Now is an Opportune Time to Enter the California Cannabis Market

California’s cannabis market, though fraught with challenges, offers unique opportunities for savvy entrepreneurs looking to establish or expand their footprint in the industry. As the largest legal cannabis market in the United States, its sheer size and potential for growth make it an attractive option for investment through purchasing existing licensed businesses. Here, we examine the factors supporting this strategy, while acknowledging the obstacles and how they can be mitigated. Now is a unique opportunity to act prior to the cannabis being rescheduled.

Opportunities for Buyers in the Current Market

1. Market Stabilization and Asset Availability
   Over the past few years, California’s cannabis industry has faced economic headwinds, including competition from the illicit market and over-regulation. However, this has led to a more stabilized market where many businesses are either consolidating or looking for buyers. Purchasing an existing business allows investors to bypass the arduous licensing process and inherit operational infrastructure, client bases, and market positioning. See listings of available businesses on the Cannabis Business Opportunities section of this blog.
2. Decreased Valuation of Assets
   Many cannabis businesses have seen a decline in valuation due to market pressures, presenting buyers with an opportunity to acquire assets at lower prices. These include established operations with cultivation, retail, or distribution capabilities, which can be optimized for profitability under new management.
3. Tax Relief and Legislative Adjustments
   California lawmakers have begun addressing some of the challenges facing cannabis businesses. There is continuing pressure to lower tax rates and streamline regulations with the aim of reducing the operational burden. For example, recent changes to enforcement policies and collaboration with regulators highlight an evolving framework to support legal operators.
4. Projected Long-Term Growth
   Despite its challenges, California’s legal cannabis market is projected to grow steadily, with estimates suggesting a market valuation of $5.37 billion in 2023 and continued expansion through 2030. Entrepreneurs entering now can position themselves to capitalize on this trajectory.

Challenges and Strategies to Overcome Them

1. High Taxes
   One of the most significant hurdles is California’s high cannabis taxes, which place strain on legal businesses. Buyers need to focus on financial due diligence to assess profitability and seek properties in jurisdictions with more favorable local tax policies.
2. Benefits of Rescheduling to Category 3
   The potential rescheduling of cannabis from Schedule I to Schedule III under the Controlled Substances Act would have a significant impact on the industry. One key benefit is the change in how the Internal Revenue Code (IRC) Section 280E applies to cannabis businesses. Currently, under Schedule I, cannabis businesses cannot deduct ordinary and necessary business expenses other than the cost of goods sold (COGS). This results in disproportionately high tax burdens compared to other industries​. If cannabis is rescheduled to Schedule III, Section 280E would no longer apply. This change would allow businesses to deduct ordinary business expenses like any other legal business. This would likely result in a substantial reduction in effective tax rates, improving profitability and making the industry more financially sustainable​.
3. Regulatory Complexity
   California’s regulatory framework can be daunting, but purchasing an existing business means acquiring a license that already has achieved some level of compliance. The difficult tasks of finding a green zone location and achieving the initial approvals have already been achieved. Partnering with experienced legal counsel is essential to navigate through any remaining steps of local and State approval of the new business ownership.
4. Illicit Market Competition
   While the illicit market remains a challenge, enforcement efforts are continuing to support the regulated industry. Buyers should focus on quality assurance and strong branding to build consumer trust in legal cannabis. Especially in California cannabis where there is an established cannabis culture, brand authenticity is essential.

Why Act Now?

The combination of favorable conditions for buyers, such as reduced asset prices, improving regulatory landscapes, and the growth potential of California’s cannabis market, makes this a favorable time to consider entering the industry through acquisition. While the challenges are real, they are not insurmountable. Strategic planning, coupled with professional guidance, allows buyers to mitigate risks and position themselves for long-term success in this dynamic market.

For those ready to explore opportunities, working with knowledgeable legal and business advisors is crucial. At Wicker Law Group, we assist clients in navigating the complexities of buying and selling licensed cannabis businesses, resulting in smooth transactions and strategic market entry.