#038 - How To Go Tax Free with an ESOP w/ Darren Gleeman of MBO Ventures

Ben Larson: 0:00

Hey everybody, welcome to High Spirits. I'm Ben Larson and with me, as always, is Annery Grabstein. It's April 4th 2024 and today we're going to be talking about ESOPs and how to go tax-free with your cannabis business. You know a lot of talk in the industry about 280E and what rescheduling means for your tax bill, but we're told there's a way to restructure your company, sell your company, do something along those lines and actually not have a federal tax bill. All very interesting, especially now deep into April, with tax season upon us. Hope to get a lot of solid information out of our guests today, because I'm confused, which is not an uncommon thing. So before we get there, Anna Rae, how are you doing on this rainy day here in California?

AnnaRae Grabstein: 0:56

I'm doing good. I am getting geared up to head to our northern sister, Canada, tomorrow, where I'll be spending the next week doing kind of two things some fun things for personal stuff Going to go see the eclipse in Montreal. There's a total solar eclipse happening on Monday, so if folks are anywhere near the totality you should go check it out. And then I'll also be touring around some cannabis businesses in the Quebec area, seeing both some production facilities and also some retailers, and really excited to get my eyes on what's happening up there.

Ben Larson: 1:38

Amazing. Are you a Bonnie Tyler fan? Are you going to be blasting like total eclipse of the heart?

AnnaRae Grabstein: 1:44

You know I should. We've got our eclipse glasses, we're ready and uh, I have. I've never, I've never witnessed an eclipse. The last time the eclipse was, uh, crossing North America was in 2017. And it was actually the exact time that my son was born, so I was pretty busy doing something else and I wasn't able to be outside, but, as a result, I prioritized making sure we are somewhere in the path of the totality for this one, I believe.

Ben Larson: 2:16

Donald Trump advises that you just stare directly into the sun as it's happening, and you'll be able to see it.

AnnaRae Grabstein: 2:25

Well, thanks for that tip.

Darren Gleeman: 2:26

I'm going to make sure I put my clip to process.

AnnaRae Grabstein: 2:30

How about you? What's going on over in your world, oh?

Ben Larson: 2:34

my God, my world's nuts. You know this whole emergence of the beverage category Total Wine, doordash, all this kind of stuff that we've been talking about. So Total Wine launched in california, uh, which for some reason just like really amplified the discussion, probably because I'm sitting in california, but, um, also because california has a very uh, entrenched in structured cannabis market without clear direction on hemp, and so we see hemp beverages hitting the end caps once again of total wines, but now in California. And it's just started a flurry of conversations, be it with regulators, associations, brands and everyone just trying to figure out which way is up, what's the right way forward. Uh, legal, illegal, all these conversations, and because of where we sit in the market, you know, I think I just find myself in a lot of those conversations. Yeah, so I haven't been sleeping much this week.

AnnaRae Grabstein: 3:47

It was a bold move for Total Wine to go for California and I've been curious of who was going to get a little snitty about it with the lack of clarity. Yeah yeah With the lack of clarity.

Ben Larson: 4:03

Yeah, and you know, if it were just low dose beverages, I think there would be a potentially like a calm conversation to be had. But it is kind of a wedge that unveils the other form factors, the heavier dosing, consumer safety, and then, you know, we it just kind of unrolls into this massive conversation. That gets the hemp and the cannabis side all riled up. And I know they aren't doing this, but I'm like, if I'm the federal government, just like sitting there like look, it's like, oh, look at these guys like infighting, it's hilarious and I don't know.

AnnaRae Grabstein: 4:59

It's like it's mind, mind numbing to like bounce from conversation to conversation and every single person.

AnnaRae Grabstein: 5:05

And there's been some other big news this week too Florida on on Monday, the announcement that that adult use is qualified for the ballot there, and some wild predictions of, if adult use passes in Florida, what that could do to some of the public company stock that are already there. I heard predictions of stock increasing in some of those companies as high as 600%, and it was just really wild to see some of the chatter around what that opportunity could be. But at the same time, in Florida also, it looks like we're going to have abortion on the ballot as well, and so to see how the dynamics of different political issues are going to affect who the voters are that are coming to the polls and what that does in terms of the market potential for cannabis in Florida is, I think, going to be a roller coaster and a wild ride. So I'm going to be excited to have more conversations about Florida on this podcast, so we'll be putting together some fun convos coming up on that for all our listeners out there.

Ben Larson: 6:15

I mean they may get the best voter turnout they've ever had. If those two issues are on the ballot, it'll be an interesting November.

AnnaRae Grabstein: 6:22

Yeah, absolutely Well, I think all of this is relevant to what many of us are dealing with right now tax season, Holy shit. I'm not sure that there's anyone that likes tax season.

Ben Larson: 6:37

But one of the takeaways- Is there tax season in October?

AnnaRae Grabstein: 6:41

Well, there's also another tax season.

