October 22, 2024 • 39 mins
Join us for a game-changing discussion with Darren Gleeman, Managing Partner of MBO Ventures, as we delve into the transformative power of Employee Stock Ownership Plans (ESOPs) for cannabis companies facing the stringent 280E tax burdens. Discover Darren's patented ESOP methodology that has helped companies like Theory Wellness navigate financial hurdles and foster employee empowerment.
Darren shares his insights on:
- Mitigating 280E tax implications through ESOPs.
- Real-world impacts and case studies from the cannabis industry.
- The role of ESOPs in enhancing employee financial well-being and promoting social equity.
This episode is a must-watch for cannabis entrepreneurs and business owners looking to understand the financial strategies that can lead to sustainability and growth in this challenging market.
Don't forget to subscribe for more insights into cannabis business strategies and stay informed about the latest industry trends.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Cannabinoid Connect,
the nation's most diverse cannabisrelated podcast.
All right. It looks like we're recording.
Darren, it's good to see you.
Welcome to the podcast.
(00:22):
And I'm psyched to be here.
Let's get started with this.
We're going to have a good conversationtoday.
And I'm excited because, you know, we'regoing to really peel back the onion here.
We've talked many times on cannabinoidConnect about,
you know, the hindrance that two ATP
puts these operators in in termsof the tax burden and just, you know,
(00:45):
and just there's so many hurdles to jumpthrough to be successful in this industry.
And it seems like you've found somewhat
of a kind of silver bullet.
So what I'd like to talk first aboutis just this let's for this conversation,
let's lay the foundation with whatan employee stock ownership plan is.
(01:05):
And then, it's already sounds confusingand then pretty confusing, right?
So that's why we're going to dive into it.
And then we'll talk about the impactsin cannabis and so on.
So let's just start there.
Yeah.
Biggest probbiggest problem with this thing.
The Esop and Esop employeesequential plan.
It's his name.
And you look in and you start googling itand you go to the IRS website
(01:27):
and you go, you know,
15 seconds in and your eyes glaze overand I, I don't know what this is.
It sounds like a pension plan.
It's not a pension plan, right?
An Esop is just another wayto sell your company.
That's it.
It's just a way to sell you a company.Right?
You could sell your companyto a private equity firm.
(01:48):
You can sell your companyto a strategic buyer like a large MSO.
Or you can sell to your
employees viathis structure called an Isa.
That's it.
That's what it is,is a way to sell your company. Now,
why would you sell your companyto employees?
They don't have any money, right?
(02:09):
Well, you know, private equityseems like they have tons of money.
Right.
And strategic buyers,why would you sell to your employees?
And M&A activity is huge in cannabis rightnow, right?
I mean, the end goal is being acquired.
So the yeah.
Yeah, it's yeah, the end goalis that acquisition,
that exit opportunity right nowit's very difficult to have that exit.
(02:31):
And there's no money.
There's no private equityfirms in the space to actually go out
and acquire companies.
And that's
because with federal legalization issues,you have the whole know your customer.
And, what do you call that?
Whatever.
Right now, it's still illegal.
So a lot of these, limited partnerscan't get into the space.
In terms of the large MSOs.
(02:53):
Yeah, there's some M&A activity going on.
They'll buy larger firms.
And when they buy these larger firmsnot giving them any cash, they're giving
very little cash is mostly stock, right.
So again, where does this Esop sellinginto sell to the employees come in?
Well, why should you do it?
The government gives youa lot of incentives.
(03:14):
It gives you a lot of incentives to do it.
One of the incentives,which is a really cool incentive,
is that if you sell a 100% of your companyto the employees via the structure,
if you sell 100%, the company pays zero
federal tax and zero state tax forever.
And when you're paying zero income tax,
(03:37):
it does not matterthat you can't take deductions.
So 280 becomes irrelevant.
Let's say that againfor the people listening.
So if you sell 100% of your companyas it through an Esop,
you are taxedexempt 280 becomes irrelevant.
At that point. At this point, yes.
(03:57):
And I like to say that a thousand times,you know, because ESOPs right.
They're not boring.
This is the most non-boring thingin the entire industry,
because you get to not pay any tax,which means that you can double
or triple your cash flow right awayas soon as you sell to the Isa.
(04:17):
It's pretty phenomenal.
It's very funny.
And I'm going to ask the follow upobvious question, which is,
okay, do do operators know about this?
Is this why you're, you know,
you're out here with the megaphonegoing, guys, look over here.
I mean, is it just
we don't know what we don't know in thisindustry right now in terms of ESOPs,
(04:38):
you don't know what you don't know.
And this is the biggest gift to the eto the cannabis industry.
And it's taken me yearslike you didn't know about it,
you know, until like couple of days ago.
Right.
So about three years ago,
someone comes to me
and they were learning about ESOPsand they were in the cannabis space.
(05:00):
They start learning, right?
They're like, you know,
there's this thing called 280and they explain it to me
and then they say, and we both at the sametime, like, it doesn't matter.
Two it becomes irrelevant.
And it was like, wow. And no one knows.
No one has a clue.
And the thing is, with ESOPs again,like I said, if you look at it right now
and you go
(05:20):
googling ESOPs, you're not going to knowwhat it is because it's so complex.
What I do is I dilute it downand in my own mind I can dilute it down.
So when I found out about this,I was like,
oh my goodness, this is the biggest thingsince sliced bread.
And I went out and started tellingthe world, well, I started doing is going
to every single attorneyin the cannabis spaces I can find.
(05:42):
I would try to get the meetings.
I would go to every single accounting firmthat I can get to
and try to get meetings,and I was able to get a lot of meetings,
and it took a long timeand people didn't believe it.
Like, these are
these are cannabis attorneysthat they just didn't believe it.
So final.
Finally, I get a meeting withthis guy's name is Eric Berlin,
(06:04):
and Eric Berlin is the head of cannabis
for a law firm, called Dentons Law firm.
Now, Dentonsis the largest law firm in the world,
and they have one of the largest cannabispractices in the United States.
They are a big behemoth.
So I sit downand I explain it to Eric and Eric.
(06:25):
Pete kind of believes it is like,you know,
there's a lot of fishy things goingon. This.
But I hear what you're sayingand I go through, I explain why it works.
He's like, well, let me look into it.
I proceed to have with Eric
and dozens of attorneys over the next six
months, many, many meetings until finallyand this is about
(06:48):
spring of 2023 or winter 2029.
It was like, spring 2023.
He calls me and he's like, you did it.
This completely works.
I can't believe you didn't know aboutthis.
We're going to give you a quiet and we'regoing to write an opinion letter on it.
And with a pain that is going to be
a should level opinion letter should levelmeans it became a street level.
(07:10):
Street level is the highest levelopinion letter that a law firm can get.
So having the largest law firmin the world writing this new level
opinion letter on this was a game changer.
For peoplethat still that that knew about it
and now you still have other attorneysand accounting firms
and, dispensaries and manufacturers.
They still don't know about itbecause you have to tell them so.
(07:31):
Right. I need to get out there.
Well, maybe this I mean, no, thisconversation definitely will help today.
And so let's dive into a bit deeper,right.
To not to get too much into the weeds,but tell us this methodology,
tell us the stipulationsin terms of the employee side.
Like, you know, how are theyvested into this stock once they buy in.
(07:52):
Is there term limits? Is there caps?
All that kind of stuff?
Yeah. Okay.
So bottom line is the employeeshave no money, right.
Let's just go.
Let's just walk through slowly. Right.
Back to private equity.
Okay.
So, so people understand
private equity is they want to getbought out by private equity.
That's like the Shangri-La.
Everyone thinks, oh, that's amazing.
What? Getting bought out.
(08:13):
Well, here's the secret that nobody knows.
When private equity buys you,they're not giving you the money.
They're giving youvery little of their own money.
Let's take an example.
Let's take a company,make very big numbers.
Let's say the company is making$20 million a year in net income,
and the value of that companyis 20 million times five, $100 million.
(08:34):
Very easy clean numbers.
Well,
well, they want to buy a company is worth$100 million.
They don't give you 100 millionfrom their own fund.
They give you $20 million.
Okay, then what they do is they borrow
$60 million three timesyour net income to bar 60 million
from a banklike JP Morgan off of your cash flow.
(08:56):
So if you had cash flows$20 million a year, they can borrow 60.
So you get 20 from them.
They get to spend themselves.
They borrow 60 from JPMorgan.
That's 80 million.
The last 20 million is called an earnout.
And that means as long as you reachedthose numbers that you told me
that you're going to reach,then you're going to get paid.
