Latest / MaxValue Podcast / (PART 1) Inside SC Labs: Lessons from a Cannabis CEO Who Sold and Returned

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(PART 1) Inside SC Labs: Lessons from a Cannabis CEO Who Sold and Returned · MaxValue Podcast

• 0:10
  SPEAKER_00: Welcome to Back to Value, the show for business owners and their trusted advisors who are on a mission to maximize their value with business valuation, exit planning, strategy, and maybe even a triumphant return to work.
• 0:21
  SPEAKER_00: I'm your host, Ben Town.
• 0:23
  SPEAKER_00: Today's episode features Jeff Gray, the once and future CEO of SE Labs.
• 0:28
  SPEAKER_00: We're going to be talking about scaling smart, selling well, and taking back the keys to the kingdom.
• 0:33
  SPEAKER_00: Jeff, welcome.
• 0:36
  SPEAKER_00: Normally I'd just ask you to do a little introduction of yourself and then hit you with questions.
• 0:41
  SPEAKER_00: But I think really today, just going through the story is the best way to organize ourselves.
• 0:49
  SPEAKER_00: So just start off a little bit with about yourself and launch into the you know the company, running the company, founding it, the exit, and what's happened since then.
• 1:00
  SPEAKER_01: Absolutely.
• 1:01
  SPEAKER_01: Um and uh excited to get into this with you, Ben.
• 1:06
  SPEAKER_01: Um so you know, my yeah, my history, uh, you know, I've been in uh I grew up in in California, grew up in Santa Cruz, California.
• 1:16
  SPEAKER_01: And um, you know, Santa Cruz is a uh is a progressive community on the coast of California that's got uh this great sort of uh uh mix of people and cultures and right, and and one of the one of the amazing things that um I think was a position politically and a support for cannabis in the space.
• 1:40
  SPEAKER_01: So um that was just sort of a part of the context of the culture I grew up in.
• 1:45
  SPEAKER_01: So um I've been in cannabis for the last 30 years.
• 1:50
  SPEAKER_01: Um I'm 50 years old, so basically my entire professional life.
• 1:55
  SPEAKER_01: And um in that I've I've I've held uh I've held a number of different positions and been working with the lab for the last 15 years.
• 2:05
  SPEAKER_01: So um we started SC Laboratories in 2010.
• 2:10
  SPEAKER_01: Um and and probably like many, like many businesses, right?
• 2:14
  SPEAKER_01: It just started with a conversation between like-minded people who felt like um they saw that they could add something, they they thought they could do something of meaning and and and uh hopefully something that gave them some joy and they had some passion about, right?
• 2:28
  SPEAKER_01: And so um, you know, we were uh four of us, we're loosely connected in social circles.
• 2:35
  SPEAKER_01: And you know, I had been in cannabis by that time for about 15 years, and you know, I I sat down with one of my partners who was a chemist at the very first lab of this kind, um, a cannabis lab that gave data, you know, um data about the active constituents, and and both from the uh I want to say on the positive and negative side, right?
• 3:00
  SPEAKER_01: So you're testing for pesticides, you're looking for consumer safety, and then on the other side you're you're looking for the active constituents.
• 3:06
  SPEAKER_01: Why do I feel the way I do when I engage with my cannabis products, right?
• 3:10
  SPEAKER_01: And so for the first time, I think after 15 years, he explained, he explained what I was doing and the product I was working with in a manner that made sense to me in a way that I never had, which was very interesting.
• 3:23
  SPEAKER_01: Um, and so I think we all sat down for dinner one night, you know, 45 minutes later, we're telling us over beer, and then we're, you know, we're uh filing for uh business partners paperwork the next day, right?
• 3:39
  SPEAKER_01: So, you know, it you could say that we we we always do, right?
• 3:43
  SPEAKER_01: We always knew it was gonna work, we always knew it was gonna be successful.
• 3:46
  SPEAKER_01: Um, and so you know, I think I was uh I was brought in really sort of from the business side of it.
• 3:52
  SPEAKER_01: It's it's interesting, you know, you sit down with people and we have different perspectives on how we might accomplish something, and I think what it would have showed us is we have different um, we had very different skill sets.