AnnaRae Grabstein: 6:42

Yes for all of us that love to extend or have K-1s, but when you're dealing with taxes, very few of us come away excited to be cutting that check and everyone's thinking, how can I figure out how to pay less next year, right? So this is a particularly poignant conversation that we're going to have today about ESOPs. Um and so with that, I want to introduce our guest today. Uh, darren Gleeman is the managing partner of MBO Ventures, and MBO Ventures is the cannabis industry's premier ESOP investment bank. Uh, the firm provides ESOP expertise and will also invest its capital alongside company owners and management teams.

AnnaRae Grabstein: 7:30

And in 2023, darren received a patent for his ESOP or it's a pending patent for his ESOP methodology used in completing the cannabis industry's first ESOP, which was for Theory Wellness, which a lot of us read about, which alleviates the tax implications of 280E for this multi-state operator. And he also recently partnered with Canna Provisions for their recently announced transformation to an ESOP, which just was in the news over the past three or four days. So Darren comes from a long history in both quantitative reasoning and modeling and scientific method, where he worked in hedge funds and in trading. He is a really fun person to talk to, so excited to welcome Darren onto the podcast today, hi Darren.

Darren Gleeman: 8:23

Thank you, I appreciate it. Guys. The eclipse yes, you should go to the eclipse. I went to the eclipse with my son seven years ago and I actually we took a plane to South Carolina to be in totality. It's super cool and I'm going again on Monday. I'm meeting him upstate in New York and we're going to actually go again because it really is something that it's kind of a once in a lifetime event and it is super, super cool what happens. So I'm glad you're going. Yeah, it's great, yeah.

AnnaRae Grabstein: 8:57

Thank you, I'm so excited. Yeah, montreal. We looked at the whole path of the totality and all the different places and seemed like the coolest spots to go were either Austin or Montreal, and went for Montreal, figured I could do some good cannabis research while I was there.

Darren Gleeman: 9:13

That's going to be great Good for you Awesome.

AnnaRae Grabstein: 9:16

Yeah, thanks. Well, thanks for joining us today. Let's kick it off.

Darren Gleeman: 9:21

Aesop, what is it? What the hell is an esop? What's an esop? Yeah, um, yeah, an esop is just another way for a company to sell themselves. That's it. Um, I just learned ben has his own manufacturing company. Let's just go Manufacturing and you manufacture the goods that go into cannabis goodies, great Cannabis drinks, all right. So all an ESOP is it's just another way for you to sell your company. That's it. You can sell your company, right, everyone wants the exit, so you can sell your company. Couple of weeks. You can sell to a private equity firm. Everyone wants the exit, so you can sell your company. You can sell to a private equity firm. You can sell to a strategic buyer, or you can go public, right, or you can sell to your employees via this ESOP structure.

Darren Gleeman: 10:16

Well, most people don't know about this, right, the ESOP structure. But why? Well, out of the goodness of your heart, ben, you're a good guy and you would love to do it, but you know other than that why? Well, the government wants you, ben, to sell to your employees. They want employees to also, you know, partake in the capitalism that you have created. They want that. They don't want you selling to private equity. So they said all right. Over the years, since 1970s, they've come up with more and more incentives to subsidize your wanting to do it instead of the goodness of your heart, and when you add up all these incentives it's pretty huge. And once you get it, you know what you don't sell to private equity, you will sell to the employees. The biggest problem that we have is not the esop structure, it's that no one knows what it is. It's an esop thing. No one has any clue. So I'll go through very quickly and then you guys can, you know, pummel me with some questions.

Darren Gleeman: 11:19

First thing when you sell your company right and you sell to private equity, you got to pay capital gains tax on that. It's very difficult to get around that. There are certain ways in the cannabis industry, but it's somewhat difficult. Capital gains you're in California, it's about 30%. So if your company is worth and I like to use the example, I always like the $100 million example value, just because it's easy math so they come in for a hundred million bucks. Well, that's $30 million in capital gains tax that you have to pay you personally when you sell to private equity strategic buyers. A lot the tax guy, it's a lot of tax when you sell to your employees. With this ESOP structure, the capital gains are deferred. That means you're not paying it and if you structure correctly, deferred forever and that's a big deal. That's huge right. And in other industries people hear that they're like well, how is that possible? But in the cannabis industry it's nice, but that's not why we're talking.

Darren Gleeman: 12:16

Second thing how do the employees buy your company? They don't have any money. How is that possible when private equity comes in and they can buy your company? They don't have any money. How is that possible when private equity comes in and they can buy your company? Well, here's a myth that private equity is buying your company for a hundred million bucks. That's not what they do. There's no one that's doing that.

Darren Gleeman: 12:34

If private equity comes in to buy your company for a hundred million dollars, they're not giving you a hundred million dollars. What they're going to do is they're going to give you from their own funds money, maybe, let's say $20 million. $20 million goes to you. Then what they do is they're going to borrow off of your company's assets or cashflow. So in this example, let's say, your company is making $20 million a year. Again, sorry for the big numbers, but it makes it easy to see You're making $20 million a year. Is the net income 20 million times five is 100 million. So that's how we came up with the value of 100 million, just easy.