If you don't reach those numbers,you're not going to get paid
(09:19):
with an Esop.
It's the same thing, right?
Except there is no equity.
That's how the employees buy it.
Now there is no money from the employees.
It cost the employees literally nothing.
It's a complete gift from the IRS,and it's a gift from the owner.
The way it works is this same company
$20 million in net income, $100 million.
(09:40):
We can say something.
No, no. Keep going.
Okay, okay.
Okay.
So, what they do is you go outand you borrow that same $60 million.
Now, in the case of the mistakes, when Isay borrow, there's no money to borrow.
There's very, very little money out there.
You can borrow money, but at rates around22%, which is kind of insane.
So but for sake of example,we're gonna go through this,
(10:00):
you go out and you borrow the same$60 million from a lender,
that $60 million, the company borrows it,and that gets paid to the owner.
So you gonna get 60 million?
The other
$40 million is what's calledthe seller note.
That's an IOU from the companyback to the owner.
That's how they get that $100million with the up.
(10:21):
All right.
Now here's something I didn't mention,
which is another aspectof another cool thing about an Esop.
This is called becoming.
Yeah, yeah.
No. Normally you sell your company, right?
You sell your company.
And anywhere in the countryyou sell your company,
you have to pay capital gains on that.
Right? That's another form of taxto pay capital gains.
So across the countryexcept for Texas and Florida,
(10:45):
capital gains, stateand federal is about 30%.
So if you sell your company for $100million, you have to pay $30
million to the government in capital beatsgot to pay that $30 million.
Except when you sell to an Esop,
the government allows you to deferthose capital gains, right?
You can defer the capital gainswhen you sell to an Esop,
(11:06):
and you can structure,
if you structure correctly,you can defer those capital gains forever.
So that's another advantage, right.
That again, people don't knowhow does that deferment happen.
What are the requirements for that.
Here's the catch for that.
They say, look, if you sell your companyfor $100 million a year, employees,
what you need to do is you need to takethat hundred million dollars
(11:29):
and you reinvest that in stocks
or bonds or some other type of asset.
Okay. Well, what does that mean?
Well, that means that I want
to put a $100 million in to actually buy,let's say it's a bond.
There are these bonds called floatingrate notes.
You can also buy real estate.
All right.Let's use real estate as an example.
(11:50):
I have one year from the date of my saleto my employees.
I say sold today. Today is October 15th.
I sell to the Esop for $100 million.
I have 12 months to reinvest that
and buy $100 million worth of real estate.
But when I buy the real estate,I don't have to put $100 million down.
I can put downwhatever the financing needs.
(12:11):
And right now, the financing to buyreal estate is about 2,025%.
So if it's a $100 million property,I can put down 20, $25 million
and then I buy $100million worth of property.
So instead of paying 30 million in tax,I put the $2,025 million down.
I now have income producing real estate,and as long as I hold on
(12:32):
to that real estate,I never pay capital gains tax ever.
You basically don't have to putall the 100 100 million up front.
You can just put that down payment inand then slowly finance.
But you still qualify,is what you're saying, right?
That's correct.
Now, the reason why I wentand I was explaining
that whole complicated thingabout how you would buy it.
(12:52):
Number one,is it cost the employees anything.
But number two, this is really interestingbecause even though you're selling
the company today to your employees,you're going to get a chunk of warrants
back in the futureto buy back a piece of your company.
The buyer is going to be my next.
That was going to be my next questionis like, well, does the owner lose out?
Right? Like,what if the company does really well?
(13:14):
Yeah that's fantastic.They are not losing out.
This is how it works.
So rememberI said that example's $100 million, right.
And we
had here in this example,we had $60 million in seller notes.
No, no, no, we had 40 million selling usan example, but we got $40 million.
We borrowed.
We bought, sorry,we borrowed 60 million from JPMorgan.
(13:36):
And we have a $40 million on that.
Seller note, by definition, is more riskythan that loan from JPMorgan.
When JPMorgan lend you money or any banklend you money, they want senior position.
What that means is if your company goesunder, they're going to take it.
They're going to take the keysand they take the company
that's called senior,the seller known as junior.
(13:57):
To them I get what's remaining,but there's going to be nothing remaining.
Most like it's going to get nothing.
So by definition, my seller note is morerisky than JPMorgan's senior lending.
No right by definition, which means
I deserve a higher interest ratefor the bigger risk that I'm taking.
Now, let's just say
(14:18):
let's just say the market interest ratefor that seller
note is let's just say 15%
putting 15%.
Even in the cannabis world, it'sstill a lot of interest
to put on to your companyto pay me back 15%.
Right.
So, so you say, look, let's sayis your company, Kevin like Kevin,
instead of paying 15% on that interest
(14:38):
of getting 15% every year, how about that?
Sell a note. You're going to get 5%.
Okay.
Well, I just told you you deserve 15.
And now I want to give you five.
So in lieu of that 10% instead of that
10% you're going to get warrants, okay.
You need unit warrantsto buyback a chunk of the company.
You can get warrants anywherefrom 10% of the company to 40%.
(15:02):
And we can push and pull leversto get you from the 10 to 40%.
Let's say you choose 40% warrants.
Okay. So
the warrants to to get the warrantsto initiate the warrants.
Right.
There's a certain priceto buy back the stock. Right.
There's always a price to it.
So the warrants, the price,the predetermined price to buy back
(15:24):
40% of your company or the $100million company, the buyback, 40%.
The predetermined price forthat is about $15 million.
So if you think about that.
So for $15 million,the time frame is about 15, 20 years.
Any time in the next 15 to 20 years,whenever you're ready,
you hand in those warrants,
(15:46):
you hand in the check for $15 million,
and you get back 40% of your company.
Even if this is now seven years down theroad, federal legalization has occurred.
Budweiser comes in to buy the companyfor $1 billion.
Okay, great.
The deal is done for the billion dollarsI hand in my warrants,
write the check for $15 million,and they get back 40% of the company.
(16:10):
The billion dollars comes in.
I, as the warrant holder, get 400 million,
and the employees get the other 600million, the 400 million.
And that's a second bite.The apple for me is the owner, right?
Because remember,I sold the company today for $100 million.
Now, with these warrants down the road,I'm selling it again.
(16:31):
So at that point,selling it down, selling it again,
that's where the employees can reallybenefit, especially in the cannabis space,
in the nor in the normal world,
you may not have a sale 6 or 7 yearsdown the road and the cannabis space.
Everyone is really stoked to havethat exit.
Federal legalization.Everyone is waiting for that.
And that's why the Esop structureis phenomenal for the owners.
(16:54):
But for the employees, it is life.
It could be lifechanging or generational changing
depending on how much money they getat the start of legalization.
Well,and I'm glad you brought up the employee
benefits because,I mean, that's to wrap up the what?
Right.
Tell me about the employee experiencewith ESOPs.
Right. So like salary,
(17:16):
how do they investand how do they vest these, you know?
Yeah, yeah, yeah.
So, the way it worksis this cost the employees nothing.
This is something it's callednondiscriminatory.
So every employee is part of itautomatically.
And it's very simple how they get stock.
It's all based on their salary.
So if you make $100,000 a year
(17:38):
and I make $50,000 a year,
you're going to end upgetting twice as much stock as I am.
Very, very simple.
Now there is one groupyou can discriminate against
and those are union workers.
You're allowed to give a union workerthe choice.
The choice is you can stay with the union.
Fantastic. Great.
(17:58):
But you can't be part of the Esop.
Or you can choose to be part of the Esopand not the Union.
You're allowed to give union workersthat choice.
So those are the only group that you can.
That's called discrimination.You're allowed to do that now.
There are
there's probably not one union employeein the world that would ever choose
the union over an Esop,because it doesn't make sense
(18:19):
that you have the chanceto become an owner.
Why would you want to becomebe part of the union?
So that choice, it's pretty easy for Esop.
But there are companies
that say, look, you can be in the Esopand the in the union.
And then also once they do that,
there's also issues there because, well,wait a second, I'm an owner now
and I'm going to be a unionagainst myself.
So it's it's kind of weird right nowin terms of vesting
(18:41):
the way it works normally.
Right. Normally, vesting means,
when can I takewhen am I going to be getting the stock
or what percentage of the stockcan I actually get.
Can you exercise stock. Yeah.
But so well not exercise. What can I get.
What can I,
what when can it be
(19:02):
part of my portfolio, which is differentthan when they can actually get
the two separate things?
Okay.
So you justyou're just starting to firm today.
You're that you joined the firm.
We're not getting any stock. Right.
What happens is every year stockis allocated to the employees every year.
And stock allocations over about a 25 yearperiod.
