Social equity in cannabis is having a resurgent moment, with recently legalized states like New York learning from the mistakes of earlier programs and finally giving social equity its proper due. However, despite good intentions, most would agree that the social equity programs currently instituted have largely been underwhelming and underdelivered. The reasons for this are varied and myriad, but they highlight that there is no one solution to social equity in cannabis. With that in mind, I would like to put forth an idea that I believe could go a long way toward addressing a portion of that spectrum — franchising.
The basic franchising model provides the franchisee not just its trade name, products and services, but an entire system for operating the business. The franchisee generally receives development support, operating aid, training, brand standards, quality control, a marketing strategy and business advisory support from the franchisor. This model ensures more stability, security and possibly immediate capitalization for the cannabis dispensary. Cannabis franchising would utilize the same basic franchise model and export it to the cannabis industry. By adding these franchising features, the normally risky cannabis field becomes more measured and secured by requiring that the franchisee follow pre-established standard operating procedures and already successful business models. Furthermore, this model ensures that a franchise partner is in lockstep with the licensee in terms of audits, inventory, compliance, record-keeping, etc.
In other words, franchising could potentially make a risky investment, like cannabis, more secure and equitable. This model also benefits the lender by ensuring that the franchisee follows already established, successful business models and is financially backed by larger organizations. Most lending institutions want to see a sufficient operating history and the franchise model ensures that franchise stores follow already established operating procedures, which adds a layer of security to the lending organization.
Curio Wellness, a vertically integrated Maryland medical cannabis company, gives us an example of how this franchising model could operate. Curio created a social-equity fund that would allow applicants to own the franchise. The 30-million-dollar fund will be able to provide up to 93 percent of the startup capital needed for a location, meaning that the applicant needs much less of their own initial funding to get involved. In their model, franchisees “start out by owning 60 percent of a Curio store outright, with Curio corporate taking a 40 percent equity position,” according to Franchise Times.
The basic idea around this type of franchising in cannabis is that as the franchisee starts earning profits and pays down the loan, they’ll be eligible to buy out the fund at a predetermined buyout multiple. This results in the franchisee eventually owning the store 100 percent. It’s important to note that I’m highlighting Curio Wellness’s program because of the associated fund they have set up for social equity applicants with a transparent path for licensees to eventually buy out the franchisor. My intent here is to suggest that states can and should embrace these programs as part of their social equity initiatives.
Similar franchising models have shown success in both the number of locations that have opened, as well as in the number of social equity applicants that have participated. There are other cannabis companies that offer franchise opportunities like ONE Cannabis, a Denver, Colorado-based company, Miracle Leaf, a medicinal cannabis health center in Florida and numerous franchise opportunities throughout the United States, as well as Canada, and Unity Rd, which is considered the first cannabis franchise in America.
New York could be the next state to allow for this innovative ownership model. In an effort to aid social equity applicants with capital, investment and monetary issues, as part of the MRTA, New York State introduced a 200-million-dollar social equity “incubator fund.” Governor Hochul explained that the fund is intended to “support social equity applicants as they plan for and build out their businesses.” This fund has been earmarked for social equity applicants interested in getting involved in the budding New York cannabis industry. New York State could put in the same model to encourage the formation of such funds to backstop franchise loans. This could potentially extend its social equity initiative to more individuals while lowering its exposed risk.
Simply put, the franchise model could be utilized in the cannabis industry in a way that allows for funding to be disseminated equally while also ensuring it goes to more applicants, allows for more growth and creates long-term ownership. With more states joining the legal cannabis market in the United States, encouraging the franchising model could drastically change the way social equity applicants get involved with, stay involved in and continue to grow in the larger cannabis industry.