Darren Gleeman: 13:12

So I buy your company by giving you $20 million of cash. I then borrow off of your cash flow. So if your company is making $20 million a year, I'm going to go out and borrow, and I can. In the normal industries I can borrow about $60 million. So as the private equity firm, I borrow $60 million off of your cashflow. I'm not taking the risk. Then I give you that $60 million. So $20 million from the fund, $60 million borrowed, that's $80 million. The last $20 million is called an earner and that means Ben. You told me you were going to grow by this levels and make these numbers. If you make those numbers, fantastic. Here's the 20 million dollars. If you don't make those numbers, you're not getting the 20 million dollars. We have some major conversations.

Darren Gleeman: 13:56

That's typical plain vanilla private equity. It works, it's great. I have no problem With an ESOP. It's structured almost identically. But there is no equity. It's all structured via debt. So you go out, raise that same $60 million, right? Except actually the rate for that $60 million would be a little bit better than the private equity firm. I'll explain to you in a second. But you're going to raise that same $60 million, so the company raises it and it goes to you then.

Darren Gleeman: 14:25

So you now get that $60 million. The other $40 million is your 100. The other $40 million is called a seller note. That's an IOU from your company back to you. They owe you the $40 million. That's how you get that $100 million. Now, what's cool? One of the subsidies. Normally, if you take out a loan, anybody in this country, anybody that's listening to this, has a mortgage. They have a business. They take out a loan. Everyone has interest. You got to pay your interest and in most firms you can deduct the interest. Cannabis you really can't, because it's 280E, you can't take deductions. But every other industry you can take an interest deduction. Nobody can deduct the actual loan itself. It a hundred million dollar loan.

Darren Gleeman: 15:09

You can't take a hundred million dollar loan when you actually go out and borrow. It can't deduct that, except if the company is being acquired by the employees. Be this esop structure, the company, your company bank can take a 60 I'm sorry, that's a hundred million dollar deduction because remember, 60 million you got a loan from j Morgan $40 million selling that's $100 million. The company can take a $100 million deduction and you're in California. That $100 million deduction is equivalent to about $40, $45 million to your company that you don't have to pay back. That's how the employees pay for it. It costs the employees nothing. It's a gift from you and the IRS. It costs the employees nothing to get that. That's how you get your $100 million with that $100 million deduction, which is huge. Now what's cool about for you? You sell it today for $100 million. Well, you're not out, because what you're going to get also is you're going to get remember I told you you have that sell a note for $40 million.

Darren Gleeman: 16:15

Do you really want to sell a note, an IOU? No, well, you don't want it, I'll take it. I'll take that every day of the week. You know why I'm going to take that. The interest rate on that selling note, right, it's subordinate, right, because you're second in line to JP Morgan, right, the interest rate is pretty high. Let's say the interest rate for that, make it up. It's 15% In the cannabis. That sounds normal, but that's not normal. 15% is high right. 15% is high right. Sounds great. Yeah, that sounds great.

Darren Gleeman: 16:51

So again, in the normal world no one wants 15% interest. It's crazy. So I say, ben, look, instead of 15% on that, we're going to give you 5%. That's what you're going to get for your seller note. I literally just told you it's 15%. So instead of that 10%, you're going to get something called warrants. A warrant enables you to buy back a piece of your company in the future. A warrant is like a stock option, so you can get warrants for, let's say, let's just use the easy number of 10%. You can get warrants to buy back 10% of your company at any time in the next 15, 20 years. We can get you a little bit more. And the price of those warrants, the predetermined price for a $100 million company for 10%, the predetermined price for you would be about, probably about a million dollars to buy back 10% of your company at any time in the next 15 to 20 years. Yeah, I know you're doing the calculation 100 million, 10% is worth 10 million. How is it a million? It's a million, and the time is 15 to 20 years, which means this 10 years down the road, federal legalization occurs. Yay, your company is now multi-state operator, all toward a billion dollars.

Darren Gleeman: 18:11

Budweiser comes in to buy your company and it's owned by the employees of this esop structure for a billion. Okay, what we do is we terminate the esop, all of the employees best. That means they automatically have to do to get the stock of their own. The billion dollar comes in. The esopOP terminated you get a hundred million. You hand in that million dollar check right to the company, hand in your warrants for 10% and you get back a hundred million dollars from the billion the employees get their 900 million. For the employees, of that 900 million it goes into their retirement accounts, of which they do not pay tax on until they take it out. You, on that $100 million second sale remember you had the first bite of the apple 10 years before On that second sale, you do have to pay capital gains tax. So, yes, that's Seller Note. You totally want that and if you don't want it, I'll take it. I'll take a piece of it and go in with you because I want those warrants.

