Note: This post was created for educational purposes only and is not intended as legal advice. Consult a lawyer for legal guidance related to cannabis contracts.
The newness of the cannabis industry and illegality under federal law leaves many retailers in harm's way when they’re choosing cannabis partners to offer services like:
This is because many partners seem legit at first glance, but they’re actually leaning on practices that take advantage of the complexity of cannabis. Some of these businesses also try to lock cannabis entrepreneurs into contracts that are predatory in nature.
What is a predatory cannabis contract?
Predatory contracts in cannabis are often the result of one-sided promises and unfavorable terms for the signing business. The severity of these contracts can vary from generally unfair to illegal and unenforceable.
Predatory contracts are not always easy to spot. They’re usually offered alongside appealing language, a smile, and lots of fine print.
Don’t be fooled by a company’s bells and whistles. Predatory contracts pose a heavy risk to your cannabis business.
Below, we’ll cover the risks of predatory contracts, along with red flags to look out for, and tips to break your contract.
What are the risks of predatory cannabis contracts?
Cannabis business owners need strong partners in order to remain competitive. However, signing a contract with the wrong vendor can be catastrophic.
Dispensaries across the country were left scrambling when their cannabis payment merchants were shut down by processors. We spoke with many of these retailers and discovered they were locked into long-term contracts with these illegitimate vendors and fighting for a way out.
Depending on the provider, a predatory contract can also cost you:
Non-compliance – Not every business that helps cannabis businesses is actually a cannabis specialist. We’re seeing more traditional businesses trying to win over the flood of cannabis retailers. If you sign a contract with someone who doesn’t understand cannabis nuances and state laws, you’re at risk of non-compliance and severe consequences.
Data insecurity – Some cannabis contracts force you to sign over your customers’ data. Data-related agreements are becoming increasingly tricky as new regulations unfold. Plus, many of your customers would be upset if they knew their information was being sold.
Time – When you are locked into a long-term contract, you’re stuck with the services they provide. A better solution may become available, but you won’t be able to switch. These inefficiencies can cost you substantial time.
Money – Many predatory contracts are focused on upselling and additional fees/costs. Predatory contract providers thrive off hidden costs to your business. They may also leave you with an unfair share of liability should something go wrong.
Lawsuit – 53% of small businesses deal with lawsuits on an annual basis. If you don’t understand the fine print, you’re at risk of legal action if you end up in breach of your contract.
Watch for these red flags before signing a cannabis contract
The only way out of many predatory contracts is through litigation, which costs businesses substantial resources. Your best course of action to avoid the risks associated with predatory contracts is to:
Talk to an attorney that specializes in cannabis.
Keep your eyes peeled for the common red flags below.
Offering leased equipment
The big issue with equipment leasing is that you are frequently bound by steep contracts. Most leases include a third party and a contract independent from your merchant agreement. These agreements are typically 48 months long and binding.
Leasing equipment is almost always more expensive than buying it outright. Businesses frequently assert that leasing is similar to a cell phone contract or that leasing is a tax-efficient alternative to owning. The math simply doesn't add up over a number of years, despite the fact that it may fiscally make sense in the short term.
Not integrating with your point of sale
When a software solution is “non-integrated”, it means it’s not connected to your dispensary point of sale software. Instead of automatically syncing up after every sale, it requires manual data entry.
Beware: Solution that are not integrated with your cannabis company’s POS will likely cost you money due to added manual work and potential data entry errors.
Greatest Hits experienced the shrinkage that comes with non-integrated cannabis payments and saved over $30,000 per year after switching.
Offering “free” hardware
When a company offers you “free” equipment, they’re making up for it somewhere. Usually, it’s in the form of higher rates or card transaction fees for cannabis payments merchants. See this example with PIN debit.
Be wary of free hardware when it’s presented in a contract or brought up in a sales pitch. Take the time to weigh the hardware savings against additional fees or the upfront cost of the software or service. You should also be sure to ask for additional information.
Providers may also be selling your customers’ data to recoup the losses for handing out hardware for free. Otherwise, they may have plans to increase prices in the near future once they’ve locked you into a contract.
Evergreen clauses
An evergreen, or automatic renewal clause, generally states that the term of a contract will automatically renew unless one party notifies the other that it does not want it to continue.
