Over the last few years, public opinion has been moving toward legalizing at least some use of marijuana. Currently, thirty-three states and the District of Columbia have passed laws decriminalizing marijuana in specific instances. Most of these states allow medical marijuana use only, but at least 10 states also permit recreational use. Several other states are considering such laws. While this is a civil rights issue to many people, it may also become a potential revenue generator with states looking to cash in by imposing sales and other taxes on these businesses. Entrepreneurs are looking for opportunities and for many reasons, franchises are becoming an increasingly popular business model.
Why a marijuana franchise?
The cannabis industry has significant barriers to entry, which makes a franchise model appealing. These include:
- Legal compliance. The cannabis industry is subject to a complex array of laws, including state and local laws governing licensing, production, distribution and sales, zoning and land use, taxes, and other areas. Franchisors may provide assistance in navigating these regulations, although they are not a replacement for getting an experienced attorney.
- Access to supplies. Businesses need a reliable high-quality supply chain, which may be difficult for a standalone operation. Franchisors can provide those connections and pricing that may be more profitable.
- Start-up costs. As the industry matures, some states are imposing significant fees to license and operate a marijuana business. This may be cost-prohibitive for owners since cannabis businesses often cannot get traditional bank loans. Franchisors may be better equipped to provide guidance on alternative funding sources.
- Operational support. Franchising is popular because of the benefits. Franchisors typically provide a known brand and business model, use of trademarks, systems of operation, assistance with training and marketing, and other support services. Producing and selling marijuana is a relatively new industry with few resources available to owners. As a result, a franchise model is particularly helpful to franchisees looking to get in on the ground floor, but also have the assistance of experienced operators in order to build a profitable business.
What are the risks?
Like any franchise, franchisors and franchisees may not be as successful as they would like. This is particularly true when a franchise is relatively new. It is important for both sides to do appropriate due diligence. Investigate the market, evaluate the costs, scrutinize the other party and vendors, and understand the evolving legal landscape. Remember that while cannabis may be legal in your state, it is illegal at the federal level, and as a result the federal authorities can shut down your franchise.
In addition, as noted above, financing is a significant challenge since many banks will not provide funding. Owners must turn to private investors, which may be more costly to the business. As the industry matures, more funding options will likely become available.
If you are considering starting or buying a marijuana franchise, a qualified attorney can help you explore your options and advise you on protecting your interests. Contact Lusthaus Law for a consultation.
