Beyond the Arches #11: Is cannabis the new green gold?
Cannabis industry poised to grow as regulators consider reclassification
Over the past few months, reports have come to light about the U.S. Department of Health and Human Services’ recommendation that the Drug Enforcement Agency (DEA) reclassify cannabis from Schedule l of the Controlled Substances Act (CSA) to Schedule lll.
While this is by no means a home run for the cannabis industry, the news has fueled a marked increase in investment interest in the space, with ETFs like ETFMG Alternative Harvest (MJ) and AdvisorShares Pure US Cannabis (MSOS) seeing significant growth.
What the move from Schedule I to Schedule lll means
Schedule I is a classification applied to drugs with no currently accepted medical use and a high potential for abuse. Examples of Schedule I drugs include heroin and LSD. On the other hand, Schedule III controlled substances are drugs with a moderate to low potential for physical and psychological dependence. In general, these substances (two of which are ketamine and Tylenol with codeine) are FDA-approved, only legally available by prescription, and uniformly regulated by the federal government.
What this does NOT mean for the cannabis industry
Reclassifying cannabis as Schedule III would not close the gap between state and federal legislation related to the substance. State-legal “adult use” and/or “recreational” cannabis transactions remain illegal at the federal level.
What this DOES mean for the cannabis industry
Reclassification of cannabis as a Schedule III drug would mean that Section 280E of the Internal Revenue Code would no longer apply. Section 280E forbids the deduction of ordinary business expenses from gross income associated with the trafficking of controlled (Schedule I or II) substances. Rescheduling would also give researchers more leeway to explore additional medical uses for cannabis and reduce barriers to entry for industry investors and entrepreneurs.
Even with conflicting federal and state policies in place, the demand for cannabis has been on the rise. According to Pew Research, public sentiment continues to trend toward legalization.
Retail sales are expected to boom over the next decade, with medical and recreational sales in the U.S. projected to potentially reach $33.6B by the end of this year alone.
Given the booming investment landscape and a positive outlook for increasing demand, how can retail investors gain exposure to this industry?
Direct investment opportunities
Here are direct investment opportunities in the burgeoning cannabis industry that can be leveraged right now:
- Bud Love
Bud Love offers herbal mixers designed to be combined and enjoyed with cannabis, similar to a mixer in a cocktail. The company has developed a range of scents meant to be paired with different strains and none of them contain cannabis, THC, or nicotine. The team behind Bud Love has decades of experience in innovative technology and scaling businesses for IPOs and exits. They’re aiming to leverage the product’s >75% gross margin to meet a 2026 revenue target of $100M. Bud Love is currently raising capital via WeFunder.
- Reef Grows
Reef Grows is on a mission to convert cannabis consumers to cultivators with a premium home grow experience. The company’s craft cultivator pods are outfitted with full-spectrum LED grow lighting, a child-proof lock, privacy shade, odor filtration, and automated irrigation that can be controlled via a mobile app. The first batch of cultivators, starting at $4,999 apiece, are slated for delivery in Q3 2023. Reef Grows is currently raising capital via WeFunder.
Cann-Ade has developed a line of USDA-certified organic hemp-infused beverages. Each bottle contains organic fruit juice and triple-filtered water infused with 20 mg of potent, third-party lab-tested hemp. All of Cann-Ade’s beverages are low-calorie, vegan, gluten-free, and kosher. The company already distributes its products to 600 retailers across the United States, including Dunkin Donuts, 7-Eleven, Exxon, Food Town Supermarkets, and ShopRite. Cann-Ade’s Reg CF offering is currently live via StartEngine.
STR Investment Opportunities
Short-term rentals (STRs) are a flexible and often lucrative way to add real estate to your investment portfolio. Check out these opportunities, courtesy of our friends at The Offer Sheet.
A rustic gem in the heart of Yosemite
This beautiful two-bedroom, two-bathroom Lindal Cedar home is situated within Yosemite National Park on nearly a quarter of an acre of private property. The large windows take advantage of breathtaking views of the pines, and the location has made this a very successful vacation rental. The home features a newer HVAC system and a three-year-old metal roof. It has a water and sewer system and an automatic generator in case of a power outage.
- Average daily rate: $499
- Expected occupancy rate: 57%
- Monthly expected income: $8,651
- Monthly expected expenses: $6,707
- Monthly expected cash flow: $1,944
- Expected cash on cash return: 9.1%
Convenient backcountry access in Colorado
3222 Middle Fork Vis, Fairplay, CO 80440 | $749,900
This three-bedroom, three-bathroom custom-built mountain home on two acres features open-concept living spaces that seamlessly flow together and soaring windows that allow nature in. You can take in the views of the surrounding mountains and valleys from the balcony and decks. The lower level features a full kitchen and family room, two bedrooms, and a second laundry room, which can function as a mother-in-law suite, short-term rental, or extra space for extended family. The current owners have short- and long-term rental history.
- Average daily rate: $431
- Expected occupancy rate: 59%
- Monthly expected income: $7,735
- Monthly expected expenses: $5,555
- Monthly expected cash flow: $2,179
- Expected cash on cash return: 13.0%
An off-grid waterfront escape in Maine
211 Caldwell Lane, Oxford, ME 04270 | $375,000
This unique two-bedroom, one-bathroom camp offers waterfront on both Whitney and Hogan Ponds. Whitney Pond is known for its great fishing, while Hogan Pond is known for its shallow and sandy waters. The camp offers stairs down to the water, with a landing area to enjoy the scenery. The camp has two main bedrooms, with extra space provided by a bonus room on the first floor. There are solar panels for the primary electric source, propane for heat, hot water, and an automatic generator, as well as an additional fireplace. Although the camp is off-grid, it’s only a short drive to town where you’ll find multiple grocery stores and restaurants.