An example from the cannabis industry is a hardware lease for computers or similar tech. If an evergreen clause is included in your leasing contract, you must notify your partner within a set period of time (usually 90 days) that you would like to end the lease or they will automatically lock you into another term.
Evergreen clauses are often hidden deep within the fine print of predatory contracts and can cost your business a lot of money and stress, especially if you don’t want to renew your contract.
Unclear payment terms
Trustworthy contracts include clear payment terms. Both parties must understand how much is due and when, along with the method of payment. If you are offered a contract that is vague in any way around the terms of payment, this presents risk and uncertainty for your business and you could face additional costs, such as application fees or hidden fees.
Termination clauses
A lack of a termination clause is cause for concern. Not only should both parties come to an agreement on the exact reasons that a contract can be terminated, but the clause should not heavily favor either party.
Look out for termination clauses that include heavy penalties for early termination. In the cannabis market, business landscapes change quickly and you don’t want to be tied to any provider without an opportunity to exit.
Liquidated damages
You should never sign a contract that includes a liquidation damages clause. These clauses generally apply to cannabis payments contracts and come with steep consequences.
Liquidated damages mean if you terminate your contract with a merchant service provider early then you have to pay the average amount you paid in previous months, multiplied by the remaining months left on the contract.
For example, if you paid $10,000 in fees last month and still have 12 months left on your contract, you’ll end up paying $120,000 to end your contract early.
Long-term contracts
One of the most common predatory contract practices in cannabis is locking dispensaries into long-term contracts. These agreements are usually very difficult to get out of and can last 2, 3, or even 5 years.
The appeal of signing a long-term contract is generally related to either a price or product offering that seems too good to pass up. The problem is that the cannabis industry is too new to guarantee any cannabis product or service will remain best-in-class in the long (or even near) term.
Many businesses report being signed to a contract for services such as payments or POS and feeling well taken care of in the beginning. But as time passes, these providers shift their focus and their relationship with the dispensary diminishes. Still, the cannabis retailer has little to no recourse if the contract is binding.
Predatory lending
Predatory lending practices run rampant in the cannabis industry. This is because cannabis businesses do not have traditional funding access so they have few options to find money.
There are two primary types of predatory lending practices in cannabis:
Unreasonable term loans – High interest rates, short payment deadlines and an unwillingness to negotiate by the lender.
Loan-to-own – A deal is structured in a way where the borrower is more likely to default on the loan which allows the lender to take over the business.
If you feel pressured to sign a loan to save or start your business, walk away. Unfavorable or unfair lending practices can leave you with less than you started with.
Instead, do your research on how to get a business loan in cannabis. Or try to find a social equity program if you qualify.
How to break a predatory cannabis contract
It seems obvious, but the best way to get out of a predatory contract is to avoid signing one altogether. If it’s already too late, follow these steps to understand what possible recourse you have.
Note: We highly recommend working with an attorney that specializes in the cannabis industry. It is not advisable to attempt to renegotiate or examine any contract without the help of experienced legal counsel.
Step 1: Reexamine the original contract. Oftentimes, conditions for termination are included in contracts. You may also find hidden details or a loophole that can help you.
Step 2: Ask to cancel the contract. Sometimes it can be as easy as asking the other party if they would be willing to cancel their contract with you. While there aren’t any guarantees this will work, it’s worth trying just in case.
Step 3: Determine if the agreement is grossly unfair. Does your contract heavily favor the provider you signed with? These contracts can be deemed “unconscionable” and provide an opportunity to terminate early without paying any late fees.
Step 4: Decide if the other party breached the contract. Depending on the contract, this may be easy or difficult to prove. Generally, if the provider is clearly no longer making good on the promises laid out in the contract, you may be able to get out of the agreement.
Step 5: This should actually be step 1, but if you still haven’t contacted a law firm for help, now is the time. The best chance you have to get out of a predatory contract is to lean on the experience of an expert.
Flowhub supports cannabis retailers
We are continually investing in product development and releasing innovative solutions in the best interests of our retail partners. We provide custom, transparent pricing based on your unique dispensary needs, will never sell your data, and won't lock you into long-term contracts.
Request a demo to learn more about our industry-leading cannabis point of sale and payments solutions.
