Cannabis operators share tips for licensing brands

As more states adopt regulated marijuana programs, executives at licensed cannabis brands are seeking innovative ways to reach new markets.

Brand licensing, revenue-sharing, profit-sharing and franchising all are ways to circumvent restrictions on interstate commerce, said Avis Bulbulyan, CEO of California-based cannabis consulting firm Siva.

“It’s all really licensing, it’s just how you go about it,” Bulbulyan told MJBizDaily.

“There are 50 different ways to split the fees.”

Under licensing arrangements, which tend to be rigid, licensees typically pay for the right to use – not own – a brand’s product or intellectual property.

Licensing often includes an upfront fee, and the licensee assumes most of the financial risk because they must pay the brand regardless of revenue performance.

However, some brands are shifting the paradigm.

Revenue-sharing agreements

California-based cannabis brand Stone Road switched from the licensing model to revenue-sharing for its marijuana flower and pre-rolls, said Sabrina Wheeler, the company’s chief operating officer.

Revenue-sharing distributes revenue and losses equally among those involved.

The financial risk is shared because payments depend on the revenue generated, so both parties are motivated to maximize revenue and success.

“There’s more at stake for both the brand and the manufacturer,” Wheeler said.

“It puts everybody in a more collaborative position.”

Wheeler said tailoring Stone Road’s stock-keeping units (SKUs) to fill gaps in specific markets has been beneficial.

For example, the brand developed a new pre-rolls multipack tin specifically for California, Massachusetts and New Mexico.

She also discovered an underserved market for concentrates in New Mexico, where Stone Road launched 1-gram and 2-gram concentrates products.

Vetting partners

Determining which companies to partner with as Stone Road expands into new markets is a long process, with the company vetting up to 20 groups before deciding, Wheeler said.

“Some are receptive, some are not,” Wheeler said.

“Some think there’s more value to creating an in-house brand.”

Although it sounds similar, profit-sharing is different than revenue-sharing in that it distributes only profits to each party – not total revenue.

If there isn’t a profit, there’s no financial distribution.

“Profit-sharing works if you have a close relationship with your partner,” Bulbulyan said.

“You have to open your books, and it creates a lot more accounting situations and issues.

“It’s not just a one-way transaction, but in the end it’s still a licensing deal.”

Brand licensing

Licensing alternatives aren’t right for every company.

But California-based flower and edibles brand Old Pal has continued to enter licensing agreements.

“Functionally, we like to keep things simple,” Old Pal CEO Rusty Wilenkin said.

Although Old Pal has been approached about profit-sharing deals, Wilenkin said they don’t make sense for the company because they require more involvement with its partners.

“With profit-sharing, when you share more of the costs, we’d need to be inside of our partners’ businesses,” he said.

“It might work in two or three markets, but to scale that nationally would be an overwhelming task to manage.”

Instead, Wilenkin said, Old Pal’s licensing partners get a set percentage of sales.

He said the simple model makes it easy to scale.

“The licensing model for pure-play brands has been really great – it’s easy to manage with a small team,” Wilenkin said.

Justin Brandt, founding partner of Arizona law firm Bianchi & Brandt, said licensing deals are the easiest route to expanding into new markets.

He said the practice is advisable, “especially if you can get connected with a solid, well-established brand that’s already a familiar face in the market you’re wanting to enter.”

Brandt’s law partner, Laura Bianchi, agrees that forming relationships with existing operators is a smart move.

“It would be smarter to do a joint venture in this situation to help get your foot in the door, rather than starting from scratch,” she said.

Bulbulyan predicts that as cannabis companies expand into new markets, some models will be favored over others.

“Right now, it’s kind of all over the place – it’s whatever people are able to structure,” Bulbulyan said.

“Before, people had very specific intentions. These days, it’s, ‘What can I get out of it?’”

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.