- Average daily rate: $299
- Expected occupancy rate: 60%
- Monthly expected income: $5,457
- Monthly expected expenses: $3,556
- Monthly expected cash flow: $1,900
- Expected cash on cash return: 21.4%
An artist’s refuge in New York
203 Stone Jug Rd, Craryville, NY 12521 | $627,000
Perched commandingly on a knoll, this impressive, fully renovated two-bedroom, two-bathroom home has new thermopane windows as well as a new metal roof, hot water heater, septic system, and appliances. It features 200-amp service, wood floors, and fiber optic Internet service. Conscious of the changing climate, the owner sided the house in the Japanese method of Yakisugi, which preserves wood by charring it. The charred surface of the board makes the wood fire-retardant as well as resistant to rot, insects, and decay. The home is surrounded by more than nine sub-dividable acres with two ponds, towering old oaks and pines, and beautiful rock formations. There is a garage/workshop and a loft above, with a water line and electricity.
- Average daily rate: $368
- Expected occupancy rate: 67%
- Monthly expected income: $7,479
- Monthly expected expenses: $5,151
- Monthly expected cash flow: $2,328
- Expected cash on cash return: 16.5%
SMB Investment Opportunities
Courtesy of our friends at SMB Deal Hunter
Multi-faceted valet/car wash service in Harris County, Texas
This business has three revenue streams: 1) valet and parking management for malls, restaurants, ballparks, etc.; 2) wash and detail for valet cars; and 3) mobile detailing contracts for car manufacturing showrooms. They’ve been offered additional locations for expansion that they’ve turned down due to bandwidth – which presents a great opportunity for a new buyer. The margins are excellent, and the seller is willing to offer a seller note as that shows confidence in the business going forward. | View listing
- Asking price: $1,999,999
- Cash flow: $550,000
- Revenue: $1,000,000
- Established: n/a
Established custom sign design & manufacturing business in Chicago, Illinois
This business designs, manufactures, and installs custom-made signs that serve a variety of commercial customers, and has already doubled down on a specific customer demographic – 50% of sales are to parking lot companies. Most of the business’s customers are repeats and 21 of its employees have been with the company for many years. The retiring owners are open to financing 10% of the transaction. A growth opportunity here (as is the case with many businesses with older owners) is to modernize sales and marketing strategies and systems. | View listing
- Asking price: $3,725,298
- Cash flow: $917,028
- Revenue: $4,182,680
- Established: 1994
Professionally run & highly profitable culinary school in Duval County, Florida
This business offers fun culinary classes for families, couples, girls’ nights out, special occasions, team building, etc. Also offered are classes paid for by healthcare organizations to teach patients how to cook for themselves and their unique dietary needs. The business has a team of chefs and support personnel; the current owner acts as a GM and does not teach any classes. The margins on this business are impressive and there could be an opportunity to expand the same model into other geographies (maybe even similar to the “Paint and Sip” franchise model). | View listing
- Asking price: $1,350,000
- Cash flow: $520,200
- Revenue: $1,292,381
- Established: 2018
Relocatable art manufacturing business for urgent sale in Ontario, Canada
This is a 30-year-old profitable manufacturer of wall art that sells on Amazon, Bed Bath & Beyond/Overstock, and Wayfair. The owner is retiring at the end of December and is willing to accept the best cash offer for his business. It comes with existing staff but will require a new space as the seller is selling his existing real estate. This could be a great opportunity for a manufacturing business with available capacity or for someone who wants to expand the business into DTC. | View listing
- Asking price: $900,000
- Cash flow: $500,000
- Revenue: $2,000,000
- Established: 1999
Franchise Investment Opportunities
A selection of franchises you can invest in right now
Thriving waxing salon franchise in Austin, Texas
This business started from the ground up and has continuously grown for the past three years. There is great potential for further growth with an active owner-operator; this particular salon is currently run on an absentee basis. The 2022 revenues exceeded $411K and owner benefit was over $117K – which represents an 18% increase in revenue and a 31% increase in owner benefit over the prior year (2021 revenues exceeded $347K and owner benefit was over $88K). An established business embedded in the Austin community with a track record of positive growth, year on year. | View listing
- Asking price: $320,000
- Cash flow: $117,840
- Revenue: $411,981
- Inventory: $1,292
- Established: 2019
Unique children’s hair salon franchise in Fort Worth, Texas
This franchise has established a presence with a growing return customer base. The beautifully built-out location is in a high-traffic location in the Dallas-Fort Worth area. All haircuts include wash, cut, and blow-dry, with amenities such as novelty chairs, video game stations, the Tween Lounge, mini-cure and glamor rings, balloons, and, of course, lots of fun. The owner has a second location that is available as a package deal to qualified buyers. | View listing
- Asking price: $119,000
- Cash flow: $26,478
- Revenue: $248,270
- Inventory: $4,200
- Established: n/a
Highly profitable massage & facial franchise in Harris County, Texas
This location is a one-stop shop for massages, facials, hair removal, and (soon) body sculpting. There are also strong retail sales at the business that make up 6% of total revenue, with top brands like Dermalogica, ClarityRx, and M. Greengrass used in services and available for purchase. The sales, seller’s discretionary earnings, service offerings, and reputation of the business have grown year over year and proved to be pandemic-resistant, as members and new customers were eager to get back in after the shutdown. The corporate entity started the franchise in 2004 and there are now more than 500 locations in the United States and Canada. | View listing
- Asking price: $1,450,000
- Cash flow: $429,801
- Revenue: $1,483,514
- Inventory: $35,000
- Established: 2015