Vertically integrated licenses are known by a broad variety of names. These licenses (or groups of licenses) allow a business to engage in combinations of cultivation, manufacturing, transportation, retail sale, and delivery of cannabis and cannabis products. Though there is an enormous diversity of approaches to vertical integration, states can be organized into three broad groups: Mandatory Vertical Integration; Permissive Vertical Integration, and Limited Vertical Integration.
Mandatory Vertical Integration
Common in many southeastern states, most notably Florida, Mandatory Vertical Integration states only offer licenses authorizing all vertical activities. In these states, all licensees provide all services within their vertical. Cross-vertical wholesaling may or may not be permitted. Finally, though there have been exceptions, for obvious reasons, official analytical laboratory testing is typically managed by third parties rather than these vertically integrated operators.
Permissive Vertical Integration
Permissive Vertical Integration takes 2 primary forms. Some states, such as Alabama, offer both vertical style licenses that resemble those in a mandatory vertical integration and also non-vertical licenses for each of the available licensed activities. Other states, such as Colorado, require a separate license for each activity within the vertical, but do not necessarily prohibit businesses and individuals from holding many different licenses, or even operating multiple licenses out of one location.
Limited Vertical Integration
Many states, including a significant number of northeastern states, place limits on vertical integration. Approaches can vary significantly; with some states outright prohibiting owners of production licenses (i.e., cultivators and manufacturers) from holding significant interests in retail licenses. Other states may impose significant limits on the number of retail licenses a production licensee may hold. Still other states, such as New Jersey, do not entirely prohibit vertical integration, but have imposed temporal restrictions on adding retail style licenses to allow non-vertical retailers the first opportunity to be licensed. In all cases, states with limited vertical integration tend to require more extensive disclosure and investigation of individual and corporate ownership prior to licensure—often “piercing the corporate veil” to prevent individuals and entities from circumventing the intent of these restrictions through complex and opaque ownership structures.
Conclusion
Though opportunities vary significantly from state to state, the economic advantages of vertical integration are obvious. And with today’s razor-thin margins, some degree of vertical integration is almost necessary in many markets. Where vertical and non-vertical licensees coexist, non-vertical entities can still remain competitive by investing in their brand and service offerings. Brand visibility, presence, and consumer recognition are pivotal to the longevity of independent operators. Many independent cultivators and manufacturers can carve out additional opportunities by maintaining diverse portfolios of clients for white labeling, product development, nursery services, distribution services, and more.
In the final installment of our Business Overview Series, we will round out the medical and recreational cannabis business license types. For more on how Fire Business Strategies can collaborate with you to develop your cannabusiness strategy, please visit our contact page to schedule a free initial consultation!
