Harnessing the economic force of franchising

Cannabis businesses could benefit from this proven business model, but challenges and risks abound

Franchising in the United States is part of the nation’s business culture and an economic force, generating $451 billion throughout the country last year. So it is not surprising that entrepreneurs in the world of cannabis are attracted to the fast growth franchising can provide.

In a franchise business, the franchisor provides a developed way of doing business, ongoing guidance, proven systems and assistance, in exchange for the periodic payment of fees. But be aware, there are federal complications that have not yet been tested.

 

The Theory

Starting a cannabis retail store can easily cost in the hundreds of thousands of dollars. For example, a fictitious cannabis retailer “Green For Me Inc.” with good brand recognition and a successful business could benefit from being replicated at many locations, but the cost of expansion can be prohibitive. Opening 20 new retail stores at $500,000 each means that Green For Me needs to spend $10 million dollars. By using a franchise model, Green For Me can license its brand, marketing strategy and business processes to others who want to operate a dispensary. This could free up significant amounts of capital for Green For Me by letting the franchisees each pay the $500,000 in startup costs to open those 20 dispensaries, and quickly expand recognition of the Green For Me name in the market.

However, operating a cannabis dispensary presents some unique challenges within this proven business expansion strategy. Unlike Big Macs and Big Gulps, which are legal in all 50 states and at the federal level, cannabis remains illegal in many states and still is a Schedule I drug at the federal level.

Laws and regulations surrounding franchises exist in many states and at the federal level, so even if a state has legalized cannabis, the federal franchise laws may still present challenges and state franchise laws may not have fully caught up with state cannabis laws.

Retail stores are in the best position to take advantage of this option. For a potential retail franchisee, there are three key advantages: (a) retail cannabis expertise and brand power without making the same mistakes as your competition; (b) cannabis retail franchisees typically get exclusive access to award-winning genetics and products; and (c) better management efficiency will likely position the franchisee for consolidation as the movement toward a national industry progresses.

 

Lower Risk

According to data from the U.S. Bureau of Labor Statistics, about 20% of small businesses fail within their first year; by the end of their fifth year, roughly 50% of small businesses fail. After 10 years, the survival rate drops to approximately 35%.

The learning curve and hidden expenses required for a cannabis retail startup are significant; franchising generally consolidates the costs into a known flat fee and/or a percentage of profits over time. By removing a significant portion of risk, franchisees are more likely to survive that critical first year — and be well situated to thrive while the cannabis market in each region stabilizes.

 

Established Product Selections

A common perk of being a cannabis retail franchisee is exclusive access to award-winning strains, proven products and great purchasing power. It is often possible to obtain lower-cost goods and supplies through a franchisor.

To protect this benefit, most franchise agreements restrict the franchisee from purchasing goods and supplies through other sources. This is usually supported by regional and national marketing undertaken by the franchisor to the benefit of all franchisees.

 

Management Training and Support

A franchisor typically provides management assistance to a franchisee. This ordinarily includes accounting process, personnel management, facility development, regulatory compliance and standard operating procedures.

Operational standards are usually established by the franchisor, which also generally controls quality and requires uniformity among franchisees. This experience helps reduce mistakes that may be financially costly and time-consuming.

 

Nuances of Franchising

Whether you are looking to open a franchise of someone else’s cannabis business or want to franchise your successful cannabis business so others can open stores with your brand and assortment of products, this is a nuanced area.

The potential rewards can be significant, but you need to know how to structure the business and fully understand the risks. The regulatory history of cannabis shows that federal government agencies often find ways to accommodate the industry and public demand to move toward more transparent access to legal cannabis. Let us hope that cannabis franchise regulatory restrictions will ease in time.

 

Anne van Leynseele is of counsel at Zuber Lawler. She focuses on cannabis regulatory matters and deals, often working across sovereign borders. She also counsels her clients on cannabis and hemp regulatory policy as it develops across the nation and around the world. She graduated summa cum laude from the University of Washington and cum laude from the Seattle University School of Law. She can be reached at avanleynseele@zuberlawler.com

Tom Zuber is the managing partner of Zuber Lawler, which handles corporate, finance, M&A, IPO, intellectual property, FDA and litigation matters from offices in California, Illinois and New York. He holds a law degree from Columbia Law School, a master’s degree in public policy from Harvard University and a biomedical engineering degree from Rutgers University, where he graduated with highest honors. He can be reached at tzuber@zuberlaw.com.

 

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