Alongside the rapid growth of legal cannabis in Canada, Ontario has seen a surge in retail cannabis stores. While the market’s growth would have left some ruing missed chances to get in early, teething problems and the impact of COVID are presenting new and potentially profitable prospects.
If you’re considering entering the cannabis market, now might be the time for a well-considered bullish stance. This article details why this may be an excellent time to buy an Ontario cannabis business and the legal factors to consider in achieving this objective.
Teething problems are creating failed stores
Cannabis has grown exponentially in terms of user adoption and popularity since it became lawful for recreational use in 2018, and that growth has launched a massive business opportunity, both globally and locally, for cannabis entrepreneurs.
According to reports, the global market is expanding at a 32% annual growth rate and will potentially reach USD 197 billion by 2028. The Canadian market is growing at a similar rate, with $2.6 billion in annual sales and a projected 3.4 million legal recreational users by 2025.
There are more than 300 stores in Toronto, and almost 10 per city block in Ontario, although the province’s regulatory regime initially provided for a maximum of 10 retail stores per city. Despite the proliferation of stores, various factors, including stringent regulations and tailwinds from COVID, have left many businesses struggling.
Federal legislation and provincial enforcement cap personal possession of legal cannabis to 30 grams per person, whether dried or equivalent in tinctures, edibles, or other products.
Likewise, growers must be licensed provincially, and there are stringent requirements relating to production practices, product tracking, and packaging and labelling. Advertising and promotional activities are carefully policed, leaving many stores with few promo avenues other than online sales.
Added to this, the advent of COVID barely two years after the industry’s takeoff in Canada meant that businesses just learning to walk suddenly had to run and fly in unfavourable circumstances. Supply chain difficulties, distribution difficulties, and other market uncertainties continue to plague several retail stores. Weak brands and single-store locations are particularly at risk, as the market currently only rewards strong brands or large establishments with ample operating capital.
As a result, many cannabis businesses are struggling to find profitability, with a good number gearing up for fire sale exits.
The opportunity for prospective owners
While starting a typical cannabis store can cost anywhere from $500,000 to $1 million, many stores are selling for between 1/8 to 1/10 of the initial investment.
Frequently, the cost to fixture a retail cannabis store may reach or exceed half a million dollars. Additionally, inventory might cost between $10,000 to $50,000, even without including the costs of obtaining a license.
But we see a number of stores up for sale from between $50,000 to $100,000, which is a bargain when one considers the total cost to open a cannabis store and process licensing from scratch.
As more of these troubled stores go on sale, entrepreneurs will enjoy a unique opportunity to enter the market at extremely favourable investment rates. Here are the critical business and legal considerations to evaluate as you proceed on this business objective.
Purchase options
There are three primary routes to cannabis retail store ownership. You may choose to build an entirely new store, purchase an existing but non-operational store, or buy an store that is operational and a going concern. Each of these options has its unique considerations and pathways.
Build a new store
Starting a new store from scratch implies taking on all the responsibilities related to renting a location, installing fixtures, obtaining licenses, and purchasing inventory. A project of this scale will typically take between 9 – 13 months to complete. Major considerations here are:
- Applying for a cannabis Retail Operator License through the Alcohol and Gaming Commission of Ontario (AGCO). You can expect a minimum of 3 – 6 months for processing.
- Finding a suitable location for the store and, either before or after obtaining a license, fixturing the unit. The location search should take between 1 – 2 months, while fixturing will require another 10 weeks for a total estimated cost of $500,000 to $600,000.
- Applying for a Retail Store Authorization once the store is completed. The authorization includes a $4,000 fee, and you can expect another 3 – 6 months for processing.
Inventory costs are ultimately fluid, depending on the types and quantity of products you wish to retail. But stocking costs typically hover between $10,000 to $50,000.
Purchase a non-operational store
If you’re planning to ride the coming wave of failing businesses, purchasing an existing but non-operational retail store can be ideal. It’s worth noting that this transaction will be structured through an Asset Purchase agreement that transfers the physical assets of the store to you. Such a transaction takes fixturing concerns off your plate.
