How to Start a Cannabis Extract Company

how to start an extract company

Starting a cannabis extract company is a lucrative business idea in the current climate of marijuana legalization in the United States. There are two main business models when it comes to cannabis extraction businesses:

  1. Solvent-based
  2. Solventless

It's also possible to produce both kinds of extracts in a single cannabis extraction facility. However, those who choose to do both generally only do so after they are successful in one approach or the other.

You'll achieve the best results with your cannabis extraction lab or facility by putting in the time to research the necessary licenses, perform market research, and create a detailed business plan before you start to invest any capital. A solid plan with high-quality equipment and raw materials will give you the best chance of growing a successful cannabis extraction business.

Why Starting a Cannabis Extraction Company Is a Great Idea

There are several reasons it's a great idea to start a cannabis extraction company:

  1. In 2022, 43% of revenue in the cannabis market involved the sale of cannabis extracts and products that included a cannabis extract as an infusion ingredient according to statistics published in Cannabis Science and Technology. This shows that there is a high demand for extracts in the cannabis market.
  2. It was observed in the same article that cannabis extracts are not as affected by price compression as primary products like flower. Focusing on processed products like extracts could be the best way to protect your profit margins going forward. 

How to Start a Cannabis Extract Company Step-by-Step

Follow these steps to start a cannabis extract company:

Step 1: Create a Cannabis Extraction Business Plan

Writing a business plan is the first and most essential step for launching a successful extraction operation. This plan will include:

Company Description

  • A description of the mission, vision, and scope of your extraction business 
  • The extraction methods and extraction equipment you plan to use
  • Whether you will run an isolated or vertically integrated cannabis operation

Market Overview

  • A global and local market analysis
  • Your target market
  • Your existing competition
  • Your company’s competitive advantages
  • Your unique value propositions
  • A SWOT analysis (strengths, weaknesses, opportunities, and threats)

Revenue Plan

  • How much revenue you plan to make
  • The products and services you will offer
  • Your anticipated customer base
  • Your business name, logo, and branding
  • Your marketing plan

Operating Plan

  • Practical details, including the projected size of your extraction lab and the layout of the areas for primary extraction and post-processing
  • Equipment lists and costs
  • Standard operating procedures/SOPs (more on this later)
  • Product packaging and labels
  • Supply chain management
  • Regulatory and compliance details
  • Testing and quality control
  • Seed-to-sale tracking

Organizational Structure

  • Who will be in the executive team
  • Staffing requirements
  • Organizational chart
  • Strategy for sale or succession

Financial Projections & Funding

  • Funding options and amounts
  • Projected ongoing operating expenses
  • Profit & loss projections
  • Cash flow projections
  • Break-even analysis

Assumptions, Sensitivity, and Risks

  • Assumptions: your anticipated costs, prices, and average sales volume
  • Sensitivity: worst and best-case scenarios and how you will respond to different scenarios
  • Risks: potential disruptions to the supply chain, changes in consumer demand, natural disasters, pandemics, recessions, changes to regulations, and so on

Step 2: Register Your Business

Cannabis extraction companies need to register with the state just like any other business. Consult with an accountant and a business lawyer, if required, to determine which business entity would be best suited to your business model and financial plan.

At this stage, you will also need to confirm that your business name is available and register your preferred business name with the state. Your business name should be memorable, easy to pronounce, and clearly communicate what your business does.

Step 3: Find a Property that Is Zoned Correctly

Finding the right property for a cannabis extraction lab or facility requires more research than finding a property for most other kinds of businesses. The property's location needs to meet the following requirements:

  1. The municipality in which the property is located must permit cannabis extraction (either solvent-based or solventless, depending on the extraction process you plan to use).
  2. The location should be as close as possible to a high-quality growing facility (if you won't grow your own cannabis) and to the dispensaries where you plan to sell your extracts.
  3. The property must be zoned correctly for a canna-business. In Nevada, for example, an adult-use cannabis establishment cannot be located within 1,000 feet of a K-12 school, 300 feet of a community facility, or 1,500 feet of an establishment with a nonrestricted gaming license.

Once you have found a property in an appropriate location, it's a good idea to include a clause in your lease or purchase agreement that makes it conditional on obtaining a license.

Step 4: Apply for the Necessary Licenses

There will always be a licensing process required for starting a cannabis extraction facility—whether you use solvents or mechanical means (such as a rosin press) for producing extracts. You may need a license that is specific to:

  • Growing cannabis
  • Transporting cannabis
  • The use of volatile solvents for extraction, such as butane, heptane, hexane, or propane
  • The use of non-volatile solvents for extraction, such as carbon dioxide, ethanol, cooking oils, or butter
  • Using mechanical extraction methods, such as ice water, dry ice, or rosin presses
  • Producing cannabis products via infusion
  • Packaging and labeling cannabis products
  • Others

It's critical to have as much information as you can before applying for the relevant licenses. This will enable you to answer any questions with confidence and prevent delays in the approval process. Read up on the relevant codes and laws, have any required engineering documents on hand, and talk to other extraction companies in your state or municipality that have completed the licensing process successfully. It might help to engage a local attorney to lend more weight and credibility to your application.

Step 5: Prepare the Space

Once you have the necessary licenses and space to run your cannabis extraction business, you will need to prepare the buildings before purchasing equipment. You will have already determined your extraction systems and the layout of your facility in your business plan. Your main focus at this stage will be on obtaining stamped architectural drawings, gaining municipal approval, and finding a reliable contractor to take care of the necessary construction work.

