Text Version of the Interview
What do you look for in an acquisition?
The hydroponic industry, as we see it as tremendously fragmented. It was an industry with about 2000 stores.
What GrowGen has done is bring in the best of the breed. There's usually one or two that are newer stores that come with what we believe to be a tremendous employee base, customer base. Stores that are really size-wise can handle the commercial growers around the country. When we first started in 2014, our stores were 2000 square feet.
Now, you see GrowGen building stores 20 to 70,000 square feet. And we indeed take a hard look at the inventory, the customer lists, the balance sheet, the income statement, and understanding the EBITDA levels.
But also taking those numbers and equating it back to the growth within the region that we're buying these stores.
There are different laws in each state. So we need to start looking at what states we want to be in first when we want to buy.
Buy or Build?
GrowGen understands how licensing around the country works. So when you take a look at our 50 states, there are some mature markets.
We also take a tough look at licensing laws within states. Certain states are tremendously restrictive in licensing that they're giving out maybe two licenses in the whole state. We also look to see if the state is medical or adult use.
So there's certainly a lot of planning going into where we're bringing stores and whether we could open stores or we're going to buy stores.
Right now, GrowGen thinks it is best to buy stores in mature states and breed stores in new states.
Effects of Regulatory Environment
It does have an effect in a lot of ways. When you start looking at some of the new legislation coming down, even look at the Moore Act that recently got through the house.
They were looking for social justice issues that are coming up right now like letting the underrepresented start to grow instead of giving the wealthy three licenses. It's also allowing individuals to grow up to six plants, up to 12 plants per family.
GrowGen is looking for states with open licensing. And less restrictions on the individuals and more CREF growing.
How do you Integrate?
It's certainly not an easy integration. We have lost some employees when we buy companies that just don't want to work in a corporate environment. We introduce our ERPs, technology and policies to them.
Integration starts from the beginning. We usually bring in our ERP system, which is much more complex than your normal QuickBooks at forecasts. You understand your customers, what they need to buy every day.
Two weeks before closing, we send both our technology teams. We usually send a minimum of three of our senior employees to these stores as a buddy system to spend time with the employees to go through books and records and teach them our ERP systems.
On the first day, we purchased these individuals' booking sales, our ERP systems. We bring our accounting staff, and we bring our marketing, purchasing our commercial team in.
So we bring this whole host of new corporate initiatives to these stores and it's worked out tremendously.
The most important part of what we're buying is employees' continuity of business. And then in this industry, a lot of the growers look towards their sales reps in their grow pros at these stores as the doctor of their plants.
If we don't have a good feeling for the employees. The store's not going to come under our umbrella. So if we're not buying employees that we need for the future and customers, we just as well open stores.
Are you Surprised when the Target CEO leaves?
We have not been surprised to date. It's part of the initial conversations and every one of our Asset Purchase Agreements (APAs). We have employment agreements prior to purchase.
So we certainly understand who wants in, who wants out, who's going, it's pretty spelled out in the non-competes we have with each and every owner and top employees of stores we buy.
So we're very careful from a legal vantage point, we're pretty buttoned up when it comes to that.
So you use Bankers?
We have not used bankers on any of our acquisitions to date. It's a lot of word of mouth, it's recommendations from certain of our manufacturers and distributors that we deal with.
So it's more inbound calls than outbound calls. But it's also pounding the pavement. At this juncture, now everyone knows GrowGen. We know the environment well. We know every store in the country, we go to all the trade shows.
We've been in business since 2014.
We're always cultivating relationships, and we have relationships around the country. Start to finish, usually, when we want to go further or they want to go further, NDAs are sent out and that's the start of every transaction and from an NDA.
Usually, we need to see two-year balance sheets, income statements in a year to date. We want to see a long-form income statement. So we understand every line item on them.
We easily understand the margins of every store in the country or the different regions. It's just a repetitive process, and we know where we are. We know what pricing is.
We have a pretty decent understanding of when we're buying with integration. When you look at our forecast, we keep a very detailed forecast as a public company.
How has your M&A evolved?
Practice makes perfect. If you ask me what's different from GrowGen now than two years ago, it's how quickly we're integrating.
How quickly we're making these stores better used to take six months to a year; now it's taking three months.
So seeing an immediate accretion around the margins around sales, we see fewer complaints from employees in the stores we're acquiring.
The easy part is purchasing. The hardest part is integrating and making these stores better.