Darren Gleeman: 19:07

Now the third piece of the ESOP and this is why we're here and this is why we're talking about it is that in 1998, congress wants to come up with a way to have a company, an actual company, that pays no tax, not a nonprofit organization that pays no tax, not a nonprofit organization, a company doesn't exist. They come up with the idea and then President Bill Clinton signs it into law. So from 1998 on we have the ability to have a completely 100% income tax-free company Zero federal taxes, zero federal taxes, zero state taxes forever. Now. We've structured over 400 of these in the past 25 years. So you know we've done quite a few over $22 billion in enterprise value. We know how to do this and it's been done before.

Darren Gleeman: 20:03

So when you're paying zero federal tax and you're paying zero state tax, it doesn't matter that you're not allowed to take deductions, because who cares? Like a Native American tribe, they don't care about deductions, they don't pay any tax. It doesn't matter. Same thing with this no taxes at all, so deductions don't matter. And so you're not evading 280E. You're not getting around 280E at all, so deductions don't matter. And so you're not evading 280E. You're not getting around 280E at all. You're using 280E, which is no deductions. You're thinking about cost of good soul, just no deductions. So when you fill out your tax return, there's no deductions at all. Doesn't matter, because when you finally get that in huge profit great, your accountant looks at it, checks off the box, files it. No taxes at all, so it just doesn't matter. Do you have a better idea of how this works?

Ben Larson: 21:00

it's pretty cool, right no, it's, it's very cool and I so let me just make it a little clearer in my head, you know, I come out of like the venture space where I feel like ventures maybe splitting the difference between what you're describing, and maybe like a traditional just owner owned company where we have ESOPs, when we structure Totally different yeah, it's a different ES structure Totally different.

Darren Gleeman: 21:29

Yeah, it's a different ESOP.

Ben Larson: 21:30

I would like to kind of dive into that, but it's like we're gifting warrants or options to employees and there's some form of ownership there. So I guess two questions. It's just a completely different definition of what you're talking about ESOP when you're structuring it from a venture company versus like a traditional-.

Darren Gleeman: 21:47

With a venture capital firm. Usually what you're doing is not ESOPs, You're doing employee stock option plans. They're options.

Darren Gleeman: 21:56

Same acronym, different meaning and actually, yeah, it's not even the same acronym but by mistake, by mistake, a lot of venture capital firms is calling it an ESOP and it's completely wrong. An ESOP is employee stock ownership plan. An employee stock option plan is completely different and it doesn't have an acronym, but they started using that. But yes, totally different animal and the employee stock option is here. You know what? Here's some stock that maybe you're going to get if it reaches a certain level. That's an option when employee stock ownership plan is so far differently. You literally they become owners in a trust. With an ESOP Employee Stock Ownership Plan you're creating a trust created by the government. Right? This is an Employee Stock Ownership Trust and the employees are all beneficiaries of the trust. There's only one shareholder. To get technical, there's one shareholder which is the Employee Stock Ownership Trust. All of the employees are beneficiaries of this trust.

Ben Larson: 22:51

So why is Congress anti-PE acquisition when in large part, the venture industry is built upon companies getting acquired and employees benefiting from some of those acquisitions? So why the big difference?

Darren Gleeman: 23:14

Yeah, it's not that they're against private equity or VC, it's just that they're more pro-employees. And so what happened is this? Back in the 1950s, there was a whole debate going on in this country. Remember the whole McCarthyism right? There was a whole debate. Well, is it better to be communism and follow the communist manifesto? Is that better or is it better to follow capitalism? And when people look at it, well, for the guy who's on the line, the manufacturing workers on the line, are they better off with capitalism in terms of creating wealth for themselves? No, not really. Will they be able to send their kids to college, get a house that they own and save up for retirement? No, they can't. They can get an iPhone, they can do the cool things that capitalism has given us all great for driving Tesla, but it's difficult. So the Capitalist Manifesto came out Seriously, the Capitalist Manifesto out Seriously. This is the Capitalist Manifesto and that's a book written by this guy, lewis Kelso.

Darren Gleeman: 24:13

Lewis Kelso really started the private equity world. He was a private equity genius he now has. There's actually a company he's Kelso and Company. It's a pretty big private equity firm. So he came up with the plan of how he can get employees to partake in this capitalism world and he created this structure called the ESOM and in 1973, it was actually formulated and it was put into the government via this ERISA. It wasn't part of it. Erisa is like a pension plan thing, nothing to do with it. They just stuck it in. The guy who put it in is going to send it along. He actually put it in to that bill. It's like people do you stick things in? He put that in, but it's not anti-private equity at all, it's just pro-employees. So they gave all these incentives to the owners to say, hey, you can sell to the employees and do better than private equity.

