Garner, Ginsburg & Johnsen, P.A. Law Offices

PROS AND CONS OF CANNABIS FRANCHISING

Franchising in the cannabis industry is fraught with risks. You should not buy a cannabis franchise unless you have done significant due diligence, consulted with both a franchise lawyer and a cannabis lawyer, and know exactly what you are getting into. People who buy franchises are often told in marketing materials that they get to “own your own business” and that “the franchisor will support you.” In the vast majority of cases, once you have opened the franchisor’s support obligations are minimal to non-existent.

There are going to be a number of cannabis franchises and dispensaries that pop up as legalization spreads. Cannabis law, however, varies dramatically from state to state, so a franchisor with experience franchising cannabis businesses in California is not necessarily going to know anything about Minnesota’s cannabis laws. But they might try to sell you a cannabis franchise in Minnesota anyway – nearly every franchise agreement I’ve ever seen (if not all of them) contains language stating that the franchisor is not responsible for compliance and the franchisee is solely and exclusively responsible for complying with state laws and regulations. While the cannabis market is confusing and ever-changing, you cannot count on your franchisor for any help when it comes to compliance. In some cases, we have even seen franchise agreements that require the franchisee to violate the law when it comes to cannabis.

So, how many cannabis businesses fail? The reality is that it’s hard to start any kind of small business — franchise or otherwise. According to the U.S. Bureau of Labor Statistics, nearly 70% of small businesses go under within their first decade. Approximately 20% will fail in the first year alone. With how regulated the cannabis industry is, it’s extra important to take all the necessary steps to avoid becoming a cautionary statistic.

HOW PROFITABLE ARE CANNABIS COMPANIES AS A FRANCHISE?

This varies and is not totally within your control since when you buy a cannabis franchise, it is not your own business. When you buy a franchise, you buy a license to operate a business for usually between 5 and 10 years. You may have renewal rights or you may not, but even if you do, that renewal will require you to sign the new form of a franchise agreement, which may contain more onerous restrictions, higher fees, and less flexibility for the franchisee. If you review a franchise agreement carefully, you will notice that you have very little actual control over the business. You can make hiring and firing decisions, but marketing, social media, recipes, sellable items, and even accounting methods are subject to strict controls by the franchisor. The franchisor wants to maintain uniformity for its brand, but what works in one place does not mean it will work everywhere. And that is particularly true in the cannabis industry.

ADDITIONAL CANNABIS FRANCHISING CONCERNS

Restrictions on suppliers are another reason to be cautious when thinking about a cannabis franchise. I do not know this to be true, but I expect that there will be consumers that want locally grown and sourced products. When you are a franchisee, the franchisor can restrict your sources of supply to one vendor (and in some cases, the franchisor can be the sole supplier of a product), and franchisors are able to obtain rebates/kickbacks from vendors. Smaller growers and producers may not have the resources to pay rebates/kickbacks to franchisors based on franchisee purchases, so you may be stuck with a supplier that you do not want to use or that produces inferior products (and sometimes at a higher cost).

There are many other reasons to be cautious when deciding whether or not to purchase a cannabis franchise, including:

• Some banks may not do business with you, making it hard to finance and simply manage funds
• Insurance is often expensive or tough to obtain for cannabis businesses
• POS systems may not be willing to do business with someone in the cannabis industry
• Cannabis is still illegal under federal law.

Cannabis franchise opportunities are popping up all over the place and there are likely to be more people seeking to sell franchises in this exciting new industry They may tell you that they will support you and they may, in fact, support you, but the business is largely controlled by the franchisor and ultimately, the burden to comply with the law is still on you (and the franchisor takes no responsibility for it).

Not to mention that you cannot sell the business without the franchisor’s approval, which it may withhold. Want to get a legal perspective from franchise lawyers who have expertise with emerging cannabis businesses? Contact Garner, Ginsburg & Johnsen, P.A. to book a consultation. We also offer this resource for potential franchisees looking to open a cannabis dispensary in Minnesota.