(19:22):
Stock is allocated.
So if it's a 25 year period,that means the stock
is going to be allocated a 4% a yearacross the right every year, 4%, 4%, 4%.
But I start today.
I'm not getting any allocation.
I'm there for one full year. Great.
I get an allocation of 4%,but that doesn't mean I'm best it.
It is a different thingbecause if I quit after one year,
(19:44):
usually the best thingis about 20% a year for five years.
So that means that
if I'm there for one year,even though I'm allocated 4% of the stock,
I've only been invested 20%,so I only get 20% of that 4%. God.
So if I'm there for two years, it's 40%60, 80, 100%.
Once I'm there for five years,I fully vest.
(20:04):
So after five years,you have five times four.
There's 20%.
The stock has been allocatedand now I'm fully vest.
Now if I leave, if I leavenow let's say I'm 30 years old, I leave.
Usually it'll be in the plan.
What will happen is the ownerswill not pay you out when you leave.
They'll pay you out five years later.
You're allowed to do that.
(20:25):
You're allowed to take five years timebecause you want this Esop
to start building up the companyto be able to build up.
So the government doesn't want to stressthe company with everyone leaving.
Plus they want to disincentivize youto leave at 30.
When you're old,they want you to stay until you retire,
because the longer you stay,the more money you get.
And if you stay until you retire at age,whatever, 62 or 65,
(20:47):
then when you retire,you get all that money
and you don't actually get the stock.
The way it worksis you you, hand in the stock
and get cash instead of the stock.
And that's how you would get it.
Unless unless the company gets sold,
that's a different story.
So in cannabis,if the company gets sold, like in 2030
and I'm there, I automatically vestand I get the stock automatically.
(21:10):
So if you sell it, what happens is allthe money comes in to everybody.
Like an exampleI just gave in before I said
Budweiser cousin for $1 billion,and the owners will get 400 million.
The employees will get 600 million.
So at that point,whatever employees are there,
they're going to get their full allocationof stock.
It's I'm glad you clarified the,
(21:32):
the five yearkind of minimum to be vested.
And then if you leave, you can stillyou can still get that stock.
But right,there's they're desensitizing you
because they want you to staybecause from what
I've heard you on other podcasts,I didn't know if like, being
with the companyuntil you retire was a requirement.
But you can it's not a retirement.
It's not a requirement at all.
(21:53):
It's just that you're incentivizedto do it.
And especially the stock is doing well.
The company is doing well.
You don't want to leave because yousee your account start to ratchet up.
Like, I don't know if you know this,but there's this company called Publix.
Publix is a supermarket out, out west.
It's one of the nation'slargest grocery store chains.
Yeah.
And you walk in thereand everyone is super friendly.
(22:14):
They're the nicest people.
You'll have these people at the cashregister that are like, they're old
and they don't.They don't look like, much.
They're super nice and super sweet,and they're millionaires
because they like really Esop oh,that's right, they are multi-millionaires.
It's insane when you walk into a Publixand you see these people
and they're so happy.
(22:34):
Yeah, they're happybecause they are millionaires.
You know, I've talked to older folkand they're like some of them have joked
and said, hey, in my retirement, you know,
I want to have just an easy part time jobwhere I'm a Walmart greeter or whatever.
Right?
But if you could work for a companyand if you're there
that long, you could essentially havethat kind of work right
where it's not so strenuousand you're you're making money.
(22:55):
I mean, through this.
That's great. Yeah.
Yeah, yeah, it'sgreat for the employee into the employers.
Right.
Once you explain this to the employees,takes a while from the again,
because a lot of times, just likewhen I was pitching it to, cannabis firms,
employees don't believe it.What do you mean?
I'm getting this for nothing.
But once they start getting,it takes about a year.
They realize, yeah, this is very real.
(23:17):
And now all of a sudden, there's a
there's a shift in productivitywhere they become more productive.
And in terms of retention,they're not quitting.
Why would they quit?
Yeah, that's all I was going to say.
I mean, it's hard to interject,but it's like it's
it's almost perfect structurefor the cannabis industry because right
now, as you pointed out, like untillegalization happens or states continue
(23:37):
to come online, it's really a hunker downsituation where we're grinding it out.
We're trying to survive, right,with the 280, hurdle.
But, you know, going this route,it seems like you to alleviate
a lot of those issues and those challengesand really help the company focus
on what's important,
which is producing a high quality productthat's safe and ineffective.
(23:58):
Right?
Oh, yeah.
I mean, your cash flow doubleseven if two ADP goes away.
Right. Let's say rescheduling occurs.
Let's say rescheduling occurs,you know next year.
And I'm all for it right.
So now you're effective tax rate.
Let's say you're making nor let's sayyou're making $2 million a year right now.
If you're making $2 million a yearin the cannabis space, well, you're paying
(24:19):
about $1.2 million in tax, right?
If two ADP goes away.
All right,now you're paying $1 million in tax.
So you're still it's not like028 goes away.
Now it's all great.
Just two eight Israel punch in the face.
But taxes in general are real punch in.
Yeah California.
Is that like what I meanI'm going to say the wrong number, but
it's like in the high 30s, like 38%or something like that, or maybe over 40%.
(24:42):
It's crazy.
Oh, the effective tax rate.
Yeah. I mean,because you guys are you're from Texas.
You have no idea.
Yeah. You have no clue how hard it.
Okay. I'm in New York on tax.
Yeah about 51% okay.
And same bring me to reality man.Yeah yeah yeah yeah.
You're in like the special.
You're like another world account.
And so like Californiais a completely separate universe, right.
(25:03):
They really they're their own country.
And that's a very high taxedcountry. Right.
So you have the federal tax, you know,which is crazy that you get taxed on.
But then you have the federal tax.You have the Social Security tax.
There's just taxed upon tax.
So yeah, in the cannabisindustry in California,
they're probably taxed at aroundbecause the 280 you're
looking at a lump for a dispensarythat could be at 6,570%.
(25:26):
So and that is it's insane.
It's insane. Yeah.
So California, this is like a,this is a game changer.
I don't know if any Californianseven know about this right now.
I haven't pitched it to anybody.California.
We're gonna we're going to definitelyblast this thing out once it goes live.
But, you know,we're getting some good education here
today, and I want to talk nowso we know the what.
(25:49):
Right.And now let's talk about the impact.
So tell me some real world examples,
of how this is financially transformed.
Some cannabis,
you know, businesses through ESOPs.
Yeah.
So in in 2023, we have structured,
four cannabis companiesthat closed that are now
(26:12):
fully 100% owned by the Esop structure.
And they are,
I can say
I think they're all out of the closet now.
So we have,
we have theory, which is a,
I had large, yeah, yeah, there's a,
there are large MSO
(26:33):
canna provisions, which is in,
Massachusetts.
There is the vault,
which is a dispensary chain,and we have East Coast
cannabis in, up in, in Maine.
Okay.
And they're all doing super.
They're doing super.
Well, the employees are startingto understand what's going on.
(26:59):
And these are all very smart peoplethat did this.
Because, you know, thesethese are the, the leaders of the group.
And that had to understand. So,
you know, we had many meetings with themand they were very, very focused.
These groups are very, very focusedon the employer and employee welfare.
Yeah.
That was a bigthat was a big reason why they all did it.
(27:21):
And the the cash flow,
paying no tax was secondary,but it was fairly huge.
And yeah, it makes a big differencewhen you're doubling
your cash for doubling, right?
I mean, and of course, right.
And then, I mean, I don't know how soonlike they have structured in an Esop, but
(27:42):
have you seen any data in terms oflike you mentioned, employee retention
rates, job satisfaction, change in companyculture, things like that?
Well, they're all they're all beginningto change the company culture.
They're getting it out.
But no, I haven't seen any data yeton the firms I've spoken to.
The, the founders, I've spoken to CFOs.
(28:04):
And they're all extremely happy with it.
And they're saying that the employeesare happy with it.
But at this point, it'sstill for the employees.
It's kind of new.
Gotcha, gotcha.
Well, after we recordhere, I'll have to get those the contact
information for those, organizations andmaybe have them talk through how it's kind
of maybe transformed or changed their,their operations, you know, so that.
(28:25):
Yeah, absolutely. Absolutely. Yeah.
So tell me how cannabis companies
can overcome Esop adoption.
We know that education is lacking,
and we're trying to address that heretoday.
But, you know, talk to me like, whywhy haven't more cannabis companies
adopted ESOPs outside of like,I guess the thing about it is or that,
(28:49):
yeah, thatthat that is the only thing there's no.
Well, okay.
