Lottery requirement is that recipient must pursue agreed-upon business structure for the final licence or risk disqualification

The 25 recipients fortunate enough to have been selected in Ontario’s recent cannabis retail lottery are now faced with transforming lady luck into a solid business operation.

“The AGCO expects that applicants will prepare plans, which account for all aspects of running a business,” says Raymond Kahnert, media contact for the Alcohol and Gaming Commission of Ontario (AGCO) in Toronto.

Lottery winners are now on their way to obtaining the first provincial licences to sell cannabis from a storefront operation. However, Kahnert notes, “the AGCO is not in a position to provide advice.”

The next steps for store owners, as outlined in an AGCO timeline, include participating in Ontario’s retailer employee training program in February and starting the ordering process and store preparation in March. The government is scheduled to issue retail store authorizations, required to operate an outlet, on Mar. 4, 2019.

Winners may need a helping hand, says Olivia Brown, owner of Professional Cannabis Consulting Inc. in Hamilton, Ont. “The government has not released any framework or structure. The lottery winners are completely on their own,” Brown suggests.

Things progressing step-by-step

Some of the planning and preparation is actually complete. Corporate structure, for example, has already been determined. Under the terms of the Expression of Interest Lottery Rules, issued earlier by AGCO, entrants were required to identify how they would conduct business. Five options were open to them, notes Kahnert: corporation, limited partnership, partnership, trust and sole proprietor. The advantages and disadvantages of each—including regulatory burden, liability, tax implications and raising capital—are detailed by the AGCO.

Now that winning firms are committed to that structure, says Karina Lahnakoski, vice-president, quality and regulatory with Cannabis Compliance Inc., in Toronto. “The lottery [requirement] is that they must pursue [their structure] for the final licence or they risk disqualification.”

Most of the winners appear to be sole proprietorships, in keeping with the overall entrant pool.

The AGCO reports that roughly one-third of all applications were from registered corporations, while 64 percent were from sole proprietorships. The latter is an unincorporated business owned by one individual, which the federal government notes, is “the simplest kind of business structure.”

At present, winning businesses are preparing to run their business in a new and evolving sector. Caution will be required on many fronts. “Be careful who you partner with,” advises Brown. “Operate with good business practices. You’re not just representing yourself; you’re representing all licence-holders.” She notes that as with any new sector, expertise can be difficult to come by and there may be opportunists looking to take advantage of inexperienced owners.

Education is essential, Lahnakoski advises. “Get involved, get connected and ensure you know what is going on around you and what are the influencing forces. Do not rely on one party to feed you information as it could be screened and potentially biased. Make sure who you are working with is impartial and working for you,” she emphasizes.

“With education you can practice risk mitigation,” says Lahnakoski. “Know what might happen, and have a plan B at all times.” Among the risks potential retailers must address are security issues, cash flow, hiring and supply.

Failure to plan effectively could be costly. While the AGCO will not fine licence-holders, it will draw against the $50,000 letter of credit companies are required to have in place. For example, Kahnert notes, if companies are not open for business on Apr. 1, 2019, $12,500 will be drawn against the letter of credit. If they fail to have their doors open by Apr. 15, 2019, another $12,500 will be drawn.

Industry insiders also expect supply to be a concern. A Global News report headlined the fact that supply shortages could persist for years. George Robinson, CEO of RavenOuest BioMed, told BNN Bloomberg that shortages could persist for more than five years. Perhaps even longer, cautions Brown. “Current estimates are that supply and demand issues will last for the next 10 years.”

Robinson reports that marijuana producers alone will need to grow as much as six million kg of pot every year to have enough of the plant’s biomass to meet domestic demand for edible and dried flower products.

Best to be flexible

Lahnakoski recommends that Ontario retailers be open to all products available through the Ontario Cannabis Store (OCS). “Product availability by the OCS may not be consistent, so if you limit yourself further by product type and the items you need later go out of stock, your business will have to pivot. Best to set up with the ability to offer a wide range and, as the supply issues resolve themselves, then specialization in product types could occur,” she goes on to say.

The key to success is seeing the forest and the trees, Brown suggests. “Take care of the short game and keep your eye on the long game.”

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