Cannabis Retail In Ontario: Franchising As A Business Model

Article by James Judson, Mondaq

 

Canada: Cannabis Retail In Ontario: Franchising As A Business Model Last Updated: October 5 2018 Article by James Judson

In the wake of federal plans to legalize recreational cannabis use,1 the Western Provinces announced licensing schemes for private sale. A number of cannabis companies, such as Canndara, Spiritleaf, and Starbuds, began the process of organizing franchise systems with a view to exploiting this new market. In Ontario, the former Liberal government had spurned the approach of the Western Provinces in favour of a public monopoly. In June 2018, that government was ousted by Doug Ford’s Progressive Conservatives, who intend to offer licenses to the private sector as of April 1st, 2019.2
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Canada’s largest consumer market will be open for business. New cannabis franchise systems will be developed in Ontario and existing ones will enter the jurisdiction. These franchises will compete against corporate owned stores of other chains. There has been debate over the relative merits of franchising and corporate store ownership as business models for cannabis retail. The main point of contention is the need for oversight of retail locations in a highly regulated industry where a license is a business’s most prized asset. A rogue operator could put the license(s) of a franchisor or corporate store owner at risk. Although the Ontario licensing scheme will not be finalized for months, standards will be stringent. The rules on license revocation will likely be drafted with a view to the federal Cannabis Act, which provides that licenses may be withdrawn on open-ended grounds such as the public interest and other “prescribed circumstances”.3
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There are brand control mechanisms available to franchisors that are suited to the potential pitfalls of cannabis retail. A well-drafted franchise agreement will enable the franchisor to enforce uniform standards across the franchise system and will contain terms and conditions that, among other things, require compliance with the standard operating procedures of the franchisor, require compliance with applicable cannabis laws and regulations, provide for termination of the franchise agreement upon failure to comply with applicable cannabis laws and regulations, provide for what happens in the event of a material change in cannabis laws and regulations, provide for the use of designated or approved cannabis product suppliers, and provide for periodic inspections of the franchise location by the franchisor. In any event, franchisees have a financial incentive to act with prudence, and a savvy franchisor will implement a careful franchisee selection process that yields competent operators.

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