• 4:02
  SPEAKER_01: And so it was actually a great harmony between the four of us, given that the finding that we could pull together, we'd be the first four employees as well, right?
• 4:09
  SPEAKER_01: Um, and that's probably a common thing as well.
• 4:12
  SPEAKER_01: So, you know, I think the vision we had what was a fairly grand one.
• 4:17
  SPEAKER_01: Um we thought that we could participate in the stewardship of cannabis from this illicit drug to something that was more akin to like an herbal medicine or a botanical supplement.
• 4:29
  SPEAKER_01: And we knew that required addressing, you know, certain elements of uh of concern, consumer safety, consistency in the apply chain, you know, the the elements that would help sort of shepherd in the normalization of cannabis, remove its stigma, that the stigmatization that it had and in sort of the grander media or what have you, right?
• 4:51
  SPEAKER_01: And just acceptance on a wider scale.
• 4:54
  SPEAKER_01: Um, specifically, you know, I think what was of most interest to us, like I said, was the idea that we could empower patients to make better choices.
• 5:02
  SPEAKER_01: And and I use the word patients because at the time, I think the the most generally accepted space that cannabis uh uh people participate in cannabis was in medical systems.
• 5:13
  SPEAKER_01: Um that sort of was the gateway, if you will, into the RAC systems that we have today.
• 5:20
  SPEAKER_01: So um that was 2010 in California, right?
• 5:24
  SPEAKER_01: And and you know, since then you've seen uh a number of states sort of move through the space and you know uh um uh uh a number of spaces really engage cannabis systems, whether on the medical side or on the on the rec side.
• 5:41
  SPEAKER_01: Um each time a state pulls in um uh uh pulls in a new set of regulations, generally what they do is they've looked at what's happened before and they either adopt or or at least are informed by kind of what's happened before and then you know kind of move forward.
• 5:58
  SPEAKER_01: And so we've been part of that slow, painstaking process since since that time.
• 6:04
  SPEAKER_01: Um I think what has really changed for us is when you know the the farm bill came in and hemp all of a sudden introduces the world to really introduce the world to cannabis, right?
• 6:15
  SPEAKER_00: I mean, when we started at least at least the CBD side of it, yeah, absolutely.
• 6:20
  SPEAKER_01: Well, I mean, when we were when we were first uh in the cannabis industry, you know, we we actually characterized cannabis in a way so type one cannabis was what we generally call drug strain, it was a high THC, low other cannabinoid cannabis, right?
• 6:34
  SPEAKER_01: Um, and then you have a mixed ratio, right, which we call type two cannabis.
• 6:39
  SPEAKER_01: Maybe it's uh uh some kind of a strain that's you know 10% CBD, 10% THC.
• 6:44
  SPEAKER_01: And then what you have is called type three cannabis.
• 6:46
  SPEAKER_01: And basically it's you know, cannabis where you're looking at either CBD or other minor cannabinoids is the dominant cannabinoid, and you're looking at THC either being there in very small amounts or in or or not at all.
• 7:01
  SPEAKER_01: So, you know, the 2018 Farm Bill comes along, and all of a sudden the type three cannabis is now the legal definition of HEP.
• 7:10
  SPEAKER_01: Um, you know, from a from a scientific perspective, it's nothing changed, right?
• 7:13
  SPEAKER_01: It's the same thing that it always was.
• 7:15
  SPEAKER_01: And so that's a really interesting dynamic for us because most of you know, people who are enthusiastic about probably the benefits and the rewards of cannabis for the general public.
• 7:26
  SPEAKER_01: We think that it's a um it's an interesting transition transition, right?
• 7:30
  SPEAKER_01: The federal government has accidentally legalized cannabis, and you know, it turns out it's not so bad for us.
• 7:38
  SPEAKER_01: It's the same plant.
• 7:39
  SPEAKER_01: And when you look at what's happening now, it's even the same cannabinoid.
• 7:44
  SPEAKER_01: Now you're looking at low-dose beverages, right?
• 7:48
  SPEAKER_01: Those that's that's these are THC beverages.
• 7:51
  SPEAKER_01: You're looking at high THCA flour that's being sold as hemp, that's actually just type one cannabis, right?