Darren Gleeman: 25:14

Now, venture is a completely different game. Venture is you're taking a chance. Venture is you're putting in money and, as you know, you're putting in money into these startups. You know series, abc, wherever you're going in and you're taking a shot. And if you go for 10 companies, hopefully they get one that you know is pretty good. If you do 100 companies, you might have one that becomes this, you know, phenomenal player. So yeah, again, it's not anti-private equity at all, it's just pro. How can we get the employees involved? Good question.

AnnaRae Grabstein: 25:40

Well. So it sounds great to get the employees involved, and it also sounds great to avoid taxes, and it also sounds great to avoid taxes, but especially where the cannabis industry is, a lot of the ownership are also the founders, and these are folks that have put a lot into creating leadership structures, to creating visions and plans for execution and growth. I have some real questions around what the governance of this type of company looks like, and also like what the entity structure is. So ESOP is not an actual entity structure. So what is the entity structure that these companies end up? Is it LLCs or C-Corps? Explain that and then also explain how these companies are led going forward once they transition from whatever they were before into this ESOP structure.

Darren Gleeman: 26:31

The way it works is, right now, just how any companies that you're working with NRA. If you have a company, it's a corporation, by the way, so you're structuring it as a corporation. All corporations in the United States have a board of directors. So right now, let's just say again Ben's company, the board of directors of Ben's company is Anna Rae and Ben. That's the board. After the ESOP is completed, you know who's on the board Anna Rae and Ben.

Darren Gleeman: 27:04

It's not going to change. What happens is there's a trustee that represents the employees. That trustee doesn't want a board seat. They don't want to run the company. The employees are not getting a board seat and the employees are not running your company. The board of directors continues to govern. The trustee could say to you look guys, anna Rae, ben, love it. What I'd like is to get an independent board member on your board by 2026 that you, anna Rae, you Ben, you choose, operate, manage or govern your company.

Darren Gleeman: 27:45

Now as the board of directors, you put in the CEO and you put in the president, which is the current CEO and the current president. That's not changing. So if you're managing before, you're still managing afterwards. So if you're hiring Wolf Meyer to be your strategic liaison and you're consulting. You're continuing to consult. It will not change at all, as opposed to if private equity comes in. That's changing. Then what I'm doing is I'm going to take out a bunch of the C-suite, I'm going to do a lot of different changes and use the people that I want to use, because I think it's better.

Darren Gleeman: 28:24

But with an ESOP, it pretty much stays very, very the same. Again, it's up to the board of directors. But if, anna Rae, if you're actually governing and you're actually I'm sorry if you're consulting and you see the way, the structures that you set up, that whole leadership, if you don't want to change that, you're not changing that at all. That's exactly how it runs, because why would anybody want to change it? It's working. You put this in place and it's brilliant. Let's continue with it.

Darren Gleeman: 28:51

But now, anna Rae, think of this you just put this whole structure in place and it's great, and now you have these employees that are thinking differently. The employees are not thinking they're not a worker that's going to go off to be a bud tender somewhere else or go on someone else's line because they're making 20 cents an hour more. Now they are owners and they start thinking like owners Retention in ESOP-owned companies increases by 300%. So now, anna Rae, when you're going in, you're strategizing Well. This is kind of good, because you now have these employees, that they're much more likely to stay, and not only that, these employees are much likely to go ahead with your vision. Productivity increases annually in an ESOP owned company by 2.4% every year.

AnnaRae Grabstein: 29:45

Wow, that is really compelling. Retention in cannabis frontline workers is is definitely an ongoing issue. Um, you said that you've done 400 of these obviously not all of those in cannabis. Um, when did you put your eyes on cannabis and realize that this was an industry that would benefit from this personally? Um and uh, and if you could talk about some of the cannabis companies that you've worked with and their success stories, that would be really, really interesting for us as well.

Darren Gleeman: 30:20

I'm telling the audience. That was my signal. When Anna Rae goes out, I do this. Um, so you, you went a little bit out, I? I think what you were saying is when did I uh, when did I come across the whole cannabis space and see that as a special space? Yeah, so about uh, now it's almost three years ago. I was talking to someone that I have an investment in one of their companies and I was talking to them and they're like oh you know, can you do an ESOP in the cannabis space? Yeah, you can do an ESOP in the cannabis space, but why would you? Cannabis is all about venture capital, capital. These things have multiples of three, four times revenue. They're growing like wild. There's money. I wouldn't do an ESOP and I'm like, okay, and I explained that a little difference to them of VC versus what selling a company is. I explained that.

Darren Gleeman: 31:15

And like yeah, you're right. And there's also this weird tax thing called 280E and they explained it to me. So at that point I'm like, okay, hold on a second, say it again what you just told me. So once they told me that, I did research on 280E and then I saw, wow, this is a crazy industry as you guys know. This is a crazy industry as you guys know, and the tax burden is so insane that it makes the ESOP structure that much more powerful. So then, of course, spoke with people, spoke with various attorneys and learned, yes, we can do an ESOP in this space. It is very doable, no problem.

