Should You Buy A Cannabis Franchise?
Ever thought about buying a cannabis business? With cannabis use legal to some degree in 33 states, and more states contemplating legalization, many entrepreneurs are looking for ways to capitalize on the legal-pot boom.
One emerging way to ride the green wave is through franchising, which can be a shortcut to opening a business in an industry that may be new to you. But franchising takes a certain mindset, and cannabis franchising has its own particular challenges.
Should you buy a cannabis franchise? Here are five important questions to ask yourself to assess your fit for this opportunity.
1. What’s my appetite for risk?
While legal cannabis enjoys popular support, it remains illegal at the federal level. This means that, technically, DEA enforcers could batter down the doors and shut down any cannabis business in the U.S., anywhere, anytime.
So far, that hasn’t happened. But the political winds are ever-shifting. In legal states, cannabis businesses are popping up all over, heedless of possible federal interference. To buy a cannabis franchise and still sleep at night, you should be a risk-taker who’s comfortable dealing with the current legal ambiguities around this industry.
A key question to ask any cannabis franchise you’re interested in is whether they provide legal support if the feds come busting in or other legal complications arise. Then you know whether you need your own legal emergency fund or not.
2. Is this truly a franchise opportunity?
If you Google “cannabis franchise,” you’ll see many interesting results about supposed cannabis franchise offers. They’re not all real, so be sure to read further on the individual companies’ websites.
For instance, you can find cannabis-industry sites that recommend a franchise offer for publicly traded cannabis company MedMen. The only trouble is that a quick check of MedMen’s investor-relations page reveals the Canadian company isn’t franchising.
Legitimate, SEC-regulated cannabis franchising opportunities are few right now. You can spot the real offers because qualified U.S. companies have a Franchise Disclosure Document (FDD) on file with the SEC for each state in which they operate. Companies that are legally qualified to offer franchises have a webpage with their franchise offer details.
3. Do I like following a system?
Cannabis franchising, at its base, is like all other franchise industries. You’ll pay a franchise fee and get a turnkey, done-for-you system. Then, you’ll be expected to follow it.
The company is hoping to create a consistent customer experience across its franchise chain and will want you to fall in line. If you chafe at having to follow orders, franchising may not be the business format for you.
4. How am I at cost control?
Right now, the cannabis business is heavily taxed in many jurisdictions, and in the U.S. it’s also under the thumb of tax rule 280E. This rule disallows all business expenses for enterprises that sell a controlled substance. In other words, cannabis businesses have a high tax burden and must pay federal tax on gross income. No deductions are allowed.
As a result, cannabis entrepreneurs must manage costs carefully and maintain high profit margins in order to stay in business. Add having to remit a monthly royalty back to franchise headquarters, and it’s all the more important that operators be masters of cost control. There are hopes that the tax picture will improve as more states legalize cannabis use, but for now, being able to crunch the numbers is key.
5. Can I fund this investment?
Buying a franchise is a major investment that requires substantial access to capital. For instance, one cannabis franchise’s investment calls for $750,000 in liquid capital and up to $2.5 million total.
It may be hard to get a loan or find investors to help you launch in a sector that’s operating in a legal gray area. One of the most common ways to fund a franchise, getting an SBA loan, is probably out, given the federal illegality of the product. That could leave more of the business risk on your plate.
Buying Into An Emerging Industry
One final thing to keep in mind: Legal cannabis is a nascent industry. That means there’s no McDonald’s of cannabis yet. There’s no franchise chain with established, national brand awareness to boost your business, which is exactly what many entrepreneurs look for in a franchise.
This is a ground-floor opportunity, where you’ll be helping to build a franchise brand from the ground up. If you’d be excited to join an emerging industry that’s projected to hit $30 billion by 2025, cannabis franchising may be for you.
Franchising can be a shortcut to opening a business in an industry that may be new to you. But franchising takes a certain mindset, and cannabis franchising has its own particular challenges.