Why is Your Strategy Shifting?
I think any big chain's evolution is no different from ours - filling out the shelf space. And then you have to put some of your own products on the shelf. It's just that evolutional growth, and it's all margin accretion for us.
So for GrowGen, when you're looking at normalized margins in the 26 to 27 and margins on private labels 50 and above, it fits that model.
We have 630 employees right now that know how to grow. We understand what our clients need. We understand what's selling every day.
So we certainly have a leg up on the manufacturer suppliers, distribution channels. Because we're a marketing tool, we see the tremendous growth of new products coming to market.
But along that side of it, we also have R&D at GrowGen. And so we also are bringing on our products to market as we speak.
How Do You Manage a Multifaceted Strategy?
We have a look at our org chart. It starts with me and our co-founder Michael Solomon. That goes down to our CFO that has twenty-five people under his command.
And then you have our Chief Op, we also have a vibrant online division. So we have our technology division. And then we also have our commercial team.
Private Label Strategy
First, we look at the products before we even start. We look at what we sell and we certainly understand every product we sell, even though there are so many SKUs.
So we start from that vantage point. What brands do we want to private label? What brands do we not want to private label? And we come up with brands, whether we're purchasing or R&D on our own. We give products out and have them tested in the street by our own individual group.
So we get feedback on products to see if they're going to stay. First, are they viable product? If they're a viable product, then it's marketed.
Do You Create a New Team?
We do have a new product team at GrowGen, and it starts with getting it to our store. So it goes to our supply chain out, our stores, and end caps in every store advertising.
We do YouTube videos on every one of them. We have a pretty talented team at GrowGen that does "how-to" videos for us.
This year is the kickoff of our private-labeled products. We have told Wall Street that we will break down our private label products on a quarterly basis. So they'll see the percentage of what we've sold and certainly the performance of our private label brands.
What's it like going from Private to Public Company
For me, probably easier than most. Again, it's my background. I used to represent public companies my whole life.
I do believe that Wall Street is a complicated area. And if you don't understand securities laws, you don't understand the public markets. It's a tough place to be involved. Everything you do is transparent.
So if you're not looking to be transparent, stay out of the public markets. Small companies are looking for greener pastures; Wall Street doesn't bring greener pastures. It brings complications. You must understand what you're getting into,
It's a lot of work. It's gaining the trust of brilliant individuals on Wall Street. If you don't gain their trust, you're not getting anywhere.
Public Company Disclosures
There are a lot of committees that you have to disclose to.
It's all transparency. As a public company, you don't have the leeway to decide which to tell. The rules are extremely specific; you have to play by the rules unlike a private company.
If you can't be transparent, good luck with your D&O insurance. You're an open book. And you'd have to understand that your book's got to be clean and everything you do has to be to the highest standards.
So for me, by understanding the law as well, I'm overly compliant because the other side of it isn't where you want to be.
How About Extra Analyst Calls?
20 hours is a normal week.
The only good thing I liked with COVID was that many CEOs around the country and CFOs don't have to travel to speak.
But if you had to travel to conferences for days. There are two kinds of CEOs and CFOs. Some are marketers, and some are workers. You have to balance your time.
The demands of Wall Street are tremendous, and they always will be.
You know, some people think they are productive. And some people don't. You know, there's that fine line of, I tell my analysts, it's not a productive conversation. I'll get rid of them, but again, it's time-consuming.
Economics Between Private and Public Company
I think it's spending a lot of time talking to Wall Street, basically putting your life on display; everyone knows everything.
One of the interesting parts is when you look at roll-up strategies that have worked in the past and can even look right now, you'll look what pool is doing, look what site one is doing. It's pretty similar, you know, GrowGen is following that footprint.
No one cares about private companies. People care about public companies.
When people ask me, what's the main difference between a public and private company? A lot of private companies give bonuses at the end of the year and that is it!
We've had very little turnover at GrowGen. In contrast, most of our employees are owners of GrowGen and they take tremendous pride in that. Making the employees owners of your company is different.
I don't own this company. Everyone owns this company, every one of our shareholders owns this company.
We try to explain to people I answer to so many more people than most. I have more bosses than you do. My boss is our board, it's my shareholders, it's Wall Street.
Benefits of Going Public?
A lot of different reasons, one of you has a tremendous business plan. I think most people know that in the public markets, it's the field of dreams in many ways.