Darren Gleeman: 31:59

And then I started going off and my original thought process was not to be the investment banker. My original thought was oh my God, I have the ability to buy companies and have no idea that we can go and pay zero taxes, which means I can start buying companies at pretty good multiples. But I'm going to have all this cash flow coming in that they don't realize that I can get. So it gave me a little what I call the arbitrage advantage. I tried that for a little bit and I realized that, no, I'm not ready to get into the cannabis space. I don't have that. You know that, that ability, and so we're like you know what. Let's just do what we do best, which is investment banking, and explain this.

Darren Gleeman: 32:43

So what I've been doing now for the past really two, two and a half years, is I go out and I've been explaining this to every single law firm and every single accounting firm that will listen to me, because if I go out and I explain it to the business owners, by themselves they don't believe it. It just sounds too good to be true. Especially in the cannabis space. It's like, oh yeah, I've heard it before, I've heard all these crazy things. So I go out and I've made all these relationships and it wasn't easy. I mean, I've spoken to attorneys that they're like same thing, this sounds too good to be true. Okay, and I know, and I've heard it before, so you need to go through, okay, the erisa go department, the tax department. You start walking through until finally the head of cannabis.

Darren Gleeman: 33:28

I agree, this does work, oh my god. And you can see in their faces it's you literally. Did it not? Maybe not, I'm not sure. Yeah, this totally works. So that that's how I got into it. Um, and so, yeah, that's what I do. That's why I'm all about just educating people on it and explaining. That's why this show is great so so so what are?

Ben Larson: 33:54

I mean? What? What are some of the examples, uh, of mainstream companies, um, that have gone through this process and are now employee-owned, and then maybe we can talk about a couple of case studies, maybe leaving out any certain specifics that you need to, but in the last year, cannabis companies that have gone through this process and, like we mentioned at the top of the show, cannaprovisions was the most recent one, I think we just saw the announcement within the last week and theory of wellness, who, who we're familiar with through Vertosa. It was the first that we had seen. So really, really interesting. But, yeah, let's start with the mainstream side.

Darren Gleeman: 34:36

Yeah, so the mainstream side. I think there's a supermarket chain called Publix. Oh yeah, it's all over the country.

Ben Larson: 34:44

Which we'll probably see when we're in Miami for Benzinga.

Darren Gleeman: 34:47

That's right.

Darren Gleeman: 34:48

That's right. We'll see you in Benzinga. And if you walk into Publix, I love Publix, everyone loves Publix because you walk in and you're greeted by someone that's super nice and they super want to help you. I've never seen any other supermarket like that. They are awesome, everyone's awesome, everyone. And that's because they're employee owned. And when you go to Publix and you're going and you're paying, go to the cash register and you pay and someone's talking to you and you have this nice old lady is there talking to you and you know she's a millionaire, she's a millionaire. They have thousands of millionaires that work at publics because they are all employee owners.

Darren Gleeman: 35:32

Um, there's another company called uh gore. It's out in maryland. Um, they uh, they do like some type of fabrics. They're also another very large ESOP owned company and Biden has mentioned them, you know, numerous times. Um, yeah, there's, there's tons of them, but those are the ones that people would know. I think Publix is really the most well-known in terms of what we've done. We've done so far in the cannabis industry. We've done four ESOPs that have been closed. Um, the two that you mentioned are theory and counter provisions. There are two others that have not come out yet, so I can't mention them until they come out and I assume when they're ready then I'll talk about it. Um, but yeah, um, in the counter, in the, in the ESOP space for cannabis, it really does truly make sense.

Ben Larson: 36:21

And if you want to go through it as like a, a case study, um, you know well, before we, before we get there, just I had a question pop in my head um, is the? What's the reporting? Like, like it's. You know, like we talked about the mechanism, but like the ongoing operations of an esop, like are you having to deliver certain reports to the shareholders and then also to the government? You know, like, obviously you're filing your taxes, hopefully with a $0 bill, but like is there any special type of reporting that's necessary?

Darren Gleeman: 36:56

Yeah, so you usually hire no one does the reporting themselves and it's not something that the employers are doing, it's not something that the C-suite is doing. You're hiring an outside third party. It's fairly cheap and they do the reporting. And there's one file that you have to do. It's called a 5500 form that the company files, just like any pension plan. So if you have a 401k in your company, you have to file this 5500. So it's the same thing with the ESOP structure. So the filing and you have to file it now for every employee.

Darren Gleeman: 37:31

Someone has to keep track of this, right? So you have a third party administrator called the TPA third party administrator and they're keeping track of. Ok, well, annabelle, anna Ray is is a shareholder, not a shareholder, she's a worker, and Ben is a worker and Darren's a worker and I've been working there for seven years. You're working there for three years and two years I make 50,000, you make 100,000, you make 75,000. These ESOP owned companies is based on time there, time served and salary. So if you make a hundred thousand dollars a year and I make 50, you're going to get twice as much stock as me.

