The Accelerating Cannabis Mergers and Acquisitions Climate - The Cannabusiness Key

All right. So now that we've got some people joining, I'm going to go ahead and begin. Let's see, we've got the recording on. And so let's start. Welcome everybody to the latest installment of the Cannabis Business Key. I am your host, Jason Klein. I am a partner with Ramon Law in the cannabis and business transactions group. I'm based out of Washington, DC, but coming to you today from Missoula, Montana. We have a wonderful guest today with Eric Ott, the co-founder of KO Acquisitions. We're going to be talking about the cannabis mergers and acquisitions climate, something that you hear about a lot in the news. You may be personally familiar with. If you're involved sort of in a day-to-day business or you've recently been involved in a transaction for your cannabis business or something that you might be looking forward to learning more about. You know, whether it be from a perspective of an operator, a licensee, an investor, it could be an ancillary business. We're gonna try to make this a very free-flowing and interactive conversation with you today. As always with this platform, we try to encourage you to send in your questions or type in your questions and take this opportunity to pick Eric's brain as a fantastic resource in all things M&A. And I'll read his bio in just a minute, but as per usual with this, we go through at the beginning here, just a little orientation, a bit of a disclaimer. Uh, let's see if we can switch the page.

Yeah, we've got it.

Uh, so of course, as always, we're not here to, um, give you legal advice. We're not creating an attorney-client relationship. We are not advising you on how to break the federal law with respect to marijuana, which remains a Schedule I controlled substance, um, under federal law. Uh, to the extent that we're providing educational advice, it's purely on compliance with state law and other legal cannabis endeavors. And of course, we are not providing— this is purely educational at very best. And you'll see what has to come in this webinar, which is again going to be very interactive. And we're going to try to answer your questions as best we can with general market information. So of course, I am going to take a moment to just give you a little pitch about Ramone. We're a fantastic law firm that's filled with fantastic attorneys all over the country, all over the world, and expanding very rapidly. The resources that we have at this firm mean that we were able to provide not just a wide range of geographies, but a wide range of services. So to the extent that you've got legal needs, please reach out to us and we can, we can certainly help to serve you. So this is some of our growth that we've seen in the last year and a half. And with expanding and better and better technology platforms, we're able to do more and more. in this new, uh, model. Uh, so, uh, take a look at RamonLaw.com when you have a moment. Okay. Um, uh, just before I do the bio, I'm just going to do a little orientation for those of you who are not familiar with the RingCentral webinar platform. What I want to point you to is your toolbar, uh, up, mine's on the top of my screen. Yours might be on a different part of your screen, but it's at, uh, the toolbar there where it's got a Q&A button, which we encourage you to use that liberally. So go ahead and type your questions in there. These are questions, you know, about the topic that we're here to talk about. So, you know, try to keep it on topic, but, you know, feel free to ask away. Ask Eric all your questions. I will be sort of monitoring this Q&A section. And reading them out to Eric so everybody can hear and see what, you know, follow along with the conversation. Of course, we've got a visual PowerPoint presentation for you to also follow along with, but, you know, I think the real content here is going to be in the conversation. So please use that Q&A section. You can also chat with me, but it's a little bit better to keep it all contained in one, on the Q&A. Of course, everybody who's on this webinar today is going to get a copy of the presentation. There's also going to be a link of the recording of this presentation. We're going to put it on YouTube and we'll post it on social media and stuff like that. So if you've got to run or if you, you know, even better, want to share this presentation with friends or family, somebody you think who could benefit from listening to the conversation, Again, encourage you to do that. We'll have that link ready by Monday for you and we'll send a thank you email. And finally, we've got another webinar coming up May 16th, same place, same time, 12 noon Eastern time for 1 hour. We're going to be talking about regulators, what they do right, what they do wrong. Hopefully we'll be focusing on what they do right. I'm afraid we may be focusing on the second a little bit more, but let's see, you know how that one goes, and everybody's affected by their regulators, their state programs, particularly those, you know, direct businesses and licensees. So that should be another interesting conversation. You'll be getting an invitation in your email, you know, about that shortly. You can sign up or you can sign up through Cannabis Business Executive, CBE. Okay, so that's all the housework for this morning. I'm gonna introduce our guest, Eric Ott. He is the co-founder of KO Acquisitions. He began his career as an associate at the venture capital firm Covado Lipsitz in Pittsburgh, Pennsylvania back in the late '80s. He was involved in the post-investment business development support to existing portfolio companies. In the early '90s, He took one of those companies into the European market and ran that business in Spain for several years. In 1995, he co-founded Rainmaker Capital, which is a boutique investment bank specializing in corporate development and M&A. At Rainmaker, Eric spearheaded the M&A team and closed a number of transactions in the technology market primarily. He's also managed corporate development arm of Rainmaker. He assisted international companies in entering into the US and California markets in particular, and formed a number of large partnerships, a number of partnerships with large tech companies. So Eric has a wide array of experience and lucky for us and lucky for the cannabis industry, he's now focused that big brain of his on our industry. So Eric Ott, welcome. To the webinar today, and thanks so much for joining.

Thank you, Jason. Pleasure to be here, and hi everybody. Pleasure to be Zooming with you today.

