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Partnering with Large Suppliers

With the advent of legalization in this country, many small business people now have dreams of owning and operating a legal recreational cannabis store. Building and operating a store will require a significant amount of resources and will involve working with a number of different partners.

That’s where larger companies come in. Many larger cannabis companies stepping into the fray to provide branding or comprehensive operational support to small cannabis retail businesses are licensed producers of cannabis or entities that are connected to such entities.

While none of the provinces have a general prohibition on obtaining services from third-party companies, you need to be aware of the rules – particularly if the company the small business is partnering with is a licensed producer or has interest in a licensed producer.

In Ontario, licensed producers and their affiliates cannot themselves own the licences required to sell cannabis. However, the Alcohol and Gaming Commission of Ontario (AGCO) has allowed these entities to partner up with store operators and provide branding and operational support. This was particularly welcome because most of the operators of legal stores at this time are sole proprietorships.

The AGCO can disqualify you if there is a “change of control” in the retail store before they permit it. This is something you need to be particularly attuned to. In agreements with larger companies, you obviously do not want to transfer a majority of shares to them. Beyond that, however, the AGCO may consider other provisions in agreements to indicate a “change of control.”

In BC, you need to be aware that the Liquor Cannabis Regulation Branch (LCRB) says it “will not approve an applicant’s store name, signage, trademark and/or branding if it appears to be associated with another business, with the exception of another licensed non-medical cannabis retail store.” In addition, the LCRB can look to the “financial interconnectedness” of a cannabis retailer and a federal cannabis licensed producer in order to determine whether a licence for a retail store should be granted in the first place.

In Alberta, the cannabis store must be operated as a “separate business” from other businesses, and separate financial records must be kept for each retail store. You will also have to provide a written agreement that states the terms and conditions between the applicant and an affiliate with respect to leasing, purchasing equipment, product or other necessary services.

Regardless of the province you are in, following are four key points for small businesses to consider when partnering with a larger company that wants to assist you in the operation of your store:

1. Make sure the company values align with yours.

What kind of goodwill does the brand bring? Do you agree with the company’s mission statement and ethos? You will also want to identify the people behind the third party, to see that they have the kind of industry experience that is required to help operate your store.

2. Identify the scope of the proposed relationship.

Companies may simply want to assign you a trademark, leaving you to operate the company. More sophisticated partners may offer an approach closer to a franchise agreement, where multiple aspects are considered.

In the end, you will have to control certain aspects of the financials and accounting: after all you are the licence holder. Make sure you determine just how much of the work you have to take on. For example, while you may have to officially pay for the wages of the workers in your store, the operator you have an agreement with may handle recruitment and training.

3. Make any agreements contingent upon either a further date or receiving licensing from the provincial regulatory body, or include a similar termination right.

This will help insulate you in the event you do not receive your provincial licensing. The process to obtain both can be long and arduous and there are never any guarantees. If you cannot negotiate your agreement to be contingent on obtaining licensing, you should attempt to obtain a termination right that allows you to terminate the agreement if a government refuses to issue respective licenses.

4. Make sure the terms of the deal make financial sense.

You will want to make sure that the deal makes financial sense. How much take-home pay do you anticipate under this deal? It’s likely in your best interests to come up with financial models based on the terms of the deal, to understand the financial ramifications. If the company wants to take a percentage of gross revenue, for example, know that in the end, it will wind up being a higher percentage off the net income that you are able to take home.

Photo courtesy of Samuel Zeller.

Tags: AGCO (57), Canada Cannabis (138), cannabis retailer (79), Harrison Jordan (3), Partnering with large suppliers (1)