Darren Gleeman: 38:08

Well, someone has to keep track of that. So that's where you hire a third party administrator to keep track of that and then every year there's a valuation of the company. That's the same thing. So they keeping track of all that. So the additional administrative duties for a company you're probably talking additionally, depending on the size, but figure in an additional $75,000 a year will be your cost to do all this stuff, which, if you're again, if you're making, we feel that the smallest EBITDA, the lowest EBITDA to do this I'm sorry net income the lowest net income is about $2.5 million is the floor in net income and 20 employees. That's where it makes sense. So if you're having net income $2.5 million and you're saving $1.2 million a year, the additional $75,000 of cost for the third-party administrator is negligible, for the third-party administrator is negligible.

AnnaRae Grabstein: 39:01

I have a question about new capital coming in once a company is an ESOP. So let's take Theory Wellness, for example. They're an ESOP now and they decide that they want to do a major expansion and they want to go take over the European market or something, and they need $100 million or they need $5 million, whatever it is. How does that happen? Can outsiders make equity investments into ESOPs, or is it only debt? Can you help us understand what that looks like?

Darren Gleeman: 39:36

Sure. So if someone wants to come in a debt-like structure, there's ways to do. Like a convertible debt, you can structure it with something called shareholder appreciation rights with additional amounts of money. Where then it would you know? Again, these are like tricks, but it would look like equity but it would act like debt. So if you have so 100% owned by the employees, well, you can structure something. Where you want to raise, let's say, another $100 million. Okay, my interest rate is going to be X and what I'm going to get as that investor is any value that's over the $100 million mark, and that would be called a shareholder appreciation rate, and you can do stuff like that. Yeah, so there's no difference between a private equity owned company and your company. It's just the structure might look different. But if a company can take in $100 million, it doesn't matter if it's owned by the ESOP or if it's owned by private equity. You can still take in that level of debt.

AnnaRae Grabstein: 40:29

Well, so, okay, this is wild. It's really interesting to hear that Bill Clinton was the president that signed this into law, because I don't think of the Democrats as the party that is a big proponent of tax avoidance and I'm wondering sort of what the different perspectives are in Washington DC about this, because I could see that the Republicans would really like this and there's elements that make it interesting for Democrats. But I'm wondering, like, what is the political environment now with the current members of Congress around this structure? Are people thinking about eliminating it? Are people excited about it? Give us some of that.

Darren Gleeman: 41:12

Okay, yeah, I'm glad you brought that up. That's interesting. This is the only thing that's truly bipartisan. So you know who really? I'll give you the two who really really really love Esau.

Darren Gleeman: 41:28

Well, cannabis, I'm not sure. That's a little bit different. But Esau, bernie Sanders and Bernie Sanders is as left as you can get. He is a declared socialist right. Bernie Sanders absolutely loves ESOPs and the reason why he loves ESOPs is because, well, if you think about it, the employees are getting this huge benefit for nothing. Just by being employees, they're getting a huge benefit. They are right. They're employee owners now. So he really loves this structure.

Darren Gleeman: 42:05

Now, on the far right, the biggest right-leaning Republican is Mitch McConnell traditional Republicans. He loves the ESOP, as you said, anna Rae, because of all of those juicy tax benefits that the owner and the company gets. I mean running a company completely tax-free, the owner getting the money out of the company and not having to pay capital gains tax. He loves it. You know who also loves it Biden, trump, the Democratic Party and the Republican Party both love the ESOP structure and that's why it's been around for the past. Now it's been 50 years that this ESOP has been around.

Darren Gleeman: 42:49

There is no movement in Congress at all to weaken it. If anything, there's always movements to strengthen it, always Because everyone really loves it. It's like a layup for them because you have both parties agree on it. This is wild, it's wild. Yeah, it loves it. It's like a layup for them because you have both parties agree on it. This is wild, it's wild, yeah, it's really. It is wild. How amazing it is. And again, no one knows about it.

Darren Gleeman: 43:11

Because, also, if you look in the IRS website which sometimes I speak to people and I'll do like presentations, and they've looked at the IRS website, right, and they'll see what it is and they'll see, um, what it is and they'll explain, they'll ask me about that. It's like, oh, um, I read this, so I'm going to read this to you for a second of what it says very quickly here An employee stock ownership plan is an IRC section 401A qualified defined contribution plan. That is a stock bonus plan or a stock bonus money purchase plan. Dot, dot, dot, dot dot. It's insane and that's what people think of when they hear about ESOPs. So when you read that, what do you read? I don't know what it is, it sounds complicated and I already have a 401k If you look at that and people literally have looked at that, and then they've interviewed me and they start asking me those questions.

Darren Gleeman: 44:10

I don't know. I don't even know what a defined bonus plan is. I do. But it's like the questions are like no, let me try to walk you back to really what it is. But yeah, because of that, people really don't have the education. Now, you guys do. I mean you guys, right now, you understand it, and this is a cool thing. If I explained it correctly and I think I did you should be saying, wow, this sounds too good to be true. Why don't more people do this? And you know what's going to happen In like two, three, four days from now. You're going to know that you liked it, but you're going to forget it. You're just going to forget because it's like it's a lot right. I mean, I'm giving you, like you know, a waterfall of information.