So Eric, I'm going to flip through to the first slide here, and, you know, we're going to be obviously talking about, you know, how and why— how to sell, we'll get into that in a minute, but why sell? I mean, geez, the market's doing well, these businesses are going strong, why would they sell now? Why not hold and, you know, wait for a better time to exit? Is this the best time to exit?

Well, it's certainly an opportune time to exit for some. I think the, you know, I think that the reason, you know, for these different, you know, pieces here on why to sell comes down to everyone's individual operating situation, right? The first one, the cash out. A lot of folks in the market right now are tired. They've been around for many, doing this for many, many years, and they really want to move on. Less so in the states that have recently become legal, but if you're in Colorado or California or some of the, like, you know, states that have been legal for quite some time, you've got some people that, that are really looking to exit. But those are more rare. I mean, they're the reasons that some folks are looking at different transactions now and aligning with another group is because they don't have the access to the capital scale up their business, right? And so, you know, everybody, you know, you may be growing along with the market, but you want to accelerate your growth beyond the speed of the market to make yourself an attractive target. And oftentimes that requires capital. And some people are really good at raising money and some people are more challenged in terms of raising money. So, I think you have a lot of people saying, look, I don't have the capital to grow my business, but I'm gonna align with somebody that does. And the same reason, you know, for in terms of competition, maybe there's, you know, you're a gummy manufacturer and there's 6 different other gummy manufacturers in your state or what have you, you know, competition is a real driver. And, you know, you need to be able to kind of be part of something that was not only, you know, maybe a house of brands or something like that, but also something of scale that eventually is going to be acquired by a larger player. These reasons to sell, the reason I bring them up is they're really, really critical, right? The buyer asks very early in the process, why are you selling? And, you know, in the last bullet point here, lack of internal alignment, that is a very legitimate reason to why people are selling. I mean, it might be an investor that has, you know, needs their money out, or there may be some kind of dispute or internal challenges you have with other management about which direction to pull the business. And so, you know, most of these, you know, the access to capital, competition, scale, and lack of alignment are typically ones where the The seller isn't saying, "Look, I'm out. I'm going to the beach and I'm done." That's the first one, the cash out, I'm tired. But the other 4 are really more of what we'll call like the on-ramp, right? How do you actually take your business and become part of somebody else's business? Obviously, you're swapping out your stock perhaps for their stock, but you're trying to be, you know, something of greater scale. And it's, you know, saying, "Hey," get on the team, start rowing, grab an oar, let's go. And so what we're seeing is, even though people refer to it as, oh, I'm going to exit, most of the deals that are done in cannabis are not exit. It is not, here's a bunch of cash, go to the beach. It's more about, here's some of my stock, get in the boat and start rowing. So I think, you know, the key thing here is, when a buyer is looking to make an acquisition or contemplating an acquisition, the most important thing in all transactions are the people. And so the buyer needs to know where the seller's head is in terms of the transaction. How do I view this deal? Am I viewing this deal to cash this person out, or is this person going to be a key resource on my business moving forward? And from an integration perspective, how do they fit underneath my umbrella? Are they, you know, maybe you're the CEO of your startup, but you might be vice president of product in your acquired company. So I think it's really critical for everybody to understand, you know, and communicate in a transparent way to the buyer why you're actually selling the business and so that they can look at it with the proper lens.

Yeah, so I think that's a great place. It's a great starting place for this conversation, Eric, because ultimately what you're saying is before you even go to market with your asset and offer it out there in the marketplace, you first have to look inside yourself and understand what your goals are. Because unless you're prepared to answer that question, you may You may either find yourself unprepared for that, to give an answer that makes some sense, or maybe you find yourself changing your mind partway through the transaction process, and that's not an easy experience either. Maybe you find yourself regretting it afterwards. So, from a starting place of, to thine own self be true.

Oh, absolutely. You know, the key here thing is it's a people business and there's no wrong answer here, but just you need to communicate it and get the alignment and the people that matter. And so you can, you know, properly convey to the seller, excuse me, to the buyer what your intentions are.

Absolutely. Yeah, and those, that human capital, you as the founder, owner, manager, operator, you're an important piece of what may make your business an appealing target for a buyer. And so, you know, don't undersell your role in this on a going-forward basis. Now, of course, there may be many instances, like you said, cash out, go to the beach, walk away, but many, many more times, number of transactions in my experience, just generally because we have young founders, who are not at the twilight of their careers, who still see a lot ahead but are looking for, you know, opportunities to, like you said, grab an oar and continue rowing. So include yourself in that calculation of what is for sale, essentially. So, okay, so psychologically we need to, you know, begin to prepare ourselves and look inside. And understand what the real reasons are for why we want to go to market. And so let's imagine that we've decided that yes, we have an exit plan. It may be soon, it may be on a longer timescale, but how do we prepare to make ourselves a target? What are the good, you know, hygienic practices here that, that allow you to, you know, get the value that you deserve when you go to market.

