The cannabis industry is exploding, and has been for years. So, it’s no wonder that 42% of marijuana business owners plan to expand into new markets.
With promising new territories opening up thanks to new states approving both medical and recreational cannabis sales, every year brings new opportunities to marijuana businesses.
Even with this expansion across the country, since marijuana laws are a patchwork of state laws and regulations, methods of getting your brand into other state cannabis markets vary. Here’s how to take your cannabis brand to new markets.
Multi-State Licensing Agreement
Unless you’re going the franchise route (which carries plenty of its own risks), your licensing agreement needs to be airtight in order to give you true control over your intellectual property (IP) as it moves into new states.
A licensing agreement maintains the quality of your brand and integrity of your intellectual property. It should lay out the expectations and requirements regarding royalties and licensed assets, along with negotiated indemnity clauses. Note that a licensing agreement could rise to the level of a franchise if the licensor (owner of IP) wields a certain level of control over the licensed assets - this would trigger other reporting requirements under franchise law.
Be sure to work with a licensed attorney who not only knows the cannabis industry inside and out, but who can advise on IP licensing and franchise models.
Commercially Reasonable Royalty
The state of Colorado has strict requirements when it comes to royalties, as do most states. For starters, it has to be commercially reasonable. Here’s how Colorado defines that:
“Commercially Reasonable Royalty” means a right to compensation in the form of a royalty payment for the use of intellectual property with a direct nexus to the cultivation, manufacture, Transfer or testing of Retail Marijuana, Retail Marijuana Concentrate, or Retail Marijuana Product.“
The state has a strict process for determining whether royalties paid actually meet their requirements of “reasonable” by calculating the percentages of royalties paid and reviewing the nature and scope of the agreement, to begin with. These are just a portion of the Marijuana Enforcement Division requirements for licensing agreements. As a Colorado Cannabis Business Attorney, I frequently prepare these types of agreements and have had them successfully approved by the regulators. Failure to conform your agreement to the regulations can cause delay, denial, headaches and wasted money. Consider working with an experienced Cannabis Business Attorney to achieve your intended results the first time around.
Struggles of Expanding Into New Markets
Even after you’ve tapped a lawyer to walk you through the licensing agreements and commercial reasonable royalties, you’ll still encounter some challenges during expansion.
According to MJBizDaily, “on average, owners of these ancillary companies are looking to grow into eight new markets within the next year.” That’s a lot of competition! Like any industry, competition will pose challenges, but for cannabis companies, more competition also means less locations available, especially in states or cities with strict zoning for marijuana businesses.
Many states put limits on the number of licenses they dole out for both medical and recreational business pursuits. Even as you prepare to expand into a specific state, you may find that all the licenses have been assigned, meaning you may have to wait before you can consider applying again.
California’s Prohibition on IP Licensing
California’s rule 5032(b) states “Licensees shall not conduct commercial cannabis activities on behalf of, at the request of, or pursuant to a contract with any person who is not licensed under the Act.” This, in effect, prevents non-licensees from being able to have control over a licensee’s production. It is doubtful that a brand holder would be comfortable with giving up all oversight of its products - hopefully we will see some evolution in this area, as it could really damage the California market as is.
Laws and Legislation
Even though more states are passing legislation to allow medical and recreational cannabis use, the fact that cannabis is still a federally classified substance means more red tape for the foreseeable future. Cannabis companies still experience issues securing bank accounts, accessing capital, procuring insurance, along with many other general business requirements.
All this, combined with the logistical hurdles of the different (often confusing) state, city, and local licensing requirements, moving across state lines can be even more overwhelming than starting up in the first place.