• 7:59
  SPEAKER_01: I mean, um, cannabis, uh the cannabinoids in their uh in the form that they're in in the plant are in their acidic form, THC A versus THC, THC.
• 8:11
  SPEAKER_01: And so, right, I mean, you put fire to THCA, converts, decarboxylates, it converts that THCA to THC, and all of a sudden, right?
• 8:21
  SPEAKER_01: We're we're where we think we are, right?
• 8:24
  SPEAKER_01: So um, you know, from a from a from a business perspective, you can see that we're growing as the industry is growing.
• 8:30
  SPEAKER_01: We're growing as the footprint of acceptance is growing.
• 8:33
  SPEAKER_01: And so, you know, we're our business is is scaling because we're in the biggest marketplace in the United States, which is California.
• 8:41
  SPEAKER_01: Um, sometime around 2018, we moved into we also moved into Oregon, right?
• 8:47
  SPEAKER_01: I think December 2017 or something like that.
• 8:51
  SPEAKER_00: And actually, Jeff, let me let me stop you, uh, pause you just for a second there because yeah, like I said, I I I I know this can I we could I could just let you go uh and have this uh uh you know fill up an hour.
• 9:04
  SPEAKER_00: Uh for uh I just wanted to interject and say that the thing that really attracted me to working with you guys back in the day, I don't know, back in 15, 2015, something like that, um was the fact that you guys are yeah in a cool, exciting industry that have a lot of opportunity.
• 9:25
  SPEAKER_00: But really it was it was the four of you partners who were coming at uh at this uh kind of uh uh grade area that because it was you know uh medically legal in California, but still very illegal everywhere else, uh, just about.
• 9:45
  SPEAKER_00: And you're coming at it from a scientific perspective, and you were coming at it from the perspective of keeping people safe uh in a lot of ways, making sure there weren't pesticides, making sure there weren't uh you know microbial agents in the products.
• 10:00
  SPEAKER_00: So that's what really spoke to me uh back then uh talking to you.
• 10:05
  SPEAKER_00: And of course, you know, now uh now it's now it's great, now it's uh uh a much bigger thing, and you guys are doing still that same great work just on a much larger scale.
• 10:14
  SPEAKER_00: And so to get back to get back to your narrative, you know what what was it and uh at what point did you realize that you had to expand out of California and maybe go national?
• 10:27
  SPEAKER_01: Interesting.
• 10:28
  SPEAKER_01: Um we far when we first started looking at expansion, it was really from uh from a perspective of um you know uh uh a cannabis footprint, meaning that you know, uh while from a scientific perspective, hemp and cannabis the same plants, um, they're very different markets.
• 10:49
  SPEAKER_01: And and and you know, uh politically and from a uh law enforcement perspective, they're absolutely different things.
• 10:59
  SPEAKER_01: And so the cannabis markets basically sit within the confines of the state lines that they're in, the regulatory framework that exists in that state, entire uh you know, uh define completely the cannabis industry for that space, and the walls around that state go up to the go up as far as they go, they never stop, right?
• 11:20
  SPEAKER_01: And so when we looked at expanding in other states, we're really thinking about it from a state by state perspective, you know, what what is um you know, like what's attractive about a particular state.
• 11:33
  SPEAKER_01: I think we're just talking about, you know, you're asking, you know, how do we at what point did we realize like a national footprint would would be meaningful, and that was part of our, that would be part of our plan.
• 11:43
  SPEAKER_01: And um, you know, I think, you know, we looked at because uh the federally uh cannabis is illegal, right?
• 11:52
  SPEAKER_01: It's a schedule one product, and you know, it's it's actually legal only within the state regulatory framework.
• 11:59
  SPEAKER_01: Um, we knew that we would grow as big as we would grow within a particular state and that we try and get market share, but we could never really expand beyond that.
• 12:06
  SPEAKER_01: That was sort of our our our limit.
• 12:08
  SPEAKER_01: So expanding from state to state was really what was going to allow us to you know expand our model.
• 12:14
  SPEAKER_01: Um, you know, I think the you know, I think the first time that we really considered what would really be a national footprint is is is with hemp, right?
• 12:23
  SPEAKER_01: Because hemp really look kind of looked more like alcohol, right?