Yeah, no doubt. It's one of my favorite terms for, how is your corporate hygiene, right? In cannabis, and many of you on, you know, listening in may have received inbound interest from different operators about the acquisition of your business. And, you know, it's in cannabis, it's really easy to get a term sheet, right? There's a lot of people growing their business through M&A. And so getting somebody to make an offer on your business is not the hard part. The hard part is closing your deal, right? And so if you have, you know, a short, medium, long-term view of what your plans are from a liquidity perspective of whether that's the cash-out exit or just kind of aligning with another team and getting on board to grow somebody else, you need to spend quite a bit of time preparing for that. And in our experience, you know, we've seen some pretty large companies take, you know, 12 to 18 months to get themselves ready to enter a transaction, or as I should say, close the transaction. And there's a lot of things that, that require this kind of clean up sometimes. And I can't help but start with probably the very first one with kind of your financial acumen. I mean, it's a great, you know, a little test that we run and saying, hey, you know, if I were to talk to you today and I said, you know, show me your Q1 2021 financial results and you turn that to me immediately and you do that in the next 5 minutes, right? Maybe you can, maybe you can't. What our experience is, is that there's varying degrees of competency in terms of financials. And it starts with the cleanest, and that's that you've been audited, right? That's rare because it's time, cost, and energy in cannabis. It's a new industry. But if you have objectives of going public or maybe merging with a SPAC, I mean, I'm on the board of a SPAC, that's trading on the NEO, and we need 3 years of audited financials for you to be our partner in de-SPACing. So there's varying degrees. You can have audited financials and they can be compiled, you can be reviewed, but you need somebody on your team and your CPAs to make sure that you are absolutely buttoned down from a financial perspective. Because a lot of it is, you know, that a lot of M&A is like, how does it feel to do business with you? Right? What is it? What are these early engagements like? Right? And so if you've got, like, if you can turn your financials, you start to give confidence to the buyer that, you know, okay, you know, there may be some things in here that I'm, you know, I need answers out about. And obviously there's the 280E elephant in the room, but you're giving a lot of confidence to the investor. To say, hey, you know, I've got my house in order and all my data is right here in a data room, and you can go check out any, you know, you can check out my tax returns, you can check out my, you know, yearly P&L, balance sheet, what have you. So I think that's the one that we see needs the most amount of work in terms of getting prepared for that and kind of going backwards and making sure, um, you know, you're, you're, you're capable of closing a transaction. Because remember, I think the buyers, there's a lot of them out there, they want to close the deal, but they can't because cannabis deals are largely stock deals because of license transfer issues. That obligation or those requirements to kind of handle 280E issues moving forward are ultimately on the buyer's plate as well. I mean, it can be structured into the deal, but so you want to have everything as clean as you possibly can from a financial perspective. So I'd say that's, you know, that's the place to start. So I'll pause there, Jason, if you want to chime in.

Well, yeah, absolutely. I mean, that bullet point, financial acumen, we could probably split that out into an entire presentation unto itself. You know, you had talked about a data room and just beginning to imagine yourself as a seller populating a data room. It's a good practice to go through outside of the context because once you get a term sheet, you're expected to go. The time to begin this work is not right before you go to market or after you get a term sheet. It's way too late for that. You know, this is a process if you've got, you know, a 6 or 12 or 18-month exit strategy. That's a process you have to begin working on now. A well-organized data room instills a lot of confidence in a buyer.

No doubt. No question about it. So I think that, you know, you're trying to be attractive as a target because you're attractive in terms of getting a deal done. And that's what the experience is from all the buyers are, you know, for every deal that closes, a few of them you know, 2 or 3 don't close and you don't want to be one of those. So again, it starts from right out of the gate. If you can prepare, you know, show that you're prepared. Obviously compliance is one that's, you know, quite fascinating because, you know, needless to say, you need to be buttoned up, buttoned down from a client compliance perspective. But the other thing that you need to be very clear on is what are any kind of license transfer requirements? I mean, you know, in California here, We've got all these different local governments, we call them little mini fiefdoms that all have their own roles in terms of how they allow for license transfer. And obviously that's the case in many markets. But we've seen a number of deals where there's a real desire to get a deal done, but the government has that third seat at the table. I mean, how many different industries does the government have a seat at the table? And you know what that means, and we all know what that means in cannabis. It's not good. And so, you know, part of that is just, you know, you need to have your compliance and everything, you know, clean as a whistle, all your SOPs. And that should be something that you lead with of how compliant an operation you run, because that's the risk of the transaction, is that the buyer, you know, has to kind of take on all of those decisions that you've made over the years and remain compliant, and even maybe a heightened degree of compliance given that there's going to be new owners on the licenses and what have you. So that's another important area, you know, in terms of making yourself a good target is kind of sharing and being upfront about any issues that might occur in a license transfer process. Some states allow you to do asset transfers. Most are stock transfers so that you have to, you know, buy the licenses and the, you know, you have to buy the shares of the company. So Long story short, it's, you know, this corporate hygiene on compliance is critical. And I'm sure, Jason, you deal with this all the time.

Even more critical in the context of stock sales than asset deals. Certainly critical in both contexts. But when you're putting up for sale the entire business, the going concern and all of its, you know, assets and liabilities that go along with that, you know, that's sort of a bigger corporate hygiene issue, as you put it, than just the salad bar of the asset sale, where the buyer can come in and pick and take and leave it as they wish. Can we just talk about your cap table and balance sheet bullet points for a moment? Because Those may be seen as sort of one, you know, one combined item here. But cap table sort of, what are we talking? I mean, we're talking about ownership and then we're talking about your, you know, the state of affairs of your finances and your balance sheet. And if you've got bad debt and, you know, other kinds of issues that might hold you back. Can you just sort of maybe separate those two?