Solvent-based extraction operations will require a special C1D1 room, which should be prepared at this stage. Solventless extraction businesses will need to think about thermal insulation and industrial-size cold rooms and freezers to accommodate the handling and storage of frozen cannabis and to ensure maximum terpene retention from harvest to distribution.

Step 6: Install the Equipment and Have it Inspected

Equipment installation can take place once construction is complete. It's generally a good idea to order your equipment while construction is in progress, depending on the lead times and installation times of the relevant equipment manufacturers.

The cannabis extraction equipment you'll need will vary depending on the extraction methods you use. For solventless extraction methods, you will need:

For solvent-based extraction methods (depending on the method chosen), you may need:

  • A closed-loop solvent extraction system
  • A closed-loop carbon dioxide extraction system
  • Ethanol extraction equipment
  • Others

Once your equipment has been professionally installed, you will typically need to hire a state licensed engineer to conduct a field verification of your equipment and its installation. Ask your equipment manufacturer about this process and whether they know of any qualified engineers who provide this service in your area.

Step 7: AHJ Inspections (for Solvent-Based Labs)

Solvent-based extraction laboratories usually need to arrange for an Authority Having Jurisdiction (AHJ) inspection to obtain final municipal approval. The AHJ may be a city inspector or your local fire marshal, depending on the rules in your locality. This individual will check the engineer's field verification of your extraction equipment installations to confirm that your laboratory is safe and complies with the relevant regulations. He or she will also conduct a final inspection before giving your lab the final stamp of approval.

Step 8: Create SOPs for Each Process (if You haven’t Already)

Standard operating procedures (SOPs) are critical for ensuring your cannabis extracts are consistently of a high quality and that your operation remains compliant and safe. Draw on resources provided by your equipment manufacturers, your state, your municipality, and national associations to help you create SOPs for the following:


Key Resources for SOPs

Extraction processes

The equipment manufacturer

Current Good Manufacturing Practice (cGMP) regulations

The U.S. Food and Drug Administration

Labeling, handling, storage, and transportation of chemicals

The Federal Hazardous Substances Act (FHSA)

The U.S. Environmental Protection Agency

The Occupational Safety and Health Administration (OSHA)

The National Fire Protection Association (NFPA)

Hazardous and non-hazardous cannabis waste disposal

The Resource Conservation and Recovery ACT (RCRA)

The U.S. Environmental Protection Agency

Your state and local waste disposal regulations

Fire safety protocols

The Occupational Safety and Health Administration (OSHA)

The National Fire Protection Association (NFPA)

State and municipal fire codes

Workplace safety protocols

The Occupational Safety and Health Administration (OSHA)

Both solventless and solvent-based extraction labs need to conduct a job hazard analysis (JHA) before commencing operations to identify all potential hazards and implement measures to prevent accidents in the facility.

Step 9: Set Up Your Supply Chain

Setting up your supply chain is another preliminary step before recruiting employees and commencing production. Your supply chain will determine the volume of output and revenue you can reasonably expect to maintain (with sufficient margin for variation) and hence the number of people you can confidently employ.

The supply chain for a cannabis extraction business will contain (at a minimum):

  • Raw materials (fresh or frozen cannabis flower and trim)
  • Consumables (water, ice, bubble bags, work bags, rosin bags, parchment paper, solvents for solvent-based extraction)
  • Equipment replacement parts and tools
  • Containers and packaging
  • Labels and labeling equipment
  • Transportation to testing labs
  • Distribution to dispensaries

Once it's set up, good supply chain management will help the entire workflow proceed smoothly—avoiding shortages and bottlenecks. You'll also need to track and trace the cannabis material itself from “seed to sale”: from the time the seeds are purchased and planted to the time your extracts are sold to retail customers. There are software programs that can help with this.

Pro tip: Subscriptions—such as our solventless subscriptions make it easy to prevent shortages of cannabis extraction consumables and improve your workflow. It's also a good idea to form relationships with multiple suppliers so you have a backup if one supplier fails.

Step 10: Assemble a Team to Implement Your SOPs

You'll need a passionate team of people to run your cannabis extraction facility successfully once it's all set up. This will involve management-level team members, in-house employees you select and train yourself, and external professionals including lawyers, accountants, and equipment maintenance technicians (a certified extraction equipment manufacturer can help here).

All of your in-house team members must be thoroughly trained in your SOPs for extraction and safety protocols and provided with adequate supervision and support to ensure they can implement these SOPs with a high level of precision and excellence. It's good practice to conduct several tests with small batches at the start to ensure your SOPs result in top-quality products before you scale production to full capacity.

Step 11: Launch!

You've put in all of the capital and hard work required to set up a legal, fully-fledged cannabis extraction company. Now let your target audience know that your doors are open for business! Clear branding, a solid marketing plan, and consistently high production standards ensure your extraction business becomes known for all the right reasons. Ongoing innovation and improvements in response to feedback are also critical for long-term success.

Put Your Best Foot Forward

The process required to set up a cannabis extraction business has multiple steps, a relatively large capital investment, and perhaps more red tape than any other industry. It's essential to put in the time to write a detailed business plan at the start and ensure you have the passion and determination to see the project through.

The good news is that all your investment and hard work are likely to pay off in spades. The cannabis extraction industry is doing very well and continues to grow. Join this booming industry now and reap the rewards!

Article written by

Levi Lanzrath

Levi Lanzrath is a cannabis extraction expert and founder of Lowtemp Industries.