February 10, 2017
California’s recent legalization of recreational marijuana caused a giant stir in the business world. With any high-growth industry, entrepreneurs are forming what’s being referred to as the “green rush” to stake roots in the country’s most populous state. Some would argue it’s the most motivated effort we’ve seen from this community since the sixties.
In a traditional high-growth industry, the logical step following the rush would be the dramatic increase of franchises.
As of right now, cannabis businesses are anything but typical. Despite 28 states and the District of Colombia currently legalizing some form of marijuana, the use is still not legal at the Federal level. For any business model, that creates drastic complications. Once you try to scale that business through franchising, you pretty much run into a roadblock at every turn.
If you’ve been considering growing a marijuana business through franchising, I urge you to reconsider.
How do you know any business? Most likely you recall the name of the business. As their reputation grows, their products and customer service become synonymous with the name. You can go anywhere in the world and order a Big Mac. Walking into Subway in Portugal will almost mirror the one down the street.
What do both Subway and McDonald’s have in common? They both trademarked their business name. In fact, every good franchise protects their name through trademarks.
Alas, trademarking eludes the cannabis industry. Point blank, the United States Patent and Trademark Office will not grant a trademark to a business dealing with an illegal substance since a trademark provides the owner Federal protection nationwide. Since trademarks are at the federal level, until policy changes from the top down, you can’t protect your business’s name.
Tommy Chong recently tested out this provision with his trademark application for Chong’s Choice, a company that sources cannabis, among other services. He listed his relevant goods in his trademark proposal as:
Herbs for medicinal purposes; Medicinal herb extracts; Medicinal herbs; Medicinal herbs in dried or preserved form; Plant and herb extracts sold as components of medicated cosmetics, cigarette papers; Tobacco jars; Hookah tobacco; lighters for smokers; Ashtrays; tobacco tins; Smoking pipes and electronic cigarettes; Oral vaporizers for smoking purposes.
His application was denied due to:
Registration is refused because the applied-for mark, as used in connection with the goods and/or services identified in the application, is not in lawful use in commerce.
In reality, the trouble starts long before the business blooms to the point of needing a trademark. In addition to the United States Patent and Trademark Office rejecting the registration trademarks related to marijuana, the banking industry also remains unwilling to open bank accounts for marijuana businesses even in states that have legalized marijuana for recreational use because it is still illegal federally.
That means it’s an all cash business.
For any business model, that creates problems. In order to open the doors you need to cash flow all expenses. Then you have to deal in all cash since you can’t accept credit cards. All the cash on the premises creates security issues, which is why you often see armored trucks outside cannabis businesses. Where exactly they take that money poses a whole additional set of questions since banks want to know where large sums of cash are coming from.
These problems grow when you expand into franchising. Not only do your franchisees inherit all the challenges of a cash business, they now have to purchase their franchise unit with all cash. Traditionally franchisees seek financing to cover these fees. Without that option, prospective franchisees need to come up with a large enough sum to cover the franchise fee plus startup costs.
As if those two challenges weren’t enough to seal the deal on this business, we have one more to add to the pot. As mentioned, federal law currently defines marijuana use as illegal. Under President Obama’s administration, the Attorney General’s office took the approach that they would allow states to self-regulate the industry without federal interference.
That may change under the new administration.
Senator Jeff Sessions, President Trump’s U.S. Attorney General, has a past at odds with legalizing marijuana. In a long list of unfavorable comments, he has remarked that, “Good people don't smoke marijuana” and that it’s “not the kind of thing that ought to be legalized.”
In his confirmation hearing, Sessions evaded specifics for his intentions with the future of the cannabis industry but made it clear that until Congress passes a law to make marijuana legal, all the states are subject to federal law.
While no one can accurately assume what that means in practice, until federal law changes, there very well could be a large federal fight against the cannabis industry on the horizon. That’s not exactly a great argument to open one of your marijuana related franchises.