• 12:27
  SPEAKER_01: Which is to say it's federally legal, but the state regulatory frameworks that would define how alcohol is treated in a particular space.
• 12:34
  SPEAKER_01: That said, distribution footprints span entire regions or possibly the entire continental United States, right?
• 12:42
  SPEAKER_01: And so it's at that point that we thought that we could really engage and provide a service to companies who have that sort of a footprint because it really could only exist within the hemp space, right?
• 12:53
  SPEAKER_01: And I think that's where we thought, okay, this this really makes sense to us.
• 12:57
  SPEAKER_01: And you know, from a timing perspective, that was really around 2020.
• 13:01
  SPEAKER_01: I think that was sort of the height of hemp.
• 13:03
  SPEAKER_01: Hemp really at that point became when you thought hemp, you would sort of define it as CBD.
• 13:10
  SPEAKER_01: Um, and now hemp is actually probably defined more by THC than it is by C BD.
• 13:16
  SPEAKER_01: Hemp is either could that C B D is either converted into THC or you're really just extracting it in really low, you know, and in really small amounts and having some combination of both can have a nice item.
• 13:28
  SPEAKER_00: Um that's definitely changed.
• 13:32
  SPEAKER_00: Now rewinding just a little bit when you're you're now 15 years in to SC Labs, but especially at the beginning, did you did you feel you know challenges and feel underestimated being in the industry, etc.
• 13:52
  SPEAKER_01: Yeah, probably on many levels.
• 13:54
  SPEAKER_01: I think you'll find that most people who are um the term usually is we're legacy cannabis people, right?
• 14:02
  SPEAKER_01: We've been in the industry from well before the time that you saw these sort of investment waves come through.
• 14:08
  SPEAKER_01: And there have been many in many different forms, right?
• 14:12
  SPEAKER_01: So um, you know, I think very much almost in the same way that cannabis is, is is feel like there's a stigmatization of cannabis, and that even if you look at the uh taxation frameworks, right, you look at the uh regulatory frameworks, you look at the um, you know, you look at the way in which testing is actually enforced.
• 14:30
  SPEAKER_01: And this is an interesting thing because it almost sounds counter to counter to like my uh uh economic bottom line, but the reality is like, you know, there's it's almost this Faustian deal, is how I've heard it described, and I think it makes a lot of sense that says the cannabis coming out of the dark and into the light requires a greater amount of rigor in our in the intensity within which we uh uh have transparency and that we define safety and that we define these rules.
• 14:57
  SPEAKER_01: Cannabis is now the cleanest product you're going to put in or on your body.
• 15:01
  SPEAKER_01: As strange as that seems, right?
• 15:03
  SPEAKER_01: This the the the the level to which it's tested, I could walk into whatever healthy grocery that you buy your organic produce at and probably fail half of what's on the shelf, right?
• 15:14
  SPEAKER_01: I mean, it just really is.
• 15:15
  SPEAKER_01: And I think that's a it's a right, there's a there's a I I feel a couple different ways about it, right?
• 15:21
  SPEAKER_01: There's a there's a real positive thing that says, hey, maybe we should shine more light on what we're actually eating, what is allowed in our food system.
• 15:28
  SPEAKER_01: We test cannabis that's out of a lot of the places that we grow most of our most of our food.
• 15:33
  SPEAKER_01: And to be honest with you, most cannabis in some of those places can't pass, not when it's grown outdoors, not during certain times of the year.
• 15:40
  SPEAKER_01: That's enlightening, right?
• 15:41
  SPEAKER_00: On the flip side, pesticides in particular, right?
• 15:45
  SPEAKER_01: Yeah, absolutely.
• 15:46
  SPEAKER_01: And uh, I think on the flip side, you have to say, well, listen, you know, regulations need to be in line with supporting a healthy industry.
• 15:54
  SPEAKER_01: Regulations at some point become this insurmountable obstacle within which you know companies can't really grow and excel.
• 16:03
  SPEAKER_01: And cannabis is sort of almost stuck in that space, to be honest with you, right?
• 16:07
  SPEAKER_01: And so um, yeah, I mean that's a that's a that's a significant challenge, right, to the industry.