Let's see companiesthat I've spoken to about it,
right now with 280, there's a
lot of companies that are in the middle ofthey don't know what's going to happen.
They don't know what's going to happenwith rescheduling.
They're not sure what's going to happenwith safe, safer banking.
(29:12):
So there's a lot of flux going on.
And so they just don't want to deal nowwith an Esop.
And they understand that.
Yeah,the tax rates are still going to be high.
But it's still so much change going onI think that's that seems to be a
a big sticker stick around it like,well let's just see what happens.
And so when you're well,I think what to happen next month.
(29:36):
Oh. It's going to happen next month.
It's going to happen next month.So everyone is like it's waiting.
But even if it's even if it passes right,like they still have to implement
and that and it's all incremental.
It's going to take time.
So, I mean, right.
Yes. It's still takestime is still exactly.
But those are for the companies thatI have spoken to that do know about it.
(29:56):
It's pretty much a, a waiting game.
Some companies, the reasonwhy they don't want to do it is,
their income is declining rapidly.
So there are firms that are they've gottheir their revenue is like this.
And so they're like,
I'm going to spend money on doing thisand I'll be out of business in a year.
So there's a lot of companies out therethat are super struggling.
(30:19):
And then thereare firms out there that are,
they're just
still on the fenceof understanding what it is.
So usually if you come inthrough your attorney
or you come inthrough your accounting firm,
that's great,because then I can explain it
and you have your accountor your lawyer said, yeah, this works.
But if I go in directlyand I was going in directly,
(30:39):
that's that's difficult because you godirectly in, and speak to the founder.
They're like,this sounds way too good to be true.
It can't be true. What's the catch?
There's literally like,I spoke to the CFO.
I mean, this is crazy.
She had a, like,a factual CFO business in New York,
and she was young and she's still livingin, like, a dorm room
(31:01):
from when she got her,like, masters or something.
And she literally did not believe itto the point where she got
angry with me and she's like,this is a scam.
And this is what she said.
She's like, if it's truebecause I told about that at the
in the normal and normalindustries, again, you know, pay taxes.
She's like, well, if that's true,why does it every company United States
(31:22):
do that.
She's likeand I don't it's not everywhere.
And that was her argument.
Like look people saw nobody. It'snot for everybody.
But she was she got so angry.
She thought it was like
she thought I was like being very,very unethical about this.
She just can'tbe true. It's not true. Like.
Well, and that's the thing, right?
(31:42):
It seems like again,there's an awareness problem.
And if more and more companies didfind out, they probably would consider it.
And at that point, if more did,then of course
the government would revise the tax code.
And we you know what I mean.
But for now,
it seems like it's a real sweet spot,especially for the cannabis industry.
(32:03):
It's a it's a huge sweet spot.
And yeah, sothis has been around since the 1970s.
Right.
The whole Esop structure citedemployees is beloved.
It's beloved by boththe right and the left.
It's the only thing that, you know, MitchMcConnell and Bernie Sanders agree on.
And same thing with Donald Trumpand President Biden.
(32:24):
They they all agree on ESOPs and ESOPs
just keep getting better and betterand better because it really does work.
That's awesome. So yeah. Yeah, it is.
It is beloved.So I don't think it's going away.
But yes, if I all of a suddenwas this unbelievable, amazing sales guy
and I can tell everybody in the countryand then you have millions of ESOPs,
they would have to go awaybecause in the country, regardless.
(32:47):
Exactly right.
But hey, let's go to this time now.
Yeah. So,
one last question to wrap this up.
It is just like the timing,not to wrap the whole conversation.
I have one more little segmentI want to touch on, but,
the timing in which it takes.
Right, like,
you don't have to go through
(33:07):
all the details, but how long does it takefor a company to restructure?
Sure.
To, to become,you know, structured in an Esop?
I would say in cannabis,
because you're not only doing cannabis
an Esop, it's an M&A deal and mergerand acquisition.
Right? It's a big process to do it.
(33:28):
So that takes time.
And then you also havethe licensing aspect.
You have to figure that out.
So I say you need to take at leastsix months.
Give yourself six months.That's what I like.
It could be less.
But I like to saygive yourself six months.
And most of that six monthsis just in case,
(33:50):
just in casesomething happens with the licensing.
Case in point, one of our clients.
No problem.
This is in Massachusetts.
It wasn't going to be an issue. Very easy.
They had to do a name change
and very simple do a name change.
And this is like alike a committee in their local town
to do with the name change.
(34:11):
That would do the name changein like December 20th.
And they go to the meeting and there'sno meeting because someone had Covid,
so they had to postpone itto like the December 29th.
And then that was postponed.
Like if it wasn't done by December 31st,they were screwed
and there was a lot of jumping around,a lot of craziness that happened, right?
Because of those couple of days,you know, it got through.
(34:33):
But these are the thingsthat you just don't know what can happen.
And, you know, in cannabis, it'sjust a very wild, wild, weird.
Less no crazy. Yeah, yeah.Who knows what's going to happen.
So yeah.
So I like to saylet's give ourselves six months.
Yep. Okay.
All right.
Well I have one final topic to talk about.
And that's the future of ESOPsin cannabis.
(34:55):
So, if you had a magic wand, Darren,and you could just spread your vision
for the future of ESOPs and how they'llevolve in the industry, as it matures.
Tell us about that. That world.
Yeah.
I think ESOPs are going to evolve
where there's going to be, a lot of,roll ups,
(35:20):
a lot of mergers
among smaller boutique cannabis companies.
They're going to merge togetherunder an Esop umbrella
and form large MSOconglomerates under this Esop structure,
where they'll be able to double thatcash flow, and then they'll be able to get
the synergiesand economies of scale of a large company.
I think that's going to be the future.
(35:41):
I think the next couple of years, we'regoing to see a tremendous amount of ESOPs
regardless of two e going away,which I hope it does, or if it stays.
It's just the beginning right now, right?
Is it beginning?
And no one really knows about it.
So as people get to know about it,out of all the people I've spoken
to, there's nobody that's like,oh, that sucks.
(36:01):
No, it's usually sounds toogood to be true.
Exactly. It starts with like,it sounds too good to be true.
You're a little skeptical.
But then when you start lookinginto the history and you see, okay.
Yeah, this, thisthis happened in the 1970s, right?
It's something that is readily availableto business owners.
And it's seems like kind ofan untapped approach and resource.
It's an untapped it's totally is.
(36:23):
Now we've structured overfive, over 400 ESOPs in the last
25 years, over$23 billion enterprise value.
We know this space well.
We've done it in every single industry.
And now, you know, we're really capturingthe Esop, the cannabis industry.
That's great.
And I mean, that's that was kind ofthe last thing I wanted you to touch on is
talk to me about MBO venturesrole in the forefront and bringing ESOPs.
(36:46):
To the cannabis industry.
And you're and your role as a thoughtleader.
Yeah. So, I mean, we've done them all.
There hasn't been there's not one.
It's not that I haven't done.
So we're advising on all on all of themso far.
And I hope to do with themall, you know, to have that little niche.
I like having that niche.As I said before.
We are the,
(37:07):
we're the we're the one to do it.
We've structured, like I said,over the past 25 years, over 400 ESOPs,
and restructured over,I guess, about $7 billion in Esop debt.
So we just know the space super well.
Proof of pudding?
Yeah.
The proof is in the pudding.We know what to do.
(37:29):
Yeah.
As a as a thought leader,I'm always on the forefront of this.
You know, I'm always reading up on it.
I'm always coming up with clever ideas.
I'm the one that came up with this idea.
And as I start doing this with our clientsand speak to other attorneys,
we have some other add ons.
I keep on thinking of
more things like that roll up ideathat we were just talking about.
(37:50):
I've been pitching this roll up to haveother companies do it for a long time.
I've been saying, look, you can do thisand explain how we can do it.
And we are now workingto actually get this done.
To do that roll up in the sap, world.
Stay tuned.
Using amazing.
Darren, it's been a pleasure.
I really appreciate you coming on.
You know,I want to give you the opportunity
(38:10):
to share your contact infoso people can get Ahold of you
if they want to learn more,
if they're, you know, interestedin restructuring and Esop.
So do the plugs.
All the plugs.
Yeah. Here are the plugs.
So I'm MBO Ventures, which is,
mboventures.com.
I'm on LinkedIn.
My name is Darren Gleam.
And you can see at the bottom there,
(38:32):
you can find me,you know, use ChatGPT or use Google.
Darren Gleam in NBA venturesor NBA ventures.
Esop,you will find me and my phone number is,
(646)Â 734-2035.
You can call me a text me.
Awesome.