However, since the store is non-operational, you will be responsible for securing the necessary licenses and authorizations. You can expect the deal and licenses to be finalized within 7 – 11 months. Here’s what to expect if you’re pursuing this option:
- First, you will have to obtain a Cannabis Retail Operator License through AGCO. The license will require roughly 3 – 6 months of processing time.
- While you avoid the fixturing period, you may still need 1 – 2 months to find a suitable location and agree on a purchase price. Prices will vary, but you can likely expect to pay between $50,000 and $100,000 for a non-operational unit.
- Once the location is sorted out, you can apply for a Retail Store Authorization, which will cost $4,000 and take between 3 – 6 months of processing.
Buy into an operational store
Purchasing an existing and operational cannabis retail store presents the fastest and potentially cheapest route to market penetration. The deal will be structured via a Share Purchase that lets you buy out the current owner and take over their operations. The estimated time frame for this transaction is between 3 and 6 months.
- While this is the most straightforward option, there’s still some location shopping involved. So, the first step is to find a suitable store that is still operational.
- Next, you need to finalize a Share Purchase transaction for the store. Pricing will vary, but if it is a failing business, you can expect to pay between $50,000 to $100,000. Depending on its success, a profitable business will likely attract prices between $500,000 to $1 million.
- Lastly, you submit a Change of Ownership application alongside the Share Purchase agreement to AGCO under the seller’s company that owns the licenses for the store.
Key priorities
Time and money are the biggest priorities of this venture. Time is important because, as you’ve seen above, each available option requires different timelines. In some cases, it may be necessary to move swiftly, such as where you’re targeting a bargain. Additionally, if you have specific timeframe preferences for the project, that will be an additional factor in selecting viable choices.
Money is a key priority due to the varying financial implications of the listed options – which means that the initial investment and expected return will take marginally longer to get back.
Regardless of which option you choose, your key priorities are likely to include the following:
- Obtain a fully operational retail cannabis store
- Ensure that the store has good prospects for profitability. This is crucial because I am personally seeing more stores suffering monthly losses and then doing a fire sale for 1/8 of the initial investment. On the other hand, the failing stores present some good opportunities for a quick purchase, flip, renovation, and take-over.
- Leverage a good brand name for the store – strong brands sell, while weak brands and single-location brands are failing more than others.
- Navigate the AGCO licensing processes without significant delay
Risk elements
Considering the options presented above and the topmost priorities for these ventures, the major risk factors to consider are as follows:
1. Unexpected AGCO delays
Dealing with AGCO represents the most unpredictable part of the process. Sometimes, AGCO approves applications within a month, while other times, applications may take up to 6 or 12 months before approval.
This risk is somewhat unavoidable as engagement with AGCO will occur no matter your choice. However, transactions with a lower estimated waiting time, such as an operational unit Share Purchase or a non-operational store Asset Purchase, may slightly reduce risk.
2. Initial investment amount
The costs can vary widely here based on the available opportunities on the market. A failing cannabis retail store presents the lowest investment outlay, as you’re likely to find a sale opportunity between $50,000 to $100,000.
However, building your store potentially carries the most substantial capital considerations, including fixturing costs of around $500,000. Licensing and inventory may add another $60,000 – $70,000.
3. Failed Background Checks
AGCO policy includes background checks on proposed cannabis retail store owners. The agency has a public commitment to prevent previously illegal cannabis operators from pivoting to legal dealings. Therefore, a background check may prevent a retail store from obtaining or renewing licenses.
Likewise, an entrepreneur may not be approved to participate in the cannabis industry based on their “character, financial history, [or] competence.” When AGCO makes a rejection, they will likely delay approval or denial of the application until they can make a thorough decision.
Conclusion
The next 6 – 12 months will present an excellent opportunity for entrepreneurs who want to enter the cannabis sector profitably. But taking advantage will depend on excellent legal and business decisions and a thorough understanding of the process.
To improve your chances of a successful venture, leverage the expertise and experience of the skilled legal operators at Hansra Law. Our services include a free, value-packed strategy session to help you capitalize on growth opportunities, identify key risk factors, and surface a fool-proof strategy to kick-start or supercharge your business venture.
Schedule a free phone call with Hansra Law today to get started.
