Archive for month: August, 2019

There are many occasions we’ve seen a quick sale over the years. One of the two factors that can often lead to one is having an exit strategy. The other? A health scare. While sometimes the health scare is genetic and unrelated to the business, very often conditions in the business manifest in some health condition, and this causes a re-evaluation of priorities, and often, a sale.

Adorable

Jim Remsite was one of two partners that started a custom software company called Adorable. In an industry dominated by robotic and functional logos and names, Jim and his partner decided to zag with a sort of pink coral decor: “We wanted customers to love their software.” And they did. Jim and his partner started the company in 2014 and by the end of 2015 they were looking at $1.5M in topline revenue.

But towards the end of 2015, Jim’s partner decided that he wanted to move on to another project he was more interested in, and because they had a buyout agreement in place, they had a good starting point for discussions. Since this other project would take longer to start providing a salary, and because the buyout agreement was set for five years, they negotiated to get a lower total amount in exchange for it coming at an accelerated rate.

Losing a Partner

With the challenge of losing a partner, Jim decided to push himself hard. This was due in part, he confessed later, because he was trying to prove to himself and everyone else that he “didn’t need a partner.” And while the company did grow to $3M in topline revenue in 2016. By 2017 it had returned to its previous level, $1.5M, and Jim had to lay off almost half of the company.

It turns out that while Jim obviously didn’t “need a partner” to go out and sell, he needed someone to balance him out, and he also needed an easier path to going from managing 11 people to managing 23. People weren’t properly managed, the sales pipeline wasn’t properly cultivated, and bad results ensued.

The Headache

A short time after these layoffs Jim was at a conference and was struggling with a very bad headache. He thought that it might be due to the conference being held at altitude, but when resting in his room didn’t work he checked in with the paramedics and they found that he had unusually high blood pressure. He went to the hospital where they monitored him for the rest of the day. The next morning he was fine and brushed it off as just a possible fluke.

But a couple of months later it dawned on him that this might be symptomatic of how things had become unbalanced, and he decided to become proactive and look for a possible acquirer. While there were three suitors, he ended up selling to the company that was much much larger than his (around ten times larger in revenue) because he knew that the problems which had created the imbalance in the company would be rectified: he would get support staff for his sales efforts, and he’d be given a c-suite – a seat at the table without having the entire burden for running the company falling on him.

Don’t wait for a health scare to consider a business sale or transition. Give us a call today so that we can take a look and see what we can do to help.

While it’s still an issue of tension between state and federal governments, cannabis is the base of a booming nationwide industry. That means we’re already starting to see transactions in that space. While we can’t say we are experts in this space, we are watching it with interest and wanted to share a case study with you that will illustrate it isn’t as simple a road as any might lead you to believe.

Brandon Ruth and his wife had spent some years abroad after college. They used that time as an opportunity to explore the world but also to become debt-free by living way below their means. But some time after they returned to the US, Brandon’s mother-in-law was diagnosed with cancer, and part of her treatment involved the medicinal use of marijuana. Brandon and his wife were intrigued by its positive effects and really began to learn about the product.

Regulation, regulation, regulation

When Washington state opened up the possibility of marijuana for recreational use, they were the third person to submit a completed application to become a licensed producer/processor. That’s the first stifling regulation of many throughout this story – the state won’t permit vertical integration, so you could apply to operate a storefront or you could apply to grow and process. You weren’t permitted to do both.

Now, because the state regulated the number of producer/processors and the number of storefronts they didn’t realize (or didn’t care) about the market effects.  Because there were so few store licenses issued, and so much grower capacity, by contrast, a major supply/demand disparity was created. With so many growers, the stores could dictate prices to the producer/processors.

The regulation didn’t stop there. Growers had to pay $1,000 per month for software that ensured compliance with the state, apart from mandatory insurance. Oh, and if you violated any growing conditions you would be fined per occurrence. Growers were also not permitted to have a website or buy billboard space.

No deductions

As if these conditions weren’t enough, federal law classifies marijuana businesses as operating in an illegal market, and as such, standard business deductions are not permitted, which meant that the 20% before tax income that Brandon was netting from $1M in topline revenue was essentially subject to a 75% shadow tax in the form of losing those deductions. Worse, he hadn’t paid himself or his other business partners a salary.

This was not an isolated story. In fact, the location that Brandon cultivated his product was home to many other growers as well. While many may think of large indoor warehouses when they think of marijuana cultivation, smaller operations, like Brandon’s, often operate in a hybrid outdoor/greenhouse model, growing some of the product outdoors as regular plants while keeping some varieties in a greenhouse. These other smaller growers were feeling the squeeze and after a couple years of frustration, they decided to have a big meeting. Almost 40 growers were present.

Roll-up

As they talked through the issues they realized that consolidation made the most sense. If there was a roll-up of existing sellers, then the current supply/demand problem could be “corrected.” Meaning, if there were only five growers in the whole state, then the stores would suddenly be in the position of having only a few choices, and would no longer be able to dictate pricing, but would probably have pricing dictated to them. One of those 40 growers had the financial backing to execute the roll-up, and before long, there were 39 deals in progress.

Now, interestingly, because of the state of affairs, the value of the business wasn’t in inventory, employees, or traditional assets. The value was the license from the state, which were no longer being issued. It was the equivalent of a taxi medallion: a license to make money, under certain conditions. The value of the “medallion” in this circumstance was being somewhat dictated by all the other deals in progress.

Thankfully Brandon stayed diligent. In an industry not usually populated by those who had studied business, Brandon stayed persistent with the buyer, pointing out the crop timeline and the importance of closing a deal by a certain date so the buyer would be certain to be able to pay for the cost of the sale by harvesting that crop instead of having to wait another year. While state regulation doesn’t allow him to disclose the terms of the sale (are you surprised by yet another regulation?) he did manage to, after clearing the business debts, make a little profit on his original investment.

And now you know that while marijuana as a plant grows very easily, business conditions are currently such as to make the business of cultivating it pretty hard.