I think it's safe to say that of the, you know, one of the most likely reasons why people come to us for assistance in selling the business is because they've got, you know, some issues on their cap table. Some investors, maybe it's as simple as like, I want out. I've been in this for a long time and I want out or find somebody to, you know, take me out. And maybe that same person might have a convertible note that's coming due, right? And that, you know, you don't have the capital. They lent you $3 million, and you don't have the capital to pay them back and that note is coming due and, you know, they may take a more aggressive tone with you and put your business into, you know, into jeopardy. So you wanna get out in front of that. There's no, those aren't bad problems. They're just life, right? And so when you're basically looking at, you know, your corporate hygiene overall, you need to get out in front of those. You need to have those discussions with your investors and saying, okay, you know, your note comes due in October. And I don't have the cash right now to pay you, so why don't we actually begin this process right now to see if we can find a buyer so that when, you know, your note comes due, we've got somebody there ready to take it over, or, you know, they convert to equity, what have you. I think it's really just about corporate hygiene, is about identifying your challenges to close. Your balance sheet obviously is one of them. I mean, you know, there's an increasing interest in acquiring companies based on EBITDA multiples and not revenue multiples. Because everyone's under pressure to show, you know, profit, right? And so if you've got, you know, a loss-making organization or, you know, a lot of debt on your balance sheet, those again are challenges. They're not insurmountable, but you don't wait till the last minute. If you've got a note coming due in October, you don't try to find a partner in September. So I think these things, you know, and it extends a little bit down into this, you know, this concept of executed agreements that I think are part of it. Is, you know, a lot of entrepreneurs in cannabis have been growing the business on kind of an agreement, whether it's, you know, they're not always papered, right? There's a lot of handshake deals, right? You know, or you've got, you know, evolving relationships with your vendors, your landlord, right? You know, so there's a lot of things that creep out of the woodworks to limit your ability to sell the business. And it's your job as a CEO or owner to make sure that constantly you're getting out in front of those issues or identifying what those issues could be, because you don't know if somebody's that perfect partner is gonna come around, right? They just, you know, de-spaced and they have a big hole in their product line and they wanna acquire a vape brand and you're that perfect company, but you're not ready. And so you wanna be, So part of this is just being ready at all times, whether you want to run a formal process or just be ready for that buyer when they come, is getting out in front of these issues that are going to stop you from closing the deal. Probably not going to stop you from getting an offer, but you're not going to be able to close and it's just going to ring up, you know, ring up a lot of expenses and, you know, not get you to where you want to be.

Yeah. Yeah. All right. This is great advice. Yeah. I think it's, it could also be said another way that these buyers are sophisticated. They know what to look for. They know what, you know, the warning flags are, warning signs are. You may not have been through a sale transaction before, but certainly they've been through many purchase transactions before. And, you know, they've got investment theories and boards to answer to themselves and limitations on themselves, and they know what to, you know, exactly what to look for. So you might not you know, like to open that conversation, for example, with that investor that's got the $3 million convertible note, because it's something that you wish just wouldn't be there or wouldn't be coming up on you. But ignoring it is not going to resolve the problem. And, you know, you've got to address these issues head-on to make yourself really a good target. Let's just talk for a moment, Eric, if I can— if we can just sort of move to the next slide here. And talk about, you know, how you think of these different markets, right? So a limited license versus competitive market or sort of unlimited licenses, and then how you think of retails versus brands. And maybe this might be a good place, Eric, I don't know if you want to— if we should throw up the poll here.

I think that'd be good.

Okay, great. So we've got a poll for the audience. We just, I just want to see who's on here and we're going to launch the poll now. So this is just to sort of see which direction we're going to take this conversation. If you could just go ahead and click one of these. Which one are you most interested in hearing about? Great. We've got some people, we've got it up now. Leave it up for 10 or 15 more seconds if you can just chime in there. So And then I will, let's see, I'll be able to post the results so everybody can see it. Looks somewhat evenly split, but retail and branding are in the lead, less interested in the cultivation and ancillary. So I'm gonna pull this down now.

That's consistent with the market, frankly.

That sounds about right.

Yeah, that's my—

So, yeah.

Yeah, we see it all the time, right? You can really bifurcate this market on— yeah, no, very, very good. Yeah, right.

Yeah, right. So yeah, retail and brands, that certainly is an area that people are thinking about and it is hot right now. So can you just sort of give us some thoughts about approaching you know, really from a seller's perspective, you know, what the differences are between these markets.

