Article by Chad Finkelstein, Globe and Mail
Last week, the Ontario government released its regulations to the Cannabis License Act, 2018. Cannabis industry stakeholders had been tentatively planning their retail strategies ever since the government previously announced that licensed cannabis producers (LPs) and their “affiliates” would be limited to own one retail store only.
But the legislation did not define what an “affiliate” meant, so LPs and their business partners had no way of knowing whether they could own a minority amount of shares in another retail store and, if so, how much. The regulations say, in essence, that LPs cannot own more than 9.9 per cent of any other retail store.
Beyond ownership, the regulations also say LPs cannot have any influence over a store that would result in “control in fact” of that store, leading the cannabis industry to wonder what “control in fact” means and whether retail stores could be franchised. So allow me to clarify: They can be.
Franchising a business and owning a business are two very different things. A franchisor does not (typically) own any portion of its franchisees’ businesses. A franchisor grants licenses to independently owned and operated businesses to use the franchisor’s brand and operating standards. Franchise agreements permit franchisors to require that those standards are followed. Franchisors do not get involved in, or control, a franchisee’s day-to-day operations, nor do franchisees want them to. Franchising is a proven format where small businesses can succeed by leveraging the strength of a well-known brand and its support infrastructure.
Ontario’s franchise legislation contains a statutory definition for a “franchise” that includes the right to exercise significant control over the franchisee’s “method of operation.” In other words, franchisors provide the playbook that franchisees need in order to maintain a uniform customer experience.