Ben Larson: 44:52

Okay. So we heard kind of the lower limits, like you need to be making a certain amount of money so that it makes sense from like an ongoing, like you know, expense 2.5 million, 20 employees. What are some of the other reasons why you wouldn't do this? Say, a company is doing really well and is on a great trajectory, would they still consider doing something like this? And what's kind of interwoven in here is that what you would do with that extra cash. Or I mean that that extra cash right, because you're not shipping it off to the federal government, so that's opportunity for that to get re-infused back in the company. Or or you also said, uh, as a way for the employees not to have to pay anything in in the purchase well, the employee?

Darren Gleeman: 45:35

yeah, no, that money is nothing the employees, it doesn't cost anything. So it's not like there's money back and forth to the employees, the employees. So you're using that additional money to kind of pay down the debt because you, as the owner, you want to cash out, you want to get some money today. You do want to get some money, but now you have a lot of additional cash flow you can use to roll up companies, if you think about it. Okay, ben, you have other companies. You're looking in the manufacturing space. You're looking at them. Some of the companies make 3 million EBITDA 3 million EBITDA that pay in 1.5 million in taxes. Huh, if you go and buy them via your ESOP, you roll them in. All of the money that accretes to you now is not 1.5 million. You're going to accrete 3 million. You're paying right, he's not paying any taxes. It is a vehicle to actually roll up companies with this.

Darren Gleeman: 46:26

To your first question if a company is making year over year, if they're growing 100%, no, do not do an ESOP. You're growing too quickly. I wouldn't want to give that up. I would never recommend someone doing that. I would recommend you're growing so much, get venture capital. You're growing leaps and bounds. Let's get venture capital, raise some debt and then we can do an ESOP later on. But for a company, again, that's a high flyer, like artificial intelligence, robotics. I think I explained to you originally. That's a company that they should not do an ESOP because the value of that company is all based on what's called a premium. They're not based on a financial model. Private equity is all about can I pay down debt? Am I making money? Today, venture capital is all about the flyer into the future. I want a company that's going to grow two, three, 400% a year. That's venture capital. That's not for private equity. I mean that's not for private equity, nor is it for ESOP.

AnnaRae Grabstein: 47:24

Well, Darren, this has been really interesting. I think that taxes are a very special kind of scourge on the cannabis industry with 280E and there is hope around rescheduling that maybe cannabis companies won't have 280E as an additional challenge for too much longer. But the truth is is with or without 280E, income taxes are really big imposition on companies. So this has been a very enlightening conversation. We are at the end of our time together, and so I want to turn the microphone over to you for your last call.

Darren Gleeman: 48:04

My last call is again. I'm Darren Gleeman, mbo Ventures. Mary Boyaska, mbo Ventures. You can email me directly and we will chat and I will explain how this works. If you are a lawyer or a accounting firm, let's definitely talk. I'll explain how it works. If you're a CEO or CFO of a company, great, let's talk. And I'd also like to speak to your attorney and your accountant, because you're probably not going to believe this and you're going to need him or her to say yes, this is real. So I don't know if you guys have it here, but you can go to LinkedIn. I'm at Darren Gleeman. Link in with me at Darren Gleeman. You can message me there, or you can go and email me at dgleeman at mboventurescom. Amazing, wonderful. Thank you, darren.

Ben Larson: 48:57

Yeah, that was incredible, it was a masterclass and we really appreciate it. You know, I feel we could probably just keep digging and asking questions, probably for the next two or three hours, maybe even eclipse that whole two to three day period you mentioned. But yeah, it's really eye-opening Even just to know that there's an alternative to exiting a company at a certain point in time.

Darren Gleeman: 49:15

Just an alternative. Exactly, exactly.

Ben Larson: 49:17

Very cool. Best of luck to you, darren. We're excited we're first tax season for a lot of these companies. We'll maybe catch up in the fall and hear how things are going. With all of that, we'll push anyone that reaches out in your direction.

Darren Gleeman: 49:30

Awesome. I appreciate it guys.

Ben Larson: 49:31

All right, we'll talk to you soon. Nra, another one in the bag. All right, folks, as we wrap up, remember that the dialogue doesn't have to stop here. We invite you to continue these conversations in the comments online, wherever you can find us. What do you like about the show? Who do you want to see on? What topics do you want us to cover? We're immensely grateful to have you your attention for the hour hours that you're joining us on the show. Please keep helping us grow the audience, grow the show like, subscribe, share, do all those things. We really appreciate it. Huge thank you to Virtosa and the Wolfmeyer teams for keeping the lights and cameras and mics on. And, of course, as always, folks, please remember, stay curious, stay informed and keep your spirits high Until next time. That's the show.