So there's a huge difference, and I'll certainly get to retail versus brand because there's a lot of different debates in the industry about those areas and where you should be. But let's start with kind of the, just the high-level overview of the difference of the markets. I mean, we have completely different markets all across the US. The easiest way to just put them in buckets is that there's limited license markets like Florida, where there's only so many licenses given out. And then there's much more competitive license. And even though Colorado and California and Oregon and Washington get most of the focus for competitive markets, even within California, You may say, well, local jurisdictions have limited licenses within a local jurisdiction. So there are limited license markets within more competitive markets. The point being is if you think about from the buyer's perspective, the buyer's perspective right now in cannabis today is where can I get the biggest bang for my buck? And so, I'm sure a lot of you follow these earnings announcements, but the one that just always jumps off the page to me is some of these Florida operators that are generating 50% EBITDA margins, right? That's an incredible return on invested capital. I mean, you invest $10 million in a grow in Florida and, you know, the next year you're making $20 million, you know, and generating $40 million of revenue. That doesn't exist in California, Colorado, these more competitive markets. So What it means is that these big MSOs are, you know, more willing. Yes, they can make acquisitions, but they're also willing to go it alone because effectively they are going it alone. I mean, they have to control their own destiny in these markets because a lot of them mandate vertical integration, and those that don't, you know, the, the MSOs are filling up as much of the value chain or the supply chain as they possibly can. And so, you know, the first, the place to start in terms of like looking at the markets is that you have a very strong position in a limited license market. You guys, you folks see M&A deals being announced, you know, almost every day at this point of pretty large transactions for companies that have an important footprint, an important asset in a limited license market. You don't see as much of that in the more competitive markets of California and Colorado. And so, you know, what's fascinating about this is while on the one hand the MSOs are clear what they need to do in Pennsylvania or New Jersey and what have you, they get out into these other competitive markets and they're not as clear. There's a lot of noise in the market, there's a lot of brands. So One of the things I find most fascinating about this cannabis space, just to digress for a second, is this kind of view of, are you a retail or a retail brand like a Gap, or are you a CPG brand, right? Like a Coke, right? And what I think is so fascinating is that you have all these MSOs who basically have told you, and you can read their literature dating back years, that many of them will tell you, I'm a CPG brand. But in order for me to be my CPG brand, I am going to acquire retail for the foreseeable future. And someday I'm gonna sell all my retail and just be a brand company, and it'll be my brands that I've launched through my stores. That's a, that's a very capital-intensive strategy to be a brand, CPG brand, but have to acquire a lot of dispensaries moving forward. And what you hear in that, you know, coming out of the MSOs' mouths is that we can get to the brand space, we can get there, you know, but right now acquiring retail is actually a safer investment, right? It's a little bit more consistency in terms of not being as volatile as acquiring a brand. So what you're seeing now is a rather slow shift to another more brand-centric strategy. So just recently in the last, you know, 90 days, we've had one here in California, the parent co. that is, you know, pursuing a brand acquisition strategy. And we had another SPAC announcement doing the same down in Southern California with Glasshouse. These are two companies right now that are set up to consolidate the California brand space. And so, you know, you have this industry debate is, are the brands gonna become from the West Coast where they are authentic and they've been around forever, or can you manufacture brands? And you can have a stake in this argument, you can have a point of view. Obviously the Western states think that the brands are all gonna come from the Western states, but, or, you know, and those that have really good CPG folks on the board think that they can manufacture brands. There's no really wrong answer, but I think what you're gonna— what you're seeing everyone realize is what does the supply chain look like in the market where you're going to compete? And the supply chain, I think it's basically, you know, industry standard now that you need to control your supply chain, you know, have a, you know, real influence on your supply chain. Even if you're licensing your brand, you have to make sure your SOPs initiated because your brand is all you have. It's your IP, and you can't let a third party kind of do any damage to your brand. So as you plot your expansion strategy, how you manage your brand, how you manage your retail growth strategy are, you know, very reliant on setting up the proper supply chain. And you've gotten, you know, differences of opinion on how to do that. But effectively, I think you've got the biggest debate right now is, can you pivot from a retail store owning hundreds across the state to being a CPG brand without M&A? And I think most people think now M&A is gonna become a big part of that eventually, not at the moment, but you're starting to see an increase in interest in brands.

Yeah, there's a lot buried in there that I want to jump in on, Eric. And I also want to sort of incorporate some questions that are coming in from the audience here. William Gao, who asked a lot of questions. William, I'm going to try to get through all 6 of your questions. Great. If we can, but I'm just going to try to pull out and keep it as much on that conversation as possible, the sort of retail versus brand and control of your supply chain. Obviously, in one of William's questions, you know, there's a difference between a retail operation and a vertically integrated operation, particularly in limited license markets. And that's a whole different beast, a vertical vertically integrated operation. But can we go back to— you mentioned about a move, a trend in the market about EBITDA multiples and valuation based on EBITDA multiples rather than sales. Can you just dive into that a little bit more and where are you seeing that? And from a buyer's perspective, why EBITDA is a safer valuation metric than a sale?

I think it's a natural evolution of the industry, given that the last time we were in a bull market in 2018, right, in cannabis, it was a land grab. And the land grab was all about top-line revenue growth. And then we hit a very brutal bear market where everybody had to level-set their businesses. And coming out of that, all the investment banks in Canada and all the companies that are publicly traded up there we're being pressured to be a profitable organization. And given the nature of the industry we operate in, these 50% EBITDA margins are crazy. They're almost like tech valuations or tech EBITDA margins. But I think what is pretty clear is that investors wanna see a sustainable business, not just rushing for the top line. So that comes on the heels of a bear market and where everyone has right-sized their business. And so everyone now is pivoting to telling a story about what their enterprise value is as a function. We're going to get to that in a little bit. I think we have a slide about looking at specific valuations. But, you know, the, the simple answer to that is, you know, they want to get to a point where they're, you know, free cash flow, they don't have to go back to raise more money. Maybe if they're you know, doing, you know, and we're talking about the MSOs, you know, market expansion often requires additional capital. An acquisition requires— is dilutive to shareholders. So, you want to make sure that the operations where you're— the states where you're operating, where you're, you know, leading in your respective markets are very profitable operations so that the investment community can project forward based on what they foresee as your growth potential, how much money you're going to be making and how much of that accretes to shareholders.