• 16:12
  SPEAKER_01: But I think it goes back to your original question, which is it is because it's cannabis, right?
• 16:17
  SPEAKER_01: Yeah, and that's why it has to meet these almost uh unreachable standards, right?
• 16:23
  SPEAKER_01: You know, so personally, I think anybody, a lot of people in the cannabis industry probably all feel that, right?
• 16:27
  SPEAKER_01: It says, hey, we're we almost said at the beginning, we're a lab that tests cannabis, we're a cannabis lab, because it almost felt like a like a you know, almost like a like a in a way.
• 16:38
  SPEAKER_01: You know, I think personally a lot of my experience as CEO of a company and growing a company is that you know, I didn't I didn't have the pedigree of having you know gone out of school during, you know, during the summers, doing my internships and then moving into a large firm and having that wasn't my business background, that wasn't my business pedigree.
• 16:56
  SPEAKER_01: But I think the principles in business are are very, you know, whether or not you can describe gravity, gravity exists, and you can describe the conditions under which you know everything is subject to it.
• 17:09
  SPEAKER_01: It's the same way whether you have the vernacular in order to be able to have the conversation at that level or not.
• 17:14
  SPEAKER_01: And that's kind of where I was stuck personally, which is I didn't have that pedigree, but I didn't been in business long enough to understand what a healthy business looks like, how to drive the bottom line, how to scale that business, and how to do so with the structures within the business that were stronger.
• 17:27
  SPEAKER_01: We ran a business that was significantly better than a lot of our competitors because we saw ourselves as this is where we want to be.
• 17:36
  SPEAKER_01: This is who we audited financials, you know, seven years before anybody thought that that made sense.
• 17:42
  SPEAKER_01: We were being ISO accredited, you know, years before anybody else.
• 17:48
  SPEAKER_01: You know, I think, but I think those were all like we really bought in.
• 17:53
  SPEAKER_01: We really bought in that those that those systems, that those efficiencies were going to drive our business forward.
• 17:57
  SPEAKER_01: And I think it did.
• 17:58
  SPEAKER_01: Once we finally got into the space to exit, you have to be able to display competencies that you're not just throwing it together, right?
• 18:05
  SPEAKER_01: And I think that we had that training, we had that background.
• 18:08
  SPEAKER_01: Um, the other thing, I mean, look, we're all, you know, like getting in front of investors.
• 18:14
  SPEAKER_01: That wasn't part of my background.
• 18:15
  SPEAKER_01: And as CEO, that is part of your role.
• 18:17
  SPEAKER_01: You're raising money, you're putting that together.
• 18:19
  SPEAKER_01: Um, the other part is as a CEO of color, I didn't see a lot of people who looked like me.
• 18:24
  SPEAKER_01: I didn't engage with people, a lot of people who looked like me at those levels.
• 18:27
  SPEAKER_01: That wasn't where money was coming from.
• 18:29
  SPEAKER_01: Um, and then, you know, additionally, you had we talked about these waves of investment, and that was a really interesting phenomenon here.
• 18:37
  SPEAKER_01: You know, we had the penny stock reverse mergers, get on the ping sheets, go ahead and you know, raise whatever money you can and try and make your go at.
• 18:46
  SPEAKER_01: I don't know one company who did that successfully, but I do know that most of the investors who tried to spin that up and you know put the deal together made some money, right?
• 18:55
  SPEAKER_01: Um so yeah, I think we were, you know, I think you know, I I I I understood that I understood at times that people may have seen me in a particular way.
• 19:09
  SPEAKER_01: Did I feel like I wasn't equipped to deal or that in some way I was lacking something?
• 19:16
  SPEAKER_01: No, that part I didn't feel at all.
• 19:18
  SPEAKER_01: But I did understand that at certain points you have to engage people and you have to enlighten them as to, you know, I understand the value in what we're bringing, right?
• 19:27
  SPEAKER_01: And that's and and we're looking for great partners, right?
• 19:30
  SPEAKER_01: That's all we, you know, we were very clear in that.
• 19:32
  SPEAKER_01: And so unfortunately, we passed on almost everything, but you know, that's that's sort of where we ended up except the right, exactly.