It's building something that hopefully will be around for many years to come. It's a tremendous way to create wealth if you d o a good job at it. Raising capital is so much easier in the public markets than in the private markets.
People are very hesitant to invest money in the private markets because there's no way to get your money back. And it's just the tool that's been used in our economy for so many years, and it's a tremendous place.
Cost of Public Relations
It's tremendously expensive! It can go over a million dollars. If you talk to any public company, they will say it's crazy.
Aside from marketing, auditing is expensive in this day and age. Even filing the requirement, your marketing, and your IRR, and your PR, as a public company, you have a duty to shareholders.
If you don't want to market and have IR and have PR and speak, you better be in a private company.
My job is partially keeping Wall Street happy and telling the story of GrowGen so people understand it. Otherwise, it's better be in private.
What Size Does it Make Sense To Do IPO?
It's a challenging decision to make. Some companies don't make money for years, depending on the industry, the appetite of the investors, and the growth.
I think there's a tremendous appetite right now. And there always has been from compounded annual growth and Total Addressable Market (TAM). Those numbers are right when you're getting into a market that there's unlimited growth.
Some people want to get in at the start. What we're doing is revolutionizing and making it better. Right now, if you look at the compounded annual growth rates, people are forecasting. We're growing faster than the other side of our industry because there's less competition for us and we're dominating what we do.
It's a tremendous opportunity for people to get involved at the early stages. So it just depends on what that end-stage is, what the end game is, what the total addressable market is.
M&A Between Public and Private Companies
We haven't done any M&A deals with public companies. All we've bought are private companies. But as a public company, again, it's transparent to everything else.
We have to file an 8-K, which is a reporting recording every time we buy something. We need our board of directors to approve everything. We will never buy anything without board resolutions. We also can use some of our stock as purchase prices. It is a different process.
When a public company is buying something instead of a private company, we have certain rules and regulations when we buy things (SCC rules with accounting). The rules are very defined in a lot of ways when we're buying organizations.
How Do Being Public Affect Negotiations?
We are very, very sticky when it comes to price, and then like anything else we've stuck to our original, believe it or not, business plan back in 2014, and that has held pretty close to the vest.
The word discipline is of paramount importance when being a public company and when purchasing the zip. If you lose your discipline, you buy things, you overpay for things and you get that reputation within the industry.
If I was to go buy something for five times more than I normally buy something for, Wall Street knows it in five minutes. And so do all the other stores in the country because it's disclosed within our Qs.
So we have to be very careful in what we pay and to keep it consistent. So consistency, transparency, and discipline are all important. I think footnotes when looking at what we're buying and what we're paying.
Benefits of Public Companies in M&A
We have a bigger market. The groups we're buying have much more transparency into our business.
The industry has evolved tremendously, which has also allowed GrowGen to evolve likewise. Now, It's all technology-based; it's controlled environment agriculture.
But three years ago, when we were still early in our growth stage, they asked me an interesting question. Do you believe that the cannabis industry is a revolution right now or an evolution?
And the first thing I said was if it was a revolution, you guys wouldn't be here. There'd be growers here with earrings tattoos, and people wouldn't be drinking fine wines, maybe.
It'd be a different element, a different group of people. I got Wall Street people here. So it's been an evolution, which is always good for most industries. It's giving people the opportunity to understand the industry on the medical side, on the adult-use side of it. Tremendous talent has come into this industry.
When I talk to CEOs of the other public companies in our space, it's usually dynamic because no one has to prove themselves anymore. They proved themselves years ago. And this is something that they have passion for and they have a love for it.
Advice for Companies Considering an IPO
A lot of people running public companies have that mindset of growth at any cost. Ours is growth to make money. And I think it's a huge difference. There are two strategies for running a public company. One is let's just build a business; we don't care what it loses. They'll keep giving us money. And those are the companies that run into trouble.
But for a young company going public, or thinking about going public, run it like it's public, say two years before becoming one. Set up a board and have financials every month. Start the process early because the process is very tedious, and make sure you can do that process and understand the process.
Also, hire a securities attorney who understands the securities laws' nuances because they are very specific. Understand the tax ramifications.
I do believe most public companies go through certain rounds of private placements before going public. But make sure you understand the industry you're in and the industry's growth rates, and understand how much capital you are going to need. Bring some shareholders in, build the confidence of a group of people.
You have the ability, but you have the constitution to do it. It is a lot of hard work and sleepless nights. So, you have to put yourself in a position to win.