We'll be sure to put that information
in the description boxfor the YouTube video as well.
And Darren, it was a pleasure.
(38:52):
Like I said,thank you so much for the education
and the insights and look forwardto following your progress.
Man, this is really interesting space.
I like to see it evolves in the future.
Absolutely.
Thanks for having me on Kevin.
Yep, and thank you all for listening. Bye.
Cannabinoid connect,
the nation'smost diverse cannabis related podcast.
Cannabinoid Connect,
the nation's most diverse cannabisrelated podcast.
All right. It looks like we're recording.
Darren, it's good to see you.
Welcome to the podcast.
(00:22):
And I'm psyched to be here.
Let's get started with this.
We're going to have a good conversationtoday.
And I'm excited because, you know, we'regoing to really peel back the onion here.
We've talked many times on cannabinoidConnect about,
you know, the hindrance that two ATP
puts these operators in in termsof the tax burden and just, you know,
(00:45):
and just there's so many hurdles to jumpthrough to be successful in this industry.
And it seems like you've found somewhat
of a kind of silver bullet.
So what I'd like to talk first aboutis just this let's for this conversation,
let's lay the foundation with whatan employee stock ownership plan is.
(01:05):
And then, it's already sounds confusingand then pretty confusing, right?
So that's why we're going to dive into it.
And then we'll talk about the impactsin cannabis and so on.
So let's just start there.
Yeah.
Biggest probbiggest problem with this thing.
The Esop and Esop employeesequential plan.
It's his name.
And you look in and you start googling itand you go to the IRS website
(01:27):
and you go, you know,
15 seconds in and your eyes glaze overand I, I don't know what this is.
It sounds like a pension plan.
It's not a pension plan, right?
An Esop is just another wayto sell your company.
That's it.
It's just a way to sell you a company.Right?
You could sell your companyto a private equity firm.
(01:48):
You can sell your companyto a strategic buyer like a large MSO.
Or you can sell to your
employees viathis structure called an Isa.
That's it.
That's what it is,is a way to sell your company. Now,
why would you sell your companyto employees?
They don't have any money, right?
(02:09):
Well, you know, private equityseems like they have tons of money.
Right.
And strategic buyers,why would you sell to your employees?
And M&A activity is huge in cannabis rightnow, right?
I mean, the end goal is being acquired.
So the yeah.
Yeah, it's yeah, the end goalis that acquisition,
that exit opportunity right nowit's very difficult to have that exit.
(02:31):
And there's no money.
There's no private equityfirms in the space to actually go out
and acquire companies.
And that's
because with federal legalization issues,you have the whole know your customer.
And, what do you call that?
Whatever.
Right now, it's still illegal.
So a lot of these, limited partnerscan't get into the space.
In terms of the large MSOs.
(02:53):
Yeah, there's some M&A activity going on.
They'll buy larger firms.
And when they buy these larger firmsnot giving them any cash, they're giving
very little cash is mostly stock, right.
So again, where does this Esop sellinginto sell to the employees come in?
Well, why should you do it?
The government gives youa lot of incentives.
(03:14):
It gives you a lot of incentives to do it.
One of the incentives,which is a really cool incentive,
is that if you sell a 100% of your companyto the employees via the structure,
if you sell 100%, the company pays zero
federal tax and zero state tax forever.
And when you're paying zero income tax,
(03:37):
it does not matterthat you can't take deductions.
So 280 becomes irrelevant.
Let's say that againfor the people listening.
So if you sell 100% of your companyas it through an Esop,
you are taxedexempt 280 becomes irrelevant.
At that point. At this point, yes.
(03:57):
And I like to say that a thousand times,you know, because ESOPs right.
They're not boring.
This is the most non-boring thingin the entire industry,
because you get to not pay any tax,which means that you can double
or triple your cash flow right awayas soon as you sell to the Isa.
(04:17):
It's pretty phenomenal.
It's very funny.
And I'm going to ask the follow upobvious question, which is,
okay, do do operators know about this?
Is this why you're, you know,
you're out here with the megaphonegoing, guys, look over here.
I mean, is it just
we don't know what we don't know in thisindustry right now in terms of ESOPs,
(04:38):
you don't know what you don't know.
And this is the biggest gift to the eto the cannabis industry.
And it's taken me yearslike you didn't know about it,
you know, until like couple of days ago.
Right.
So about three years ago,
someone comes to me
and they were learning about ESOPsand they were in the cannabis space.
(05:00):
They start learning, right?
They're like, you know,
there's this thing called 280and they explain it to me
and then they say, and we both at the sametime, like, it doesn't matter.
Two it becomes irrelevant.
And it was like, wow. And no one knows.
No one has a clue.
And the thing is, with ESOPs again,like I said, if you look at it right now
and you go
(05:20):
googling ESOPs, you're not going to knowwhat it is because it's so complex.
What I do is I dilute it downand in my own mind I can dilute it down.
So when I found out about this,I was like,
oh my goodness, this is the biggest thingsince sliced bread.
And I went out and started tellingthe world, well, I started doing is going
to every single attorneyin the cannabis spaces I can find.
(05:42):
I would try to get the meetings.
I would go to every single accounting firmthat I can get to
and try to get meetings,and I was able to get a lot of meetings,
and it took a long timeand people didn't believe it.
Like, these are
these are cannabis attorneysthat they just didn't believe it.
So final.
Finally, I get a meeting withthis guy's name is Eric Berlin,
(06:04):
and Eric Berlin is the head of cannabis
for a law firm, called Dentons Law firm.
Now, Dentonsis the largest law firm in the world,
and they have one of the largest cannabispractices in the United States.
They are a big behemoth.
So I sit downand I explain it to Eric and Eric.
(06:25):
Pete kind of believes it is like,you know,
there's a lot of fishy things goingon. This.
But I hear what you're sayingand I go through, I explain why it works.
He's like, well, let me look into it.
I proceed to have with Eric
and dozens of attorneys over the next six
months, many, many meetings until finallyand this is about
(06:48):
spring of 2023 or winter 2029.
It was like, spring 2023.
He calls me and he's like, you did it.
This completely works.
I can't believe you didn't know aboutthis.
We're going to give you a quiet and we'regoing to write an opinion letter on it.
And with a pain that is going to be
a should level opinion letter should levelmeans it became a street level.
(07:10):
Street level is the highest levelopinion letter that a law firm can get.
So having the largest law firmin the world writing this new level
opinion letter on this was a game changer.
For peoplethat still that that knew about it
and now you still have other attorneysand accounting firms
and, dispensaries and manufacturers.
They still don't know about itbecause you have to tell them so.
(07:31):
Right. I need to get out there.
Well, maybe this I mean, no, thisconversation definitely will help today.
And so let's dive into a bit deeper,right.
To not to get too much into the weeds,but tell us this methodology,
tell us the stipulationsin terms of the employee side.
Like, you know, how are theyvested into this stock once they buy in.
(07:52):
Is there term limits? Is there caps?
All that kind of stuff?
Yeah. Okay.
So bottom line is the employeeshave no money, right.
Let's just go.
Let's just walk through slowly. Right.
Back to private equity.
Okay.
So, so people understand
private equity is they want to getbought out by private equity.
That's like the Shangri-La.
Everyone thinks, oh, that's amazing.
What? Getting bought out.
(08:13):
Well, here's the secret that nobody knows.
When private equity buys you,they're not giving you the money.
They're giving youvery little of their own money.
Let's take an example.
Let's take a company,make very big numbers.
Let's say the company is making$20 million a year in net income,
and the value of that companyis 20 million times five, $100 million.
(08:34):
Very easy clean numbers.
Well,
well, they want to buy a company is worth$100 million.
They don't give you 100 millionfrom their own fund.
They give you $20 million.
Okay, then what they do is they borrow
$60 million three timesyour net income to bar 60 million
from a banklike JP Morgan off of your cash flow.
(08:56):
So if you had cash flows$20 million a year, they can borrow 60.
So you get 20 from them.
They get to spend themselves.
They borrow 60 from JPMorgan.
That's 80 million.
The last 20 million is called an earnout.
And that means as long as you reachedthose numbers that you told me
that you're going to reach,then you're going to get paid.
If you don't reach those numbers,you're not going to get paid
(09:19):
with an Esop.
It's the same thing, right?
Except there is no equity.
That's how the employees buy it.
Now there is no money from the employees.
It cost the employees literally nothing.
It's a complete gift from the IRS,and it's a gift from the owner.
The way it works is this same company
$20 million in net income, $100 million.
(09:40):
We can say something.
No, no. Keep going.
Okay, okay.
Okay.