Absolutely. Eric, I think we should continue to plow through these slides and see if we can get to one of those EBITDA slides eventually. But before we move too quickly and pass over some interesting content, and we've got about 18 minutes left in the presentation. So again, you know, this would be a good time to ask your questions if you want to sort of take this conversation in a slightly different direction after the next 18 minutes. You know, feel free, just type those questions there in the Q&A. And also, of course, we're going to be— like I said, we're going to be sending out the presentation afterwards to everybody. So hopefully we can get through everything, but even if we can't, you'll get a copy of the slides. And we're gonna have Eric's contact information too, so you can continue the conversation directly with him afterwards. But, you know, we did talk a little bit about, you know, what is interesting to the acquirers, the buyers out there, the most active buyers, and where this market, where you see this market moving over the last year as we've sort of been through a bit of a rough ride. But obviously it's a bull market right now. I don't think there's any disputing that. But what's really hot is, you know, the retail and cultivation, particularly where they have a lot of control over their supply chain.

Yeah, I think that what you're seeing when you're tracking the M&A deals, you're looking at the deals are getting progressively larger, right? So as, you know, there's probably 10 MSOs that have a market cap over a billion dollars, right? They can't be running around making, you know, $8, $9, $10 million acquisitions. They're now— you're starting to see the average deal size be $50, $60, $70 million, right, in a new market. So they're really pursuing a scale, something that has significance, something that has growth potential. Maybe, you know, 3 retail doors open with 2 more that are licensed that, you know, that they can grow with. So I think, you know, We touched on a little bit of this and I know people really want to talk about valuation, so we can pass through this. But, you know, you're starting to see, I think the best way to say it is, you know, in these, in the markets where an MSO wants to move in or even a single-state operator, SSO, you know, they want to get to levels of scale and your piece in their puzzle is a critical, you know, adjunct to how they can get there. And so understanding where you fit with the acquirers, when you see somebody that has a big hole in their product line, that's a great opportunity. Or if you see someone that wants to get into your state, you're vertically integrated, vertically integrated, another great opportunity for you to engage with MSOs at this point and a great time.

Great advice. It's great advice. And, and, and, um, one of William's other questions that he had asked was just to about sort of changes upcoming and what you see where the trend line is moving to potentially with the SAFE Banking Act that most people here are probably familiar with and other sort of increasing pace of state legalization, state adult use adoption, new state medical adoption, although there's fewer and fewer states who are not yet in that place right now. Can you just sort of talk about that maybe in the context of fluctuating capital markets? I mean, I think most outside observers, and I guess the question for you is whether you would agree that capital markets are loosening and becoming more accessible and available to cannabis companies than they were, you know, even in the 2018 bull market run.

Yeah, no question. We've seen over $1.5 billion of capital come into the publicly traded companies since January. And that drives up their valuation, and frankly, it drives up your valuation too, right? It's floating all boats. And obviously, part of that are the headwinds, or the tailwinds, I should say, of legalization. Having said that, as you talk to people, and you talk to the large MSOs, nobody's really banking on anything, no pun intended, anything significant to happen here. In the next, you know, 6 to 9 months. Maybe towards the end of the year we'll see some legislation. And there's varying debates, so I'm not going to opine here because I think a lot of people are, you know, believing that we're gonna have interstate commerce in 2022. And, you know, generally speaking, I would say, you know, push back all your wildest dreams and expectations by about 2 years or maybe longer. Interstate commerce or having a large cultivation in California to sell oil to the East Coast states is still a good long-term business model, no question about it, but you need to be able to generate, you need to be able to sell what you grow in California in the meantime. I think that valuations are certainly going up, but it's better to just focus on what we're calling the arbitrage here so that you understand why you're of interest to those particular targets. If they're calling on you or if you're calling on them to sell your business, I think you really need to understand, you know, two things. That, you know, it's not all about valuation, it's about structure and terms, but also how do they value their businesses. And just real clear understanding on how the MSOs value their business, I think, is useful.

Yeah, we're gonna, we're gonna get to some examples on the next slide with some comps and looking at how they may value their business from an EBITDA perspective. But that word arbitrage, it's an interesting word to unpack if you've not encountered that word. I mean, it's just a general economic concept that you buy something in one market and you can resell it for a higher price in another market. And so you get a margin and that's the arbitrage. You know, move, and it can be applied in a lot of different contexts. But what you're talking about here is simply that the purchase price of your business is going— it's going to be worth more to the buyer's bottom line than what they're paying for it. And they're going to be able to arbitrage that asset that they now own, which is your business, and, you know, add to their bottom line more than what they paid for it.

