counting your marketing and sales budget.
What Are Additional Considerations I Should Think About before Using Cannabis Co-Manufacturing?
There is a TON to consider. We’ll list out some that we think are uniquely, hyper-relevant to the cannabis co man industry.
Cannabis Contract Manufacturing License Status
While this seems obvious, verify the co man’s license with the state’s website https://search.cannabis.ca.gov/.
Black market operators, CBD/Industrial Hemp misconceptions, and even fraud does occur. Some black market co mans or cbd companies will falsely use someone else’s cannabis manufacturing license to close the deal. In this situation, you also run the risk of illegally producing and selling cannabis products.
Cannabis Contract Manufacturing Experience
Since you don’t own the cannabis license, this means you are relying purely on the co man’s experience. Ever read a recipe the first time and still completely miss the mark? Then on top of that, how do they ensure consistent quality, accurate dosage, Taste, flavor, texture, etc. Ultimately, the resources, money, and time come out of your pocket.
Cannabis Contract Manufacturer Financial Health
The worst thing that can happen is when you have a contract manufacturer that closes its doors and leaves you stranded with a large unfulfilled order. Whether you’re meeting with a new or established company, always ask them point-blank about their stability and financial health. Look into their history as well. If a contract manufacturer offers pricing that seems too good to be true, ask questions.
Intellectual property Theft
There are definitely situations where a co-man has produced for another company “not to satisfaction” which kills the deal. Then a short while later, release a similar co-man branded product as their own with just minor formulation modifications. Even if you are clear on the terms of your intellectual property, just keep in mind adding in one ingredient or changing one step is a new product.
Legal Fees, Attorneys
A necessary evil that we always have to bring up. As lawyers ourselves we always strive to think of the worst-case scenario and prepare for it. There’s a lot of risk in a co man deal because what DOES happen if the co man ends up going bankrupt? If they don’t produce your product on time and your sales outlets are getting frustrated with delays? What happens if the DCC realizes you are an unlicensed entity receiving the profits? What else is the co man doing which could affect your business?
A co man is usually producing for multiple companies and a single deal can shut down the whole operation. There are many cases where brands using co mans have been burned, lose a bunch of money, then have to try again.
Who is Cannabis Co Manufacturing Good for?
At the end of the day, cannabis co manufacturing is good for already licensed cannabis operators who have a product that is already on the market, is selling well, and needs to scale up their production to hundreds of thousands to millions of units a month.
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:
⦁ The Top 5 Ways to Start Your Cannabis Business
⦁ Part 1: The MyGN Type S License
⦁ Part 2: The Traditional Route to get a Cannabis License
⦁ Part 3: What is Cannabis Contract Manufacturing?
⦁ Part 4: What is Cannabis White Labeling?
⦁ Part 5: What is Cannabis Co Location