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A Deep Dive into Investing into an Extraction Lab Business
Extraction is a booming business. In more developed markets up to 70% of all retail sales come from some form of extract derived product. It’s no wonder why entrepreneurs and growers are rushing into the business. But what are the real costs and prospective returns on investment for an extraction lab?
According to Nick Tennant, founding partner of Precision Extraction Solutions, which provides extraction site planning services and equipment, “The vast majority of the lab startups that we consult fall in the $400,000- $800,000 budget range, which includes the cost of leasing a property.”
While some may have initial sticker shock with the costs of an extraction lab startup, the prospective upside is massive. Also, according to Tennant, “There is simply no shortcut for building a safe, compliant and efficient lab. The prudent entrepreneur is well aware of the competition and proper planning and investment is the best way to lower risk.”
But what are the real costs and prospective ROI for a startup extraction business?
Case Study: A Typical 2,000 Square Foot Lab
*This example assumes startup costs and ROI of a typical 2,000 square foot lab utilizing Precision® Extraction equipment (with 9 times the processing efficiency at half the cost of comparable CO2 systems).
Securing a Property/Lease
The first major expense will be the cost of a building. A pre-fabricated steel “butler” style building will cost approximately $50 per square foot. Occupying an existing building, or part of a building, by lease rather than ownership, will generally cost much less and free up capital to use elsewhere in the extraction startup venture.
As investment into building ownership can vary greatly, this analysis will be assumed that the building is leased rather than owned. Hence, assume $22,500 in initial lease costs.
Planning Phase/Professional Team
Once the property is secured, the planning phase will include a designer, architect, mechanical engineer, electrical engineer, equipment supplier and consultant. This can run in the range of 8-20% of the total cost of the project. Assuming the median for a 2,000 square foot lab, a reasonable estimation of cost is $75,000 for a professional team of experts to see the project through.
Once the design is complete, the next major expense is incurred through the construction of the actual lab. Generally, this can run between $60-$100 a square foot built to code. For budgeting purposes, it is always best to err on the side of caution. So, on the high side, plan to spend $200,000 on the buildout.
Precision Extraction Solutions’ complete lab equipment and training package, is as follows:
- Q1 PX1 v2017 System
- Q1 Precision GC 5000 Recovery Pump
- Q1 Distillation Mach, 4” Wiped Film
- Q1 Heidolph HBX Package: Hei-Vap Industrial 20L
- Q1 Decarboxylation Vessel
- Q2 Vac Oven Elite 4.4 UL Certifications
- Q2 Vacuum Ovens: AI 4.4 Elite – 200V
- Q2 Vacuum Pumps – Edwards, NXDS10i 7.7cfm
- Professional Services: Wiped Film Evaporator Training
- Professional Services: Install/Basic Training
Total Equipment/Training Cost: $334,000
The last significant expense to be incurred is final engineering inspections and final fire safety reviews. These costs are generally in the range of $15,000 to $25,000. So, to be conservative, plan to spend $25,000.
As provided above, the total 2,000 sq. ft. lab cost per our example is as follows:
- Cost of Initial Lease: $22,500
- Cost of Planning; $75,000
- Cost of Construction: $200,000
- Cost of Equipment/Training: $334,000
- Final Inspections/Reviews: $25,000
Total Startup Costs: $656,500
Note on Budget Restrictions. If your startup budget is limited, you can cut back on the initial equipment expenditures. According to Tennant, “I always recommend to clients that are tight on cash to do a phased build out. This means they start with lower production until they are cash flow positive, and then add more equipment that has been designated in the planning phase.”
Return on Investment
Now with a state-of-the-art extraction lab at your fingertips, how do you make money? How long before your business reaches its breakeven point? Working with the built, compliant and equipped 2,000 sq. ft lab and costs identified above, the ROI can be swift.
PX1 System: Processing Capabilites/ROI on Wholesale Raw Oil
As you can see, with the processing power of 17,800 grams of input material per day, even a medium-sized system like the PX1 is able to produce large profits from the basic production of non-refined crude oil. Depending on the quality of the input material (based in 3 tiers above) daily operational profits range from $15,520-$22,120 per day.
Refined Extracts: Post-Processing Production Capabilities/ROI
The “crude oil“ produced above, may be further refined with the post processing equipment included in the costs. Such post processing into a more refined and desirable product, such as shatter, full spectrum high terpene extraction, or THC distillate, can compound the lab’s profitability.
For the model below, the assumed yield loss from post processing is 30%. Removal of impurities results in less overall weight. This will vary, but it is a conservative estimate for loss due to refinement.
The gross revenue after post processing and refinement is increased from $96,120 per day with crude oil to as high as $201,840 with 99% THC distillate. Most other products fall in the range of an average increase in revenue between 20-70% with the introduction of post processing. (see chart below)
Note on Operating at Maximum Efficiency. The above models assume that the model lab is operating at 100% efficiency and capacity with trained and experienced operators. Per Tennant, “In most cases we have seen, it does take some time to hit stride in production, and you can figure to initially operate in the 25-40% efficiency range.”
Depending on the cost of input material and operational experience, the entire cost of the lab can be paid within a matter of days or weeks. For larger, higher volume extraction labs, the return on investment is equally as impressive. In any event, the return on investment is based entirely on the startup expenses, cost of input material, marketability of the end product produced, and operator experience.
Note of Caution. The exceptionally prudent businessperson will add at least an additional 20-30% to the costs of the startup for packaging materials, peripheral lab items, initial employee salaries, marketing, travel, other and unforeseen expenses. It is always best to be overcapitalized than undercapitalized. Always assume your existing and would-be competitors are well financed.
The rapid return on investment and early breakeven point of extraction labs have made this industry niche incredibly attractive to entrepreneurs and investors alike. When preparing your extraction lab business plan, keep in mind the items and cautionary notes presented in this article and you’ll be well on your way to cashing in on the very lucrative and fast growing extraction industry.
Continue at: https://precisionextraction.com/2017/03/starting-an-extraction-business-cost-and-roi/