Very simple.

So, so in our last 10 minutes here, let's just look at some of these numbers because this is a really interesting chart that you've got here, Eric, from, from some publicly available sources. And there's some familiar names here. Obviously the big names in cannabis are here. And can you just sort of, I don't know, point out a few important you know, revenue sort of numbers that you're seeing in here, growth numbers, even the numbers that you're seeing in here, and how they sort of come out on, you know, an average down here on the bottom line.

So I think the most important part of establishing a valuation for your business and other people's business is to understand that the publicly traded companies are operating on a multiple of 2020 EBITDA, sorry, 2022 EBITDA, calendar year 2022 EBITDA and calendar year 2022 revenue. Those are the most important numbers because they're trying to factor in the growth of what this company can look like. So it starts with like, do you even have projections? I mean, if you have projections, you should have a really solid set of projections for the next 2 years because the buyer is going to be looking at this and saying, okay, you know, how do I incorporate it? How does this fit with my multiple? So you have, for example, you have, you know, an EBITDA multiple in calendar year '22. These are estimates, right? And so you have at the bottom of the page, you see the average EBITDA multiple is about, you know, of 2022 earnings is about 12 times revenue, or 11.5. It's it says there, right? That's a very meaty multiple. That is a good multiple. Those, you know, there are a lot of tech companies that are selling on multiples of future earnings like this. So the multiples are solid, right? But if you're only providing the seller with like, you know, your historical financials, then you're not giving them anything to value on other than trailing 12 months revenue. And you're just shooting yourself in the foot. Because what you should be doing, assuming you're growing, right? If your revenues are just flat, it's a different story. But if you're growing, you want to present to them the growth model of your business, how profitable you're going to be, you know, and over the course of the next couple years, so they can look at it and say, oh great, well, I sell for 12 times my 2022 EBITDA projections, and here you are, I'll buy you at 5 times your 20, whatever the number is, right? Whatever you negotiate. But those are still much better multiples for you to be focused on than your trailing 12 months EBITDA, because that only happens if you haven't taken the time and energy to prepare a sophisticated, well-thought-out 2-year pro forma, minimum 2-year, maybe even 3. You're just losing an opportunity to say, I want to value my business based on future models. 'Cause everyone's gonna say, well, we do the same thing. So be ready for that. And you're likely to get a better valuation if you understand that you're not gonna get 11.5 times 'cause they're publicly traded, but you're gonna get somewhere maybe half that or in that vicinity. Still an excellent valuation for your business. It's probably a lot better than looking at trailing 12 months.

It's really great advice. It's hard to, overestimate the value, the millions of dollars that are just hidden right there in Eric's advice, because there are so many sellers that I encounter who have a hard time putting themselves in the buyer's shoes and understanding how these buyers would value themselves and in turn how they would value your business if just given the opportunity. And if you only look at yourself in a historical way and sort of aren't taking these multiples, you know, understanding what your buyer's arbitrage opportunity is, really, right? Because that's, that's really all this is. What, you know, you value yourself differently than how they value themselves and how they would value you if they were part of your business or you were part of their business. So you need to understand it from the buyer's perspective. Obviously, these are some of the biggest, most active acquirers out there in the market. And the averages here are very, very meaty as far as, you know, the EBITDA multipliers in the 10, 11 times, 11x, which is a very impressive number. So if you're growing, and yeah, I think Eric, you've got a great point. If you're stagnant or, you know, losing market share, you don't necessarily want to try to pitch a forward-looking EBITDA number because that might not have the same appeal. But for most cannabis businesses, which are still in a growth mode, this is the right way to think of it. So we've got just a few more minutes here. Eric, I don't know if you want to move on to the next slide or if you want to chat about this one a little bit more. The next slide we're going to talk about—

I think we're going to run through the next slide. Just really quick, right? Because I think, you know, it has some issues, right? So cannabis is notorious for deals falling apart. We've talked about some of the reasons why, but one of the reasons we see is people negotiate, you know, there's an LOI, right? A letter of intent. And, you know, the buyer and the seller do not negotiate the full terms of the deal. Certainly on the commercial side, you can't cover every legal point in an LOI, but you can cover all the basis points for the commercial terms. And so, if you leave those, if you're a seller and you basically agree to kind of not negotiating all the details and kicking that can down the road, you're gonna lose all your leverage because you have leverage at a point until you sign that LOI. And so, and use that leverage and that, you know, advantage you have to negotiate all the terms. But we're seeing a lot of people that don't really have those hard conversations until after they sign an LOI. Now they're spending money, everyone's spending money, and they don't really get to an agreement because they didn't spend the time on the front end. So you're gonna save a lot of time and money and actually likelihood that a deal closes by going through a detailed LOI. The second one that I think is general to all deals is that, you know, you get into it, you start to get to know each other. The biggest thing I would say that plays out here is the seller gets to know the buyer intimately. We call that reverse due diligence. So you're actually saying, okay, you wanna buy me, but what's your strategy? And as you get to know each other, as that progression takes place, you start to understand their vision, their products, their strategy, and you say, that's not really how I see it. I don't really think that's the right strategy or what have you. So during deals, there may be no way to stop that alignment discussion, depending on certain situations. But you wanna have those alignment discussions early in the process to make sure, and frankly, before you sign the LOI, to make sure that you would even believe that a combination of this is the proverbial 1 1 3, right? Because if you can't get there, then find that out as early as you can.

