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Franchising Tips for Cannabis Businesses

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March 27, 2019

Franchising can seem like an easy way to start to grow your cannabis business, especially when you have something special that is actually kicking off a healthy amount of cash or profits.

Many adult-use cannabis operators see franchising as a quick way to expand their footprint and make more money. However, there are a few caveats to using the franchise model you may want to consider.

Why Franchise Your Business?

For those unfamiliar with the concept, franchising is a way for new entrepreneurs to enter a market by paying an initial fee and ongoing royalties to a franchisor.

The new entrepreneur is then allowed to use the franchisor’s branding and trademark, sell their products or services, and receive ongoing support from the franchisor in expanding their area of operations.

Sounds like a win-win for everyone involved!

And generally speaking, franchising is a good way for a business to grow – but there are a few drawbacks that we will get into later.

First, franchising is a smart way to bring talented people into an organization.

In a franchising relationship, the franchisee has a vested financial interest in the success of the new location or joint venture.

Rather than simply hiring a manager to expand your footprint, you gain essentially the equivalent of a small business partner – and all the hard work, determination, and resourcefulness that person brings to the table.

This synergy and aligned interests can give you a backbone to grow your brand while keeping everyone moving to the same beat.

Next, franchising is also a good way to get an infusion of capital.

If you’re not sure where to find new investors or the funding for expansion, then grow your locations by licensing out your business model to a franchisee.

According to Entrepreneur, the “percentage returns you earn can be many times what you would have earned if you opened and ran the outlets yourself.”

Not only do you get that initial franchise fee, but you can create co-op marketing funds, on-going fees, and other revenue streams by being a franchisor.

Why Not Franchise Your Cannabis Business?

But don't kid yourself, there are some drawbacks to the franchise model.

First, you have less control over your brand and the way it is represented.

Though you will produce a large manual with brand guidelines, operating procedures, and more, you need to consider who is actually going to follow those guidelines and implement them.

Remember, you won’t be hiring the new location’s employees, and therefore can’t monitor or train them yourself.

So plan some type of 'brand compliance' audits that you will perform to make sure you are showing up in the market the way YOU want to.

Secondly, as franchised companies grow, they may have a hard time implementing new products, services, or brand refreshes as franchisees develop their own customers and sense of identity.

Each market area is different has its own customer profiles and culture. As you start to do national or state-wide roll outs of new products you will have to take all of these nuances into account.

Will the people in the eastern cities appreciate this California-inspired product?

Will this product that performs well in warmer climates actually hurt your brand in warmer climates...or will it cost more to produce in other areas?

Lastly, In the cannabis industry, franchising is even more complicated due to rules and regulations around cannabis products.

You thought running one cannabis business in one city was hard?

Try running three of them in three different jurisdictions with three sets of local regulations and three different communities...all while keeping your brand essence intact.

Franchising in the Cannabis Industry

The cannabis industry seems like a natural fit for the franchise model.

High demand from franchisees, lots of great products, and money floating around.

As more entrepreneurs try to enter the market, franchising seems like a good way get a piece of this competitive industry. But, there are some caveats to know before trying to master the franchise model.

Due to regulations, it’s more difficult to franchise a dispensary business than other cannabis-related enterprises.

Dispensaries have strict regulations when it comes to branding, inventory, and their overall business model that makes it hard to replicate one dispensary’s success elsewhere.

Remember when I brought up three sets of regulations for three locations? What if you had to produce packaging JUST for one location due to local laws?

Now is it worth it to have that location a few states away or is it simply a headache?

Experts at the National Cannabis Industry Association suggest that “given the complexity and variation of state regulations for direct cannabis businesses such as dispensaries and grow operations, ancillary businesses like clinics may be the more natural outlet for franchises in the near term.”

In addition, there are some potential obstacles that franchisees will face when trying to expand their cannabis operation.

First and foremost is something called the “sudden death risk” in the federal requirements of the Franchise Disclosure Document as it relates to cannabis franchises.

This language says that while cannabis may be legal in your state, it is federally illegal, and as a result the federal authorities can shut down your franchise at will.

It’s a risk, and not the only one – while signs toward full legalization continue to proliferate at the state level, there’s no indication that decriminalization will happen at the federal level.

A more specific risk relates to the newness of cannabis franchisees.

It’s already risky for operators that are very familiar with the landscape to run a cannabis operation due to complex and constantly-changing regulations.

New entrepreneurs entering the space as franchisees don’t have the savvy and familiarity as an existing cannabis business.

Being 'new and green' in this space is a huge disadvantage.

So make sure you find the right partner if you wish to expand your operations through a franchise model. Someone who is experienced in the cannabis space or other highly regulated industry is a solid candidate.

One last consideration: there are downsides to opening a new franchise location too soon.

Industry analysts like to report big expectations for the cannabis market (expected to reach $26 billion by 2025), but high tax rates in many states as well as price fluctuation make it hard for operators to see meaningful profit in opening a franchise.

Alternately, a cannabis company might consider licensing some of its intellectual property rather than a full franchise model.

To find out more about whether franchising is right for your company, talk to our experts by clicking the "Get Started" button below.

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