Every investment comes with some risk. But in the cannabis sector, the heightened risk of the operations means it’s even more crucial to understand how to safeguard your cannabis business ROI.
California cannabis business tax liability, compliance-related risks, and law changes make this space risky. But with the right moves, it’s possible to get an incredible return on your investment.
Here are a few quick tips to guide your cannabis investments:
- Conduct your due diligence for a full view of all risks and potential ROI on your investments.
- Research the competition and consider how the market will evolve in the future.
- Analyze the types of shares you’re purchasing and consider how dilution can impact them.
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Despite heavy California cannabis taxation, the industry is expanding like no other. As the potential for impressive cannabis business ROI increases, so does the number of people willing to invest. The types of return on investment available–whether interest, dividends, or capital gains–are tempting potential investors.
Investment opportunities in the cannabis sector are vast–and they’re multiplying. Experts claim that by 2022, the global cannabis market might be worth up to $32 billion.
The North Bay Business Journal also reported that global spending is on track to reach $57 billion by 2025. But how does this translate into giving you a solid cannabis business ROI?
At this point, the cannabis sector still has exponential potential for growth and impressive revenue. However, it isn’t very easy to evaluate investment options, especially if you’re just getting started investing.
While you might be able to gain some broad insight from a business ROI calculator, it’s always a smart move to look at the market trends for additional insight. By checking how the market is fluctuating, you should be able to get a good idea of the volatility of the cannabis sector.
At this point, there’s not much data on past trends and company track records because the industry is still immature. With this in mind, how can you tell if you’ll get a solid cannabis business ROI?
In this guide, we cover how to analyze the risk associated with investing in emerging sectors, as well as how to minimize your risk. Here’s what you should know about cannabis investing and the return on investment you should expect.
ROI in the Cannabis Sector
ROI in the cannabis industry is comparable to investing anywhere else; the higher your potential return on investment, the more risk you’re taking on. But just because you’re willing to take on more risk doesn’t mean you’re sure to receive a higher return. However, the risks involved are still more.
Determining the viability of your investment means performing due diligence. This is how you’ll fully understand your investment, what you have to gain or lose, and the company’s reliability.
Consider the following as you’re performing your due diligence:
- The problem they solve. Does anyone actually need this business? What true customer pain point does the company solve?
- The company’s team. Look at who is involved in the company’s activities to get a better idea of what you can expect. How skilled is the team in cannabis? Does the team have experience? What can the team handle? Does the team have a solid list of connections?
- The company’s competitive advantage. Does the company’s team do or have something that gives them a competitive edge?
- The company’s traction. How long has the company been in operation? Does it have customers or sales?
- The company’s capital table. Who is on the company’s capital table, and what’s the split? Whoever is on the capital table will likely remain a part of the company long-term until there’s enough liquidity to make an exit.
Cannabis Business Investment Risks to Consider
As with any investment, investing in cannabis doesn’t come without a set of risks. A return on investment analysis is essential to improve your chances of obtaining the returns you crave.
With this in mind, potential investors should consider the following as they evaluate investment opportunities in the cannabis sector:
Regardless of how good the investment looks, a positive return on investment isn’t guaranteed.
‘Rags to riches’ and overnight success stories fuel cannabis investments. But many cannabis companies are risking their success to achieve profit and sales in the future. Your return on investment analysis should take this into account.
With this being the case, many times, investors tend to focus on the appeal of profitability in the future. Thus, it’s crucial to keep in mind that while the company might say it’ll generate profit or increase its stock’s value, there’s simply no guarantee.
Analyze the business model and how external factors can impact it. This, of course, includes how regulation might affect its operations favorably or negatively.
Even though some states have made cannabis legal in one way or another, federal prohibition still plagues the industry.
While some states have made using and selling cannabis for medicinal and/or recreational purposes legal, it’s still prohibited federally. Since it’s still illegal on the federal level, the federal government can seize a cannabis business’ assets without hesitation. If a cannabis business has its assets seized, the investments are nearly impossible to recover.
Look over the investment’s legal strategy and all future plans. This should give you a good idea of how the company plans to evolve with new legislation. The safest investments are the companies that focus heavily on compliance.
While the company might seem on a fast-track to success, competition could become an issue down the line.
As the industry matures, so do the markets. New companies will continue entering the market, and this translates to additional competition for existing businesses.
With increased competition comes the potential that existing companies will need to shift their current business model and product prices to remain competitive. This can have a direct impact on the value of an investment.
Consider what your potential investment has to offer. Think about the competitive advantage that’s securing its market position. If there’s a high barrier to entry to compete on the company’s level, this could be a good sign.
Keep in mind that a price difference isn’t a long-term competitive advantage. Your return on investment analysis should take intellectual property, technology, and proprietary processes into consideration.
What Else Should You Consider?
While you might be tempted to invest in canna-businesses directly working with cannabis, many companies offer support services to the industry. Looking into the pharma and biotech companies producing cannabinoid-based drugs can prove fruitful. Also, many service and product providers previously operating outside of the cannabis sector are diving in since legalization.
Need assistance investing for the best cannabis business ROI? Contact us today for expert assistance.