And so this is for the 90%, 95% of sellers out there who are gonna grab an oar and continue rowing. Or do some seller take-back financing or something where they're buying into the acquirer's business. Not for the cash-out, go-to-the-beach person, but this reverse due diligence, this is very important. 'Cause you see the dollar signs on the LOI and that can draw you in, but then you actually, whether you sort of intend to or not, you do this reverse due diligence, you get to know your acquirer. And you may realize, well, this is not exactly going to be a marriage made in heaven.

Yeah. And you know, Jason, I'm gonna make two quick points here 'cause I know we're coming up against it, but two, one from each of the categories, the seller corporate hygiene and buyer can't close. I'm gonna make two points here that I think are important and happy to take it offline with anyone who wants to chat. But one of the areas we see on the sell side is that we talked about those pro forma projections, right? Well, cannabis deals take a long time to close, right? They're not like— you don't sign an LOI and close 2 months later. It's usually 6 or 9 months. Well, you've provided projections to that buyer on your business, and what happens if you've been overly aggressive and you inflated those projections and you start missing them while you're negotiating a definitive agreement? You know, the other side starts to wonder, hmm, this is not what I was signing up for. You are unable to hit these projections. Are we starting something? Is this the way it's always going to be? And that, you know, you could take, again, you could take a lot of different approaches here, but what the buyer's gonna do is say, you know what, you're not hitting your numbers right now. Let's reconfigure this deal. Let's add a little earnout to this deal and like make sure you hit your numbers. So there are, you know, real challenges that impact your deal. They might say, I'll pay you all cash at close for your deal, But as you're going through the process, you're like, you're not hitting your numbers, you know. And so that's really important for the seller to understand that, you know, you have to be a realist and, you know, don't sell a hockey stick growth if you can't hit that hockey stick growth because it's just gonna come back to bite you. And frankly, it might just be a result of somebody saying, you know, you're so off, all of this was a pipe dream and it's not gonna happen. So, or half of it was predicated on you having $5 million in cash.

Right?

So that's a big one on the seller side. And I'll just make one more point on the buy side, 'cause this is probably the biggest point. And if there's one takeaway that you take away from this discussion today, it's that the buyers are out there making LOIs, you know, presenting LOIs to lots of different companies. 'Cause they know that a lot of deals don't close. They know that, you know, for every LOI they issue, or even sign, not all of them are going to close. Well, I think what they do is they treat the LOI like, you know, an option to acquire. Like one MSO says, "I flip LOIs like pancakes." That is not particularly— that's great to get offers and throw offers out there. That is not, you know, what you want as a seller because you want to make sure that they're focused on your transaction. So, two ways to do that is either you make them pay for that option to buy. Okay, you're gonna sign, you know, we're gonna sign an LOI, but you're gonna move some money over to my account as an option to buy. You're actually gonna pay for that option if you're serious. Sometimes they don't do that, and it's a great way of signaling that maybe they really weren't that interested in your business, right? Or they've got— you can just flat out ask them, how many signed LOIs do you have right now? You'll often hear the answer is north of 5, and you don't know where you're gonna fit in that because what happens in cannabis deals take a long time. We call it deal fatigue. There's no more, you know, greater challenge in getting a deal closed than overcoming deal fatigue. And that's oftentimes you're number 6 and you're like, hey, when are we doing my deal? This is frustrating. When are you going to focus your time on me? Say, well, I got another deal, I'm working in this market, what have you. So You know, you really need to hold your buyer's feet to the table. Having them put up some money is a great way to do that and really getting their commitment that your deal is mission-critical and that they're not going to chase another shiny bright object is probably, you know, the most important piece of advice I could give.

You put that deposit in the LOI and you tie it to the no shop, and that is going to be a very reasonable way for a seller to approach a deposit It's a quid pro quo. You're taking your asset off the market for some certain period of time in exchange for a relatively small payment, a small fraction of the purchase price. And it's a way of sort of getting that buyer to put a little bit of skin in the game at the beginning so that we don't have this shiny bright object syndrome. Eric, we have to wrap. We are up at our deadline. So Eric, your email address is not a typo there. It's just o@koacq.com. Please go ahead and, and, and go ahead and, you know, reach out to Eric on email, find him on LinkedIn. I don't know if you're active on LinkedIn, Eric, or, you know, however you want to get in touch with Eric. Obviously, if you are planning If you've got designs on an exit or an acquisition, you need some advice about how to get your corporate hygiene in order, how to make yourself a viable target, go ahead, reach out to Eric. He's gonna be a great resource for you. Remember to tune back in with us. Watch for the announcements for May 16th for the next Cannabis Business Key webinar and all the rest of them coming up for the rest of the year. And, Gosh, thanks so much for joining us today, Eric. This has been a great conversation.

Looks good, folks. Thanks everyone for chiming in and participating. Good questions, and look forward to carrying on with anybody. Happy to help you in any way I can. Thanks, Jason.

Thanks again. Thanks again. Everybody have a wonderful day and a wonderful weekend, and we will see you here next month.

Bye-bye.