So, what they do is you go outand you borrow that same $60 million.
Now, in the case of the mistakes, when Isay borrow, there's no money to borrow.
There's very, very little money out there.
You can borrow money, but at rates around22%, which is kind of insane.
So but for sake of example,we're gonna go through this,
(10:00):
you go out and you borrow the same$60 million from a lender,
that $60 million, the company borrows it,and that gets paid to the owner.
So you gonna get 60 million?
The other
$40 million is what's calledthe seller note.
That's an IOU from the companyback to the owner.
That's how they get that $100million with the up.
(10:21):
All right.
Now here's something I didn't mention,
which is another aspectof another cool thing about an Esop.
This is called becoming.
Yeah, yeah.
No. Normally you sell your company, right?
You sell your company.
And anywhere in the countryyou sell your company,
you have to pay capital gains on that.
Right? That's another form of taxto pay capital gains.
So across the countryexcept for Texas and Florida,
(10:45):
capital gains, stateand federal is about 30%.
So if you sell your company for $100million, you have to pay $30
million to the government in capital beatsgot to pay that $30 million.
Except when you sell to an Esop,
the government allows you to deferthose capital gains, right?
You can defer the capital gainswhen you sell to an Esop,
(11:06):
and you can structure,
if you structure correctly,you can defer those capital gains forever.
So that's another advantage, right.
That again, people don't knowhow does that deferment happen.
What are the requirements for that.
Here's the catch for that.
They say, look, if you sell your companyfor $100 million a year, employees,
what you need to do is you need to takethat hundred million dollars
(11:29):
and you reinvest that in stocks
or bonds or some other type of asset.
Okay. Well, what does that mean?
Well, that means that I want
to put a $100 million in to actually buy,let's say it's a bond.
There are these bonds called floatingrate notes.
You can also buy real estate.
All right.Let's use real estate as an example.
(11:50):
I have one year from the date of my saleto my employees.
I say sold today. Today is October 15th.
I sell to the Esop for $100 million.
I have 12 months to reinvest that
and buy $100 million worth of real estate.
But when I buy the real estate,I don't have to put $100 million down.
I can put downwhatever the financing needs.
(12:11):
And right now, the financing to buyreal estate is about 2,025%.
So if it's a $100 million property,I can put down 20, $25 million
and then I buy $100million worth of property.
So instead of paying 30 million in tax,I put the $2,025 million down.
I now have income producing real estate,and as long as I hold on
(12:32):
to that real estate,I never pay capital gains tax ever.
You basically don't have to putall the 100 100 million up front.
You can just put that down payment inand then slowly finance.
But you still qualify,is what you're saying, right?
That's correct.
Now, the reason why I wentand I was explaining
that whole complicated thingabout how you would buy it.
(12:52):
Number one,is it cost the employees anything.
But number two, this is really interestingbecause even though you're selling
the company today to your employees,you're going to get a chunk of warrants
back in the futureto buy back a piece of your company.
The buyer is going to be my next.
That was going to be my next questionis like, well, does the owner lose out?
Right? Like,what if the company does really well?
(13:14):
Yeah that's fantastic.They are not losing out.
This is how it works.
So rememberI said that example's $100 million, right.
And we
had here in this example,we had $60 million in seller notes.
No, no, no, we had 40 million selling usan example, but we got $40 million.
We borrowed.
We bought, sorry,we borrowed 60 million from JPMorgan.
(13:36):
And we have a $40 million on that.
Seller note, by definition, is more riskythan that loan from JPMorgan.
When JPMorgan lend you money or any banklend you money, they want senior position.
What that means is if your company goesunder, they're going to take it.
They're going to take the keysand they take the company
that's called senior,the seller known as junior.
(13:57):
To them I get what's remaining,but there's going to be nothing remaining.
Most like it's going to get nothing.
So by definition, my seller note is morerisky than JPMorgan's senior lending.
No right by definition, which means
I deserve a higher interest ratefor the bigger risk that I'm taking.
Now, let's just say
(14:18):
let's just say the market interest ratefor that seller
note is let's just say 15%
putting 15%.
Even in the cannabis world, it'sstill a lot of interest
to put on to your companyto pay me back 15%.
Right.
So, so you say, look, let's sayis your company, Kevin like Kevin,
instead of paying 15% on that interest
(14:38):
of getting 15% every year, how about that?
Sell a note. You're going to get 5%.
Okay.
Well, I just told you you deserve 15.
And now I want to give you five.
So in lieu of that 10% instead of that
10% you're going to get warrants, okay.
You need unit warrantsto buyback a chunk of the company.
You can get warrants anywherefrom 10% of the company to 40%.
(15:02):
And we can push and pull leversto get you from the 10 to 40%.
Let's say you choose 40% warrants.
Okay. So
the warrants to to get the warrantsto initiate the warrants.
Right.
There's a certain priceto buy back the stock. Right.
There's always a price to it.
So the warrants, the price,the predetermined price to buy back
(15:24):
40% of your company or the $100million company, the buyback, 40%.
The predetermined price forthat is about $15 million.
So if you think about that.
So for $15 million,the time frame is about 15, 20 years.
Any time in the next 15 to 20 years,whenever you're ready,
you hand in those warrants,
(15:46):
you hand in the check for $15 million,
and you get back 40% of your company.
Even if this is now seven years down theroad, federal legalization has occurred.
Budweiser comes in to buy the companyfor $1 billion.
Okay, great.
The deal is done for the billion dollarsI hand in my warrants,
write the check for $15 million,and they get back 40% of the company.
(16:10):
The billion dollars comes in.
I, as the warrant holder, get 400 million,
and the employees get the other 600million, the 400 million.
And that's a second bite.The apple for me is the owner, right?
Because remember,I sold the company today for $100 million.
Now, with these warrants down the road,I'm selling it again.
(16:31):
So at that point,selling it down, selling it again,
that's where the employees can reallybenefit, especially in the cannabis space,
in the nor in the normal world,
you may not have a sale 6 or 7 yearsdown the road and the cannabis space.
Everyone is really stoked to havethat exit.
Federal legalization.Everyone is waiting for that.
And that's why the Esop structureis phenomenal for the owners.
(16:54):
But for the employees, it is life.
It could be lifechanging or generational changing
depending on how much money they getat the start of legalization.
Well,and I'm glad you brought up the employee
benefits because,I mean, that's to wrap up the what?
Right.
Tell me about the employee experiencewith ESOPs.
Right. So like salary,
(17:16):
how do they investand how do they vest these, you know?
Yeah, yeah, yeah.
So, the way it worksis this cost the employees nothing.
This is something it's callednondiscriminatory.
So every employee is part of itautomatically.
And it's very simple how they get stock.
It's all based on their salary.
So if you make $100,000 a year
(17:38):
and I make $50,000 a year,
you're going to end upgetting twice as much stock as I am.
Very, very simple.
Now there is one groupyou can discriminate against
and those are union workers.
You're allowed to give a union workerthe choice.
The choice is you can stay with the union.
Fantastic. Great.
(17:58):
But you can't be part of the Esop.
Or you can choose to be part of the Esopand not the Union.
You're allowed to give union workersthat choice.
So those are the only group that you can.
That's called discrimination.You're allowed to do that now.
There are
there's probably not one union employeein the world that would ever choose
the union over an Esop,because it doesn't make sense
(18:19):
that you have the chanceto become an owner.
Why would you want to becomebe part of the union?
So that choice, it's pretty easy for Esop.
But there are companies
that say, look, you can be in the Esopand the in the union.
And then also once they do that,
there's also issues there because, well,wait a second, I'm an owner now
and I'm going to be a unionagainst myself.
So it's it's kind of weird right nowin terms of vesting
(18:41):
the way it works normally.
Right. Normally, vesting means,
when can I takewhen am I going to be getting the stock
or what percentage of the stockcan I actually get.
Can you exercise stock. Yeah.
But so well not exercise. What can I get.
What can I,
what when can it be
(19:02):
part of my portfolio, which is differentthan when they can actually get
the two separate things?
Okay.
So you justyou're just starting to firm today.
You're that you joined the firm.
We're not getting any stock. Right.
What happens is every year stockis allocated to the employees every year.
And stock allocations over about a 25 yearperiod.
(19:22):
Stock is allocated.
So if it's a 25 year period,that means the stock
is going to be allocated a 4% a yearacross the right every year, 4%, 4%, 4%.
But I start today.
I'm not getting any allocation.
I'm there for one full year. Great.
I get an allocation of 4%,but that doesn't mean I'm best it.
It is a different thingbecause if I quit after one year,
(19:44):
usually the best thingis about 20% a year for five years.
