McGanja? Franchising Could Be on the Horizon for Budding Canna-preneurs

As the cannabis landscape expands and evolves, business owners face the challenges of changing rules and navigating legal gray areas.

Marijuana businesses, tasked with gaining a foothold in this shifting market, are stepping out into a new world of potential opportunities – some more established than others, and with probably still more to come. One of the latest to emerge is the concept of franchising.

“As legalization continues, franchising is the growth vehicle that will help the industry flourish,” said Christian Hageseth, CEO and founder of up-and-coming franchise, Colorado-based ONE Cannabis, and founder of Green Man Cannabis, a cannabis cultivator and dispensary operator with two retail locations in Denver.

“Cannabis is a nascent industry – some markets are obviously more established than others, but many newcomers are entering each year, and cannabis isn’t the easiest space to navigate. Franchising simplifies the barrier to entry and makes cannabis entrepreneurship much more viable to a wider audience.”

Hageseth said he anticipates securing 50 Colorado franchise locations within the next 30 months, as well as expanding nationally via franchise partnerships.

“We’ve had a lot of success with Green Man from both a product and retail standpoint,” he said. “And, as one would imagine, my team and I have a wealth of experience in the legal cannabis industry. We started ONE Cannabis to help others compliantly operate their business, without having to learn the expensive lessons of growing a cannabis dispensary. Our goal with ONE Cannabis is to create the world’s most powerful cannabis business franchise system.”

Does this mean the cannabis space is gearing up to become the next power franchise market with McDonald’s-type dispensaries popping up in every corner of the country and world? McGanja, anyone?

Not so fast.

According to National Cannabis Industry Association Media Relations Director Morgan Fox, there are some big obstacles for entrepreneurs looking to franchise – at least for the time being.

“Traditional franchising is not really an option given the differences in state law and continued federal prohibition,” said Fox. “There are likely many companies that would like to do so.”

But there are other business models in place that have carried other brands – including the luxury cannabis retailer MedMen – into expansion.

“All cannabis businesses face the same challenges in terms of onerous tax burdens, lack of access to banking and financial services, and high state licensing costs,” Fox said. “However, these issues affect small businesses much more heavily. New businesses face the added challenge of being relatively inexperienced with compliance in a very challenging regulatory space. This is why many of them choose to work with consultant companies or experienced brands.”

MedMen, A Modern Marijuana Fairytale

California-based MedMen co-founders Adam Bierman and Andrew Modlin had an idea in 2010: Start a marijuana business.

Daniel Yi, senior vice president of corporate communications for MedMen, said Bierman and Modlin didn’t come from within the industry. Rather, they owned a boutique marketing agency in Los Angeles. They were hired by a local medical marijuana dispensary to do their marketing. And though it was still too early to call it an industry, they saw its vast potential.

“The industry from that point on evolves, almost exponentially,” said Yi.

They modeled the business after the casino-hotel industry – specifically Harrah’s, said Yi. MedMen Management LLC was formed, and for a fee, the company managed licensed cannabis facilities for the owners of each license.

“We started as a management company,” he said. “The models already exist, they were transferring that into cannabis.”

As the MedMen founders developed this model, something else started to happen. They were approached by people wanting to invest in cannabis. In 2016, they launched a private equity fund and raised $200 million of capital.

“You had basically a conglomeration of business entities that constituted MedMen enterprises,” Yi said.

In 2017, some marijuana companies started heading to Canada to go public on that country’s stock exchange because it wasn’t allowed in the United States, said Yi. MedMen was among them.

In 2018, MedMen is no longer only a management company. It owns and operates 14 of its 18 retail locations. The other four are managed by MedMen for companies or private equity funds. Yi said he can’t comment on whether franchising is the way to go for new businesses. Franchising wasn’t MedMen’s model, but whether a franchise model will work is really up to the market.

“It’s not either/or,” he said. “This industry is gonna go through the same maturation process that every other industry does. … Do you remember Netscape or AOL?”

‘Anyone Who Has a Bold Prediction About the Industry is Likely to be Wrong.’

Carlos Perea, COO of New York-based iAnthus Capital, said his company is a national network of vertically integrated companies operating as one, but not a franchise. Publicly traded in Canada, it uses Canadian capital to invest in U.S. cannabis companies, and currently operates in six states – New York, Florida, Massachusetts, Vermont, New Mexico and Colorado.

“Legal cannabis is still in its infancy stages,” said Perea. “Anyone who has a bold prediction about the industry is likely to be wrong, not because they aren’t smart or insightful, but simply because there are so many externalities and factors that are beyond our control, such as federal legislation.”

Regardless of the particular business model, he said the key to future success is adapting to the current market environment and acting quickly.

“What we think will separate the winners from the losers will be agility and responsiveness,” he said. “Successful companies will learn to fail quickly, adapt and move on. They will be highly adaptive and responsive to market demands and trends. To do this well you have to measure, monitor and act.”

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