A number of Cannabis companies across Canada have organized franchise systems to capitalize on the recreational cannabis market. The idea of buying a cannabis retail franchise with an already established brand can be enticing, but before you buy, you should know the answers to these questions:
- How do I choose the right franchise?
- How does the law restrict franchisees in the cannabis retail industry?
- What issues does the law not yet address for cannabis franchisees?
- What should I consider when negotiating a franchise agreement?
How do I choose the right franchise?
If you are looking to purchase a cannabis retail franchise, you would be wise to enter into a franchise agreement with a franchisor who is knowledgeable and experienced in the cannabis industry. A franchisor with the right background and knowledge can assist you with things like (a) selecting an ideal location for your store and understanding zoning laws; (b) obtaining cannabis licences and approvals from the AGCO; (c) planning your store layout, selecting products, and developing merchandising tactics; (d) ensuring brand recognition and developing and maintaining goodwill; (e) marketing; (f) managing finances; and (g) hiring and training staff. After all, it is in both the franchisee’s and the franchisor’s best interests for the franchise to be profitable.
How does the law restrict franchisees in the cannabis retail industry?
In Ontario, cannabis retail is highly regulated. To open and operate a cannabis retail store, you need a Retail Operator Licence, a Cannabis Retail Store Authorization, Cannabis Retail Manager Licences, a supply purchase contract with the Ontario Cannabis Retail Store (OCS), security clearances, and mandatory training (See our 2-part blog series, which discusses these steps in greater detail). You will also have regular reporting obligations once you open your store. The Cannabis Licence Act, 2018 (the “CLA”), Ontario Regulation 468/18, and the Registrar’s Standards for Cannabis Retail Stores also impose certain restrictions on you in areas such as:
- store location and layout, equipment and facilities, and surveillance and security;
- advertising and promotion;
- staff training; and
- record keeping and confidentiality.
What issues does the law not yet address for cannabis franchisees?
The cannabis retail industry in Ontario is relatively new, so there are some unanswered questions in the legislation, such as:
- whether the franchisor has the right to control your Retail Operator Licence and Cannabis Retail Store Authorization;
- how to reconcile the differences between the Arthur Wishart Act, 2000 (the legislation governing franchises in Ontario) and the CLA (i.e. different requirements for what the franchisor is required to disclose to you);
- whether certain restrictive covenants in your franchise agreement will be enforceable (i.e. if your franchise agreement prohibits you from taking your business records and customer lists with you if your franchise agreement is terminated, how will you also comply with the AGCO’s rule that you, as the Retail Operator License holder, are to remain in control of the business’ records?); and
- how to balance the AGCO’s requirement that you, as the Retail Operator License holder, are to keep your records secure and confidential with the franchisor’s desire for information about the business.
What should I consider when negotiating a franchise agreement?
In addition to the issues in the section above, there are other factors that you should consider when negotiating a franchise agreement, such as:
- whether the location of the retail store complies with municipal zoning and the AGCO’s site-selection requirements (franchisors may also be concerned with how these requirements impact proximity between other franchise locations in the franchise system);
- whether you or the franchisor is responsible for obtaining the required licences and approvals from the AGCO;
- potential delays you might experience in obtaining your licences and approvals (because of the complexity of the franchise structure), which may lead to delays in buying the franchise and an obligation on you to notify the AGCO of any material changes to the information you submit during the licensing process;
- the impact of the AGCO’s authority under the CLA to create new standards and requirements for you and the franchisor to fulfil;
- whether the franchisor has a right to alter its business model, given the fairly new and evolving cannabis retail industry (you might wish to restrict this right to avoid the costs and inconvenience of making changes and/or negotiate for your own right to customize your store, within reason);
- whether your franchise agreement is conditional on you or the franchisor obtaining the required licences and authorizations and securing a site (you should have the ability to terminate the franchise agreement without penalty if you cannot obtain a licence or lease and to renew or re-apply for licences that have expired before the franchisor terminates the agreement. You should also consider how your licences may be impacted if the franchise agreement is terminated); and
- the risk of you being in breach of the law and losing your licences if the franchisor fails to carry out its own legal obligations (i.e. record keeping, confidentiality, etc.) (in the franchise agreement, the franchisor should indemnify you against all costs and damages you might incur in this instance).
Conclusion
Canada’s federal legalization of the sale of recreational cannabis through retail stores has provided franchisors and franchisees with more opportunities to develop expansive retail systems and to build well-known brands across the country. As touched on in this blog, there are a number of factors to consider and requirements to fulfil when purchasing a cannabis retail franchise. The most successful businesses in the Canadian cannabis industry will be those who are guided by legal advice that is responsive to the complexities and evolving nature of cannabis law.