• 19:40
  SPEAKER_00: And I think that's you know, kind of the you know, the that's the next stage of the story, really, is at some point you you all kind of realize that even with the excitement in the industry and and the growth you were able to accomplish, you wanted to take some of those chips off the table.
• 19:56
  SPEAKER_00: And at that point, you know, you're pick up from that point, you know, when when you want to actually have a have have pick some cash out.
• 20:07
  SPEAKER_01: Yeah, I mean, look, I I it wouldn't even be honest for me to say that that wasn't a that wasn't a uh a part of the consideration, but it was you know, it was it was definitely it was definitely more than that.
• 20:18
  SPEAKER_01: I mean, you know, we had been um that time we think we had been in the industry for 12 years.
• 20:25
  SPEAKER_01: It's a difficult space to be successful in because of that one, the regulatory burden.
• 20:30
  SPEAKER_01: And then, you know, uh what we discussed in terms of like the the the federal the federal position with cannabis as Schedule One, um, even though the states had basically not only um set up a regulatory system that that approved of cannabis as either medical or recreational both, um, and a licensing framework within which you can participate.
• 20:51
  SPEAKER_01: Um, it didn't change your lack of access to banking, it didn't change your lack of access to capital, it didn't change the um, you know, the the require you know 280e requirements on whether or not you can even claim cost of goods sold.
• 21:06
  SPEAKER_01: And so, you know, for for us, it's a really for anybody who participating in cannabis, really, it's a really difficult space to throw, right?
• 21:13
  SPEAKER_01: And so I think we did a we did an outstanding job of doing that, but we'd have to piece things together to really make leaps, right?
• 21:19
  SPEAKER_01: And you're not really gonna make that um it's more expensive, it's more time consuming, it's right, that part is a grind to really be able to think that you can position yourself for real grow, right, in in terms of engaging with a capital partner, small raises, constantly kind of putting it together.
• 21:37
  SPEAKER_01: Um, the one thing we did do though is I will say that we were um we were diligent, and it was very important to me to protect my partners and the investors that we had brought in early.
• 21:47
  SPEAKER_01: So by the time we actually did get to a deal, we owned almost 90% of the cap table.
• 21:53
  SPEAKER_01: We we had we had taken very little delusion.
• 21:57
  SPEAKER_01: And one, you know, it was twofold.
• 21:59
  SPEAKER_01: We realized one of Value and the other one was control.
• 22:02
  SPEAKER_01: We had a vision, we wanted to pursue the things that we were interested in, and that was something that we held dear.
• 22:09
  SPEAKER_01: And so we didn't even try to marry that to an investment partner.
• 22:14
  SPEAKER_01: We just said we'll keep that, we'll keep that until we need to get to a certain point.
• 22:18
  SPEAKER_01: Um, so yeah, I mean, the the you know, the the the business environment, the macro business environment was a portion of it, right?
• 22:28
  SPEAKER_01: Just the difficulty there, we knew at that point we needed to make a change.
• 22:31
  SPEAKER_01: And then just my personal life.
• 22:33
  SPEAKER_01: I mean, I was at the point that I was having kid number four and five.
• 22:37
  SPEAKER_01: Uh, I think that you know, my son, who was born in 2018, my wife had my son on a Thursday, I was back at work on a Monday, right?
• 22:45
  SPEAKER_01: That the business was demanding.
• 22:47
  SPEAKER_01: I needed, you know, I needed support.
• 22:49
  SPEAKER_01: I needed to build the company that was stronger than just the people at the top of it, but that we could also invest in the systems to support it on the much longer term.
• 22:59
  SPEAKER_01: So by the time we, you know, we we got to that point, we just sort of also found good partners.
• 23:06
  SPEAKER_01: We found smart money.
• 23:07
  SPEAKER_01: We found people who were serious, people who had deep pockets of a vision, and uh, you know, really understood the space, right?
• 23:17
  SPEAKER_01: I mean, diligence works both ways.
• 23:19
  SPEAKER_01: You know, you're trying to qualify me as a partner, and I want to know do I really want to follow your lead?
• 23:24
  SPEAKER_01: If you're gonna become the majority owner of this business and you want me to participate, then I have to really believe that you under you have a good understanding of what's here, right?