So that means that
if I'm there for one year,even though I'm allocated 4% of the stock,
I've only been invested 20%,so I only get 20% of that 4%. God.
So if I'm there for two years, it's 40%60, 80, 100%.
Once I'm there for five years,I fully vest.
(20:04):
So after five years,you have five times four.
There's 20%.
The stock has been allocatedand now I'm fully vest.
Now if I leave, if I leavenow let's say I'm 30 years old, I leave.
Usually it'll be in the plan.
What will happen is the ownerswill not pay you out when you leave.
They'll pay you out five years later.
You're allowed to do that.
(20:25):
You're allowed to take five years timebecause you want this Esop
to start building up the companyto be able to build up.
So the government doesn't want to stressthe company with everyone leaving.
Plus they want to disincentivize youto leave at 30.
When you're old,they want you to stay until you retire,
because the longer you stay,the more money you get.
And if you stay until you retire at age,whatever, 62 or 65,
(20:47):
then when you retire,you get all that money
and you don't actually get the stock.
The way it worksis you you, hand in the stock
and get cash instead of the stock.
And that's how you would get it.
Unless unless the company gets sold,
that's a different story.
So in cannabis,if the company gets sold, like in 2030
and I'm there, I automatically vestand I get the stock automatically.
(21:10):
So if you sell it, what happens is allthe money comes in to everybody.
Like an exampleI just gave in before I said
Budweiser cousin for $1 billion,and the owners will get 400 million.
The employees will get 600 million.
So at that point,whatever employees are there,
they're going to get their full allocationof stock.
It's I'm glad you clarified the,
(21:32):
the five yearkind of minimum to be vested.
And then if you leave, you can stillyou can still get that stock.
But right,there's they're desensitizing you
because they want you to staybecause from what
I've heard you on other podcasts,I didn't know if like, being
with the companyuntil you retire was a requirement.
But you can it's not a retirement.
It's not a requirement at all.
(21:53):
It's just that you're incentivizedto do it.
And especially the stock is doing well.
The company is doing well.
You don't want to leave because yousee your account start to ratchet up.
Like, I don't know if you know this,but there's this company called Publix.
Publix is a supermarket out, out west.
It's one of the nation'slargest grocery store chains.
Yeah.
And you walk in thereand everyone is super friendly.
(22:14):
They're the nicest people.
You'll have these people at the cashregister that are like, they're old
and they don't.They don't look like, much.
They're super nice and super sweet,and they're millionaires
because they like really Esop oh,that's right, they are multi-millionaires.
It's insane when you walk into a Publixand you see these people
and they're so happy.
(22:34):
Yeah, they're happybecause they are millionaires.
You know, I've talked to older folkand they're like some of them have joked
and said, hey, in my retirement, you know,
I want to have just an easy part time jobwhere I'm a Walmart greeter or whatever.
Right?
But if you could work for a companyand if you're there
that long, you could essentially havethat kind of work right
where it's not so strenuousand you're you're making money.
(22:55):
I mean, through this.
That's great. Yeah.
Yeah, yeah, it'sgreat for the employee into the employers.
Right.
Once you explain this to the employees,takes a while from the again,
because a lot of times, just likewhen I was pitching it to, cannabis firms,
employees don't believe it.What do you mean?
I'm getting this for nothing.
But once they start getting,it takes about a year.
They realize, yeah, this is very real.
(23:17):
And now all of a sudden, there's a
there's a shift in productivitywhere they become more productive.
And in terms of retention,they're not quitting.
Why would they quit?
Yeah, that's all I was going to say.
I mean, it's hard to interject,but it's like it's
it's almost perfect structurefor the cannabis industry because right
now, as you pointed out, like untillegalization happens or states continue
(23:37):
to come online, it's really a hunker downsituation where we're grinding it out.
We're trying to survive, right,with the 280, hurdle.
But, you know, going this route,it seems like you to alleviate
a lot of those issues and those challengesand really help the company focus
on what's important,
which is producing a high quality productthat's safe and ineffective.
(23:58):
Right?
Oh, yeah.
I mean, your cash flow doubleseven if two ADP goes away.
Right. Let's say rescheduling occurs.
Let's say rescheduling occurs,you know next year.
And I'm all for it right.
So now you're effective tax rate.
Let's say you're making nor let's sayyou're making $2 million a year right now.
If you're making $2 million a yearin the cannabis space, well, you're paying
(24:19):
about $1.2 million in tax, right?
If two ADP goes away.
All right,now you're paying $1 million in tax.
So you're still it's not like028 goes away.
Now it's all great.
Just two eight Israel punch in the face.
But taxes in general are real punch in.
Yeah California.
Is that like what I meanI'm going to say the wrong number, but
it's like in the high 30s, like 38%or something like that, or maybe over 40%.
(24:42):
It's crazy.
Oh, the effective tax rate.
Yeah. I mean,because you guys are you're from Texas.
You have no idea.
Yeah. You have no clue how hard it.
Okay. I'm in New York on tax.
Yeah about 51% okay.
And same bring me to reality man.Yeah yeah yeah yeah.
You're in like the special.
You're like another world account.
And so like Californiais a completely separate universe, right.
(25:03):
They really they're their own country.
And that's a very high taxedcountry. Right.
So you have the federal tax, you know,which is crazy that you get taxed on.
But then you have the federal tax.You have the Social Security tax.
There's just taxed upon tax.
So yeah, in the cannabisindustry in California,
they're probably taxed at aroundbecause the 280 you're
looking at a lump for a dispensarythat could be at 6,570%.
(25:26):
So and that is it's insane.
It's insane. Yeah.
So California, this is like a,this is a game changer.
I don't know if any Californianseven know about this right now.
I haven't pitched it to anybody.California.
We're gonna we're going to definitelyblast this thing out once it goes live.
But, you know,we're getting some good education here
today, and I want to talk nowso we know the what.
(25:49):
Right.And now let's talk about the impact.
So tell me some real world examples,
of how this is financially transformed.
Some cannabis,
you know, businesses through ESOPs.
Yeah.
So in in 2023, we have structured,
four cannabis companiesthat closed that are now
(26:12):
fully 100% owned by the Esop structure.
And they are,
I can say
I think they're all out of the closet now.
So we have,
we have theory, which is a,
I had large, yeah, yeah, there's a,
there are large MSO
(26:33):
canna provisions, which is in,
Massachusetts.
There is the vault,
which is a dispensary chain,and we have East Coast
cannabis in, up in, in Maine.
Okay.
And they're all doing super.
They're doing super.
Well, the employees are startingto understand what's going on.
(26:59):
And these are all very smart peoplethat did this.
Because, you know, thesethese are the, the leaders of the group.
And that had to understand. So,
you know, we had many meetings with themand they were very, very focused.
These groups are very, very focusedon the employer and employee welfare.
Yeah.
That was a bigthat was a big reason why they all did it.
(27:21):
And the the cash flow,
paying no tax was secondary,but it was fairly huge.
And yeah, it makes a big differencewhen you're doubling
your cash for doubling, right?
I mean, and of course, right.
And then, I mean, I don't know how soonlike they have structured in an Esop, but
(27:42):
have you seen any data in terms oflike you mentioned, employee retention
rates, job satisfaction, change in companyculture, things like that?
Well, they're all they're all beginningto change the company culture.
They're getting it out.
But no, I haven't seen any data yeton the firms I've spoken to.
The, the founders, I've spoken to CFOs.
(28:04):
And they're all extremely happy with it.
And they're saying that the employeesare happy with it.
But at this point, it'sstill for the employees.
It's kind of new.
Gotcha, gotcha.
Well, after we recordhere, I'll have to get those the contact
information for those, organizations andmaybe have them talk through how it's kind
of maybe transformed or changed their,their operations, you know, so that.
(28:25):
Yeah, absolutely. Absolutely. Yeah.
So tell me how cannabis companies
can overcome Esop adoption.
We know that education is lacking,
and we're trying to address that heretoday.
But, you know, talk to me like, whywhy haven't more cannabis companies
adopted ESOPs outside of like,I guess the thing about it is or that,
(28:49):
yeah, thatthat that is the only thing there's no.
Well, okay.
Let's see companiesthat I've spoken to about it,
right now with 280, there's a
lot of companies that are in the middle ofthey don't know what's going to happen.
They don't know what's going to happenwith rescheduling.
They're not sure what's going to happenwith safe, safer banking.
(29:12):
So there's a lot of flux going on.
And so they just don't want to deal nowwith an Esop.
And they understand that.
Yeah,the tax rates are still going to be high.
