Cannabis Retail in Ontario: Franchising as a Business Model

Written by on September 21, 2018.

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]

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license revocation will likely be drafted with a view to the federal Cannabis Act, which provides that licenses may be withdrawn on open-ended grounds such as the public interest and other “prescribed circumstances”.[3]

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.

The franchise agreement must, of course, be made conditional upon the franchisee obtaining a license to begin with (or the franchisor must otherwise refuse to deal with a prospective franchisee that does not have a license in place). It should be noted that there is legal separation between the franchisor and franchisee as license holders that does not exist between a corporation and the management of a corporate store. In this respect, franchisors are better insulated from risk of license revocation. Franchising also comes with the appeal of being the most expedient way to build both a web of retail locations and a well-recognized brand that stands out to the public. Unlike in the United States, impediments to growing an expansive Cannabis retail system are not widespread in Canada. Patchwork legalization on a state-by-state basis disrupts American distribution networks and the threat of federal prosecution always looms notwithstanding state laws. Expect opportunistic and ambitious cannabis companies to engage in franchising in Canada and in Ontario in particular. The most successful businesses will be guided by comprehensive legal advice that is responsive to the intricacies and uncertainties of cannabis law.

[1] Federal legalization will be effective October 17, 2018.

[2] In the meantime, the Ontario government will control cannabis distribution in the Province via an online platform.

[3] Among other, more specific grounds.

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