As legal cannabis expands across the country, state by state, legal issues and entrepreneurial opportunities unheard of decades ago emerge with importance. For instance: franchising cannabis businesses.
In any industry, but especially newer ones, the companies that thrive almost always have superior branding. Meanwhile, part of the problem with launching a new business is that nobody will know who you are at first — what you stand for and what you provide. Opening a franchise addresses both of these issues. Consumers will already understand your brand, its products and values.
So it goes with cannabis businesses. Leading franchises have established themselves. Entrepreneurs looking to enter the space can become franchisees, buying into brands with better staying power. For a deeper dive into this part of the industry — its advantages and challenges — we recently spoke with Paul Woody, an attorney with certified expertise in franchising, at Greensfelder.
Cannabis Regulator: What are the benefits of cannabis franchises?
Paul Woody: Franchises have figured out the business model already, so that minimizes the risk of starting a business. They already have successful branding and marketing. When starting a business you can make 99 right decisions and 1 wrong one and still tank the business. There’s a reason why so many people don’t open their own pizza place but instead buy a franchise, because of the benefits of owning a business where people already know your product.
For cannabis dispensaries, there’s not a lot that’s available to differentiate. The products are the same by the state. And price control also makes it difficult to differentiate from competitors. It’s difficult to create more-affordable cannabis like we do with other things.
But if someone can build up a critical mass of stores under one brand, that’s enormously helpful. Now you can expand and become a household name faster, helping franchisees stand out.
CR: How are cannabis franchises affected by the lack of federal legalization?
PW: It’s difficult for franchise brands to offer a turnkey operation, because going across state lines with it is difficult. What works for a business in one state, with that’s state’s set of rules, may not work in another state with another set of rules. That erodes the benefits that a franchise can offer.
However, the real benefit of a cannabis franchise is that whoever can figure out the model and give franchisees a toehold, if/when federal regulation comes, those businesses are going to have a headstart.
CR: How important is federal regulation to cannabis franchises?
PW: It would allow these businesses to operate like a real business. Right now, federal criminalization keeps a lot of people on the sidelines.
With federal regulations, the would be more opportunities with financing, with convenient payment processing. There would be increased safety and consumer convenience. There would be confidence that you can do business safely.
There would also be normalization of the tax code. That would alter the model that franchisors can offer. Cannabis businesses are taxed heavily. Franchisors have to build that into their model. It’s harder to make money off of franchise royalties when there’s also so much in taxes.
CR: Are there any challenges with federal regulation for franchises?
PW: Trademark protection is another thing that would change with federal regulation. You can’t regulate that right now, because the industry operates on a state-by-state basis. That’s an enormous drawback. But as the space gets bigger with federal regulation, brands will bump into each other. Established brands might not be able to enforce their brand as well as they thought they would.
Of course, the risk of federal intervention is that you can’t just sell a franchise to anyone. A change in policy could be disastrous. What exists now for cannabis businesses seems to be open and available, but if the president or attorney general changed tack, it could dry up the market.
Whether federal decriminalization preempts state structures or not is also a huge deal.
CR: When will we see federal legalization?
PW: It depends on the 2024 election. And there’s too many variables to say for sure.
Biden has not made it a priority in his administration so far. Does he run for reelection? Does he get reelected? Is he more aggressive with cannabis in a second term, knowing he won’t have to face reelection?
If it’s not Biden on the Democratic ticket, then who is it? If the winner is his opponent, what’s that Republican administration look like? Missouri, for instance, is an example of a Republican state that just legalized cannabis by ballot. What kind of Republican gets elected president if they win? What kind of Congress does he have?
So I don’t see federal legalization on the immediate horizon. But it’s important to remember, as shown in states throughout this country, when legalization does happen, it happens quickly.
One of the advantages of the federal model is that the U.S. government can watch the states that have legalized cannabis already, and then pick and choose which cannabis laws work.
I do think that the critical mass of states legalizing cannabis will eventually force the federal government’s hand. But the question remains: Will this legislation override the states’ cannabis laws? Or will the federal government leave it up to the states?
From a legal standpoint, a single source of regulation from the federal level makes more sense. It seems more efficient. But it also depends on what federal regulation looks like, what kind of input the industry gets.
This interview was condensed and edited for publication.
Feature photo by CRYSTALWEED cannabis on Unsplash.
Kyle Swartz is editor of Cannabis Regulator. Reach him at email@example.com. Read his recent piece, Interview: What Does 2023 Hold for Cannabis Companies?