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3 Reasons Why the ROBS Strategy for Business Financing Benefits the Cannabis Industry

July 07, 2020

Three of the major issues cannabis organizations currently struggle with include limited access to financial support, high employee turnover, and extensive tax regulation.

Business funding for companies that are in or support the cannabis industry tends to be illusive. Until the use of cannabis is legalized federally, many of these issues will continue to limit cannabis entrepreneurs in their efforts towards growing their businesses and contributing to the economy. Yet, a solution exists that can help startups and existing cannabis enterprises in all three areas; The Rollovers as Business Startups (ROBS) strategy.

In an industry with limited access to financial support, cannabis companies can fund their business with a company sponsored retirement plan.

With federal government oversight of all US banks and even credit unions, most financial institutions are unwilling to grant accounts to business owners and entrepreneurs operating in the cannabis industry, fearing government repercussions including costly penalties and fines. While there is no law specifically prohibiting banks from doing business with cannabis companies, only one in about 30 banks across the U.S. are willing to take on these clients, according to CNN Business.

Despite cannabis being legal either recreationally, medically, or both in the majority of states across the United States, the industry unfortunately still lacks federal approval, placing business owners at a financial disadvantage. In most industries, banks work with and assist business owners, providing them access to Paycheck Protection Program (PPP) funds, Small Business Administration (SBA) loans, and other traditional bank loans for small businesses. Unfortunately, the failure to reach a federal policy agreement has deprived cannabis business owners of these vital financing opportunities. Considering the average startup cost for dispensaries in the United States ranges from around $250,000 to $750,000, the financial reality of succeeding in the cannabis industry without the support of a banking institution is nearly impossible for most entrepreneurs. However, the Rollovers as Business Startups (ROBS) financing strategy presents an alternative for those businesses that are strapped for cash.

The ROBS arrangement is a financing strategy that utilizes savings from a company sponsored retirement plan as capital to start a new business or grow an existing enterprise. For industries covered in red tape and restrictions, such as cannabis, implementing the ROBS strategy provides business owners with an ideal method of funding their venture without having to qualify for a traditional bank loan. More importantly, the fundamental principles of the ROBS strategy do not change from industry to industry. As such, there is no reason a cannabis company should be prohibited from putting a ROBS plan in place.

In an industry with high employee turnover, cannabis organizations can retain more employees by offering a retirement plan.

As a consequence of being vastly underrepresented by financial institutions over the years, many cannabis companies do not currently offer any retirement benefit options to their employees. In numerous cases, cannabis owners and executives are simply unaware that these services exist for their industry. That being said, over the past five years, several retirement plan providers that already specialize in non-traditional investments and innovative plan setups have worked side-by-side with cannabis organizations to create a solution. Through collaboration with financial, legal, and retirement industry experts, cannabis companies can now legally offer employees retirement plans like a 401(k) or Cash Balance plan, thereby allowing them to fund their business ventures using the ROBS financing strategy.

The ROBS business financing solution requires the use of a 401(k) Plan to get entrepreneurs access to funding. Implementing a retirement plan not only makes financing with the ROBS strategy possible, but it helps cannabis enterprises attract quality employees, reduce employee turnover, and improve company morale. Cannabis companies have traditionally struggled when it comes to employee retention, with nearly 60% of workers lasting less than two months. Several experts consider employee turnover to be among the most costly factors of operating a small business. In fact, studies have shown that it can cost twice an employee’s salary to recruit, hire and train a replacement. A company sponsored retirement plan is one of the best methods to reduce these high turnover levels and attract employees that are interested in building a long-term career with the company. According to a Glassdoor report, around 40% of employees working for small businesses would leave their current company to work for a company that offers a 401(k) plan. In recent years, employees and job candidates have been actively searching for positions that offer more than just compensation-based pay. Instead, they are seeking opportunities that enhance their overall quality of life. 

In an industry with extensive tax regulations, cannabis businesses can reduce taxes by implementing a retirement plan.

While the ROBS plan can be complicated to implement, the payoff is more than worth it. Business owners can avoid high interest fees, monthly payments, and early withdrawal fees by establishing a ROBS setup. Remember, ROBS is not a loan or a taxable distribution of your retirement monies! A common misconception many entrepreneurs fall victim to is believing the only way to fund their business is through acquiring a traditional bank loan and burying themselves in debt. With the ROBS financing strategy this misconception can be put to rest, as business owners don’t incur debt or experience a taxable event when utilizing ROBS for business funding. In fact, the article Debunking Common Myths About ROBS, by Guidant Financial states that, “It’s an entirely debt-free financing solution. With this funding solution, you invest your retirement funds into your new business or franchise. One of the major benefits of ROBS is being able to enter business ownership without the burden of loan payments or interest.”

In addition to creating a debt-free option for business financing, sponsoring a ROBS plan can also reduce taxes. While a cannabis organization cannot claim business deductions related to the sale of cannabis, it may claim a cost-of-goods adjustment for indirect production-related business expenses. This includes employer contributions to a 401(k) for cannabis employees, and with the ROBS business financing strategy, those contributions go right back into funding the company. Cannabis is not a cheap industry to operate in when considering the hefty amount of taxes associated with the product. As such, business owners should seriously consider implementing the ROBS strategy to fund their business, increase quality hires, and reduce their taxes as much as possible, all while allowing their employees to save for a secure future.

“A ROBS enables entrepreneurs to access retirement funds without taxes and penalties by rolling over the retirement funds into a 401(k) plan which has been established by your startup.” - Marc Prosser, Forbes Magazine

Utilizing the ROBS business financing strategy has an immense upside especially for companies operating in nontraditional industries. However, implementing ROBS can be an extremely complex process and certain precautions must be taken into account. Before engaging with a ROBS plan, business owners and entrepreneurs should consider these three factors:

  1. How to select your ROBS provider
  2. The most common compliance issues when engaging in the ROBS business financing strategy 
  3. Strategies to reduce taxes when implementing ROBS


Unlike most of the industry giants, LRS places a focus on client groups who have been traditionally underserved by our industry, such as women owned companies. All of this experience has drawn us to the cannabis industry. Over the past five years LRS has been working side-by-side with cannabis companies, providing them with the retirement solutions they need and deserve.

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About The Author

Keyvan Khaki is a student at the University of Washington School of Business. He is a Brand Content and Marketing Intern at Leading Retirement Solutions. For more information on Keyvan and the work he is pursuing, be sure to check out his LinkedIn.

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