But it's still so much change going onI think that's that seems to be a
a big sticker stick around it like,well let's just see what happens.
And so when you're well,I think what to happen next month.
(29:36):
Oh. It's going to happen next month.
It's going to happen next month.So everyone is like it's waiting.
But even if it's even if it passes right,like they still have to implement
and that and it's all incremental.
It's going to take time.
So, I mean, right.
Yes. It's still takestime is still exactly.
But those are for the companies thatI have spoken to that do know about it.
(29:56):
It's pretty much a, a waiting game.
Some companies, the reasonwhy they don't want to do it is,
their income is declining rapidly.
So there are firms that are they've gottheir their revenue is like this.
And so they're like,
I'm going to spend money on doing thisand I'll be out of business in a year.
So there's a lot of companies out therethat are super struggling.
(30:19):
And then thereare firms out there that are,
they're just
still on the fenceof understanding what it is.
So usually if you come inthrough your attorney
or you come inthrough your accounting firm,
that's great,because then I can explain it
and you have your accountor your lawyer said, yeah, this works.
But if I go in directlyand I was going in directly,
(30:39):
that's that's difficult because you godirectly in, and speak to the founder.
They're like,this sounds way too good to be true.
It can't be true. What's the catch?
There's literally like,I spoke to the CFO.
I mean, this is crazy.
She had a, like,a factual CFO business in New York,
and she was young and she's still livingin, like, a dorm room
(31:01):
from when she got her,like, masters or something.
And she literally did not believe itto the point where she got
angry with me and she's like,this is a scam.
And this is what she said.
She's like, if it's truebecause I told about that at the
in the normal and normalindustries, again, you know, pay taxes.
She's like, well, if that's true,why does it every company United States
(31:22):
do that.
She's likeand I don't it's not everywhere.
And that was her argument.
Like look people saw nobody. It'snot for everybody.
But she was she got so angry.
She thought it was like
she thought I was like being very,very unethical about this.
She just can'tbe true. It's not true. Like.
Well, and that's the thing, right?
(31:42):
It seems like again,there's an awareness problem.
And if more and more companies didfind out, they probably would consider it.
And at that point, if more did,then of course
the government would revise the tax code.
And we you know what I mean.
But for now,
it seems like it's a real sweet spot,especially for the cannabis industry.
(32:03):
It's a it's a huge sweet spot.
And yeah, sothis has been around since the 1970s.
Right.
The whole Esop structure citedemployees is beloved.
It's beloved by boththe right and the left.
It's the only thing that, you know, MitchMcConnell and Bernie Sanders agree on.
And same thing with Donald Trumpand President Biden.
(32:24):
They they all agree on ESOPs and ESOPs
just keep getting better and betterand better because it really does work.
That's awesome. So yeah. Yeah, it is.
It is beloved.So I don't think it's going away.
But yes, if I all of a suddenwas this unbelievable, amazing sales guy
and I can tell everybody in the countryand then you have millions of ESOPs,
they would have to go awaybecause in the country, regardless.
(32:47):
Exactly right.
But hey, let's go to this time now.
Yeah. So,
one last question to wrap this up.
It is just like the timing,not to wrap the whole conversation.
I have one more little segmentI want to touch on, but,
the timing in which it takes.
Right, like,
you don't have to go through
(33:07):
all the details, but how long does it takefor a company to restructure?
Sure.
To, to become,you know, structured in an Esop?
I would say in cannabis,
because you're not only doing cannabis
an Esop, it's an M&A deal and mergerand acquisition.
Right? It's a big process to do it.
(33:28):
So that takes time.
And then you also havethe licensing aspect.
You have to figure that out.
So I say you need to take at leastsix months.
Give yourself six months.That's what I like.
It could be less.
But I like to saygive yourself six months.
And most of that six monthsis just in case,
(33:50):
just in casesomething happens with the licensing.
Case in point, one of our clients.
No problem.
This is in Massachusetts.
It wasn't going to be an issue. Very easy.
They had to do a name change
and very simple do a name change.
And this is like alike a committee in their local town
to do with the name change.
(34:11):
That would do the name changein like December 20th.
And they go to the meeting and there'sno meeting because someone had Covid,
so they had to postpone itto like the December 29th.
And then that was postponed.
Like if it wasn't done by December 31st,they were screwed
and there was a lot of jumping around,a lot of craziness that happened, right?
Because of those couple of days,you know, it got through.
(34:33):
But these are the thingsthat you just don't know what can happen.
And, you know, in cannabis, it'sjust a very wild, wild, weird.
Less no crazy. Yeah, yeah.Who knows what's going to happen.
So yeah.
So I like to saylet's give ourselves six months.
Yep. Okay.
All right.
Well I have one final topic to talk about.
And that's the future of ESOPsin cannabis.
(34:55):
So, if you had a magic wand, Darren,and you could just spread your vision
for the future of ESOPs and how they'llevolve in the industry, as it matures.
Tell us about that. That world.
Yeah.
I think ESOPs are going to evolve
where there's going to be, a lot of,roll ups,
(35:20):
a lot of mergers
among smaller boutique cannabis companies.
They're going to merge togetherunder an Esop umbrella
and form large MSOconglomerates under this Esop structure,
where they'll be able to double thatcash flow, and then they'll be able to get
the synergiesand economies of scale of a large company.
I think that's going to be the future.
(35:41):
I think the next couple of years, we'regoing to see a tremendous amount of ESOPs
regardless of two e going away,which I hope it does, or if it stays.
It's just the beginning right now, right?
Is it beginning?
And no one really knows about it.
So as people get to know about it,out of all the people I've spoken
to, there's nobody that's like,oh, that sucks.
(36:01):
No, it's usually sounds toogood to be true.
Exactly. It starts with like,it sounds too good to be true.
You're a little skeptical.
But then when you start lookinginto the history and you see, okay.
Yeah, this, thisthis happened in the 1970s, right?
It's something that is readily availableto business owners.
And it's seems like kind ofan untapped approach and resource.
It's an untapped it's totally is.
(36:23):
Now we've structured overfive, over 400 ESOPs in the last
25 years, over$23 billion enterprise value.
We know this space well.
We've done it in every single industry.
And now, you know, we're really capturingthe Esop, the cannabis industry.
That's great.
And I mean, that's that was kind ofthe last thing I wanted you to touch on is
talk to me about MBO venturesrole in the forefront and bringing ESOPs.
(36:46):
To the cannabis industry.
And you're and your role as a thoughtleader.
Yeah. So, I mean, we've done them all.
There hasn't been there's not one.
It's not that I haven't done.
So we're advising on all on all of themso far.
And I hope to do with themall, you know, to have that little niche.
I like having that niche.As I said before.
We are the,
(37:07):
we're the we're the one to do it.
We've structured, like I said,over the past 25 years, over 400 ESOPs,
and restructured over,I guess, about $7 billion in Esop debt.
So we just know the space super well.
Proof of pudding?
Yeah.
The proof is in the pudding.We know what to do.
(37:29):
Yeah.
As a as a thought leader,I'm always on the forefront of this.
You know, I'm always reading up on it.
I'm always coming up with clever ideas.
I'm the one that came up with this idea.
And as I start doing this with our clientsand speak to other attorneys,
we have some other add ons.
I keep on thinking of
more things like that roll up ideathat we were just talking about.
(37:50):
I've been pitching this roll up to haveother companies do it for a long time.
I've been saying, look, you can do thisand explain how we can do it.
And we are now workingto actually get this done.
To do that roll up in the sap, world.
Stay tuned.
Using amazing.
Darren, it's been a pleasure.
I really appreciate you coming on.
You know,I want to give you the opportunity
(38:10):
to share your contact infoso people can get Ahold of you
if they want to learn more,
if they're, you know, interestedin restructuring and Esop.
So do the plugs.
All the plugs.
Yeah. Here are the plugs.
So I'm MBO Ventures, which is,
mboventures.com.
I'm on LinkedIn.
My name is Darren Gleam.
And you can see at the bottom there,
(38:32):
you can find me,you know, use ChatGPT or use Google.
Darren Gleam in NBA venturesor NBA ventures.
Esop,you will find me and my phone number is,
(646)Â 734-2035.
You can call me a text me.
Awesome.
We'll be sure to put that information
in the description boxfor the YouTube video as well.
And Darren, it was a pleasure.
(38:52):
Like I said,thank you so much for the education
and the insights and look forwardto following your progress.
Man, this is really interesting space.
I like to see it evolves in the future.
Absolutely.
Thanks for having me on Kevin.
Yep, and thank you all for listening. Bye.
Cannabinoid connect,
the nation'smost diverse cannabis related podcast.
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