We often work with cannabis businesses that want to license their brands to third parties. Licensing is a great way to expand the reach of a brand and make some revenue without the capital expense of funding and owning a new location outright. For states that restrict ownership of marijuana businesses to state residents, licensing can be one of the primary ways non-state residents get into the market.
But any time a business enters into a licensing deal where the licensee is in the same line of work as the licensor, challenges arise. Specifically, that licensing agreement can be interpreted by state and federal regulators to create a quasi-franchise. As we’ve written before, this can cause problems because franchises must comply with a bevy of state and federal rules with which non-franchises do not have to contend.
Just because franchises are regulated, however, does not mean they are to be avoided forever. The first cannabis company to execute on a well-planned franchise model is going to make an absolute fortune. To date, there hasn’t been a lot of movement of would-be marijuana franchisors. Part of the reason is that would-be franchisees want to see established brand and operations value before entering into a franchise agreement. To demonstrate that value, a franchisor company’s best bet is to show positive performance at multiple locations. A single cannabis retail store may do great business, but from the outside, it is hard to tell whether that store is benefitting more from its location or its local team or its marketing or its branding. But when multiple locations carrying the same branding and using the same business practices consistently put up big numbers, they become very enticing to potential franchisees.
Market consolidation is already happening — a first step in creating the types of chains that can be precursors to franchises. In Colorado, data shows that more and more retail stores are becoming part of corporate retail chains. Washington recently increased its cap on direct ownership of marijuana businesses, allowing an individual to own up to five retail licensed businesses, and has seen similar movement toward consolidation.
In looking for potential franchise locations, California’s new demand-rich market is a logical target. California also boasts some of the nation’s most restrictive franchise laws, providing significant protections for franchisees. Franchises must be registered with the state of California. California also requires the Franchise Disclosure Document, a large comprehensive document defining the ins and outs of the franchise relationship, to be registered with the state. Franchisors are prohibited from terminating franchise agreements early without good cause, and a franchisor cannot stop a franchisee from selling or transferring the franchise to a different person that meets all of the franchisor’s current standards for new or renewal franchisees. If a franchisor wrongfully terminates a franchise, the franchisee is entitled to the fair market value of the franchised business and assets as damages.
And though California has the strongest protections for franchisees, most other states offer similar protections. A franchise isn’t a relationship a franchisor can enter into on a whim; it is a significant long-term commitment of time and money.
All that said, it’s only a matter of time until we see big movement in cannabis franchises. They represent part of the natural progression of a growing industry.