• 23:31
  SPEAKER_01: And so uh we were lucky enough to find them, right?
• 23:35
  SPEAKER_01: And um, you know, it was more than just a sales pitch, which which, you know, which is which is great.
• 23:42
  SPEAKER_00: Absolutely.
• 23:43
  SPEAKER_00: And and I mean, some some things come to mind about this, you know, it in your discussions, in your search for a partner, for a finance partner, and in the discussions with them, you know, first off, uh you guys were very clear about what you wanted out of out of a deal.
• 24:01
  SPEAKER_00: And you know, there there are some things to negotiate and there are some things that are non-negotiable.
• 24:06
  SPEAKER_00: And and you were very clear uh about what those things were, which was which is hyper important.
• 24:12
  SPEAKER_00: And then secondly, even though the partner is the one with the money, you know, the the resource, let's say it's not even the money, it's the resource to you know change some parts of the business, you you're coming at it as as equals, right?
• 24:28
  SPEAKER_00: Because you've built something great, they want to want to enhance it and you know and go into go into business with you.
• 24:35
  SPEAKER_00: Uh so I I think that's really interesting.
• 24:37
  SPEAKER_00: And you know, I you kind of brushed up on it a little bit, but you know, right in the I remember right in the middle of the conversations, you you you had your uh you had your twins uh with uh and and that kind of in in one sense put the pause button on or you maybe derailed uh a little bit the the conversation.
• 24:59
  SPEAKER_01: Yeah, I mean I only um I only had the experience that I did, right?
• 25:05
  SPEAKER_01: Given that we had shied away from money for the most part, up until that point, you know, I I the size of this deal was significantly bigger.
• 25:16
  SPEAKER_01: But you know, like I said, I I I I had gone through that with my uh with my middle son and and just not really giving that moment of my life that the the right you you have to value your your your time and and and the things that are important to you and your family is more important than the business.
• 25:35
  SPEAKER_01: And honestly, as a business owner, sometimes that gets out of whack, right?
• 25:39
  SPEAKER_01: And so um in this instance, I was very clear up front when I said, Hey, you know, we're due in July.
• 25:46
  SPEAKER_01: Believe we started talking April, we had just met in April, just getting into the conversations.
• 25:50
  SPEAKER_01: I said, you know, hey, we're due in July, and I've I'm I'm gonna focus my energy there.
• 25:56
  SPEAKER_01: I'm gonna take at least two months to focus on that.
• 25:59
  SPEAKER_01: Radio silence, like, you know, is this that that has to be that's important to me, right?
• 26:03
  SPEAKER_01: That's a non-negotiable.
• 26:05
  SPEAKER_01: And not only were they um were they amenable that to that in the beginning, but I didn't get a single phone call.
• 26:13
  SPEAKER_01: I didn't get a single, right?
• 26:14
  SPEAKER_01: You know what I mean?
• 26:15
  SPEAKER_01: Like they really gave me that space.
• 26:17
  SPEAKER_01: They did, and that was that was important because a deal of that size is significant, right?
• 26:22
  SPEAKER_01: And so um I I appreciated that.
• 26:25
  SPEAKER_01: And then, you know, I felt like I I it also kind of gave me what was interesting, it kind of gave me a moment to step back, take a little perspective on the deal, and then to come back to it.
• 26:35
  SPEAKER_01: You get mired in the deal, and sometimes the back and forth and the details of that, you you push away from the table and just give it some thought.
• 26:42
  SPEAKER_01: And it also gave me a uh a brief moment to do that.
• 26:45
  SPEAKER_01: So um, yeah, that was uh, you know, is is like I said, I don't know if that's part of the course or that's a rare thing, but it was a meaningful thing to me, you know.
• 26:56
  SPEAKER_00: Absolutely.
• 26:56
  SPEAKER_00: It and from my experience, no, that's not very common.
• 27:01
  SPEAKER_00: Uh, but I would say it's it's a great test.
• 27:04
  SPEAKER_00: I mean, like any relationship, you bring in a baby or two, and that's the ultimate test of diligence.
• 27:10
  SPEAKER_00: So I think I think it's great.
• 27:11
  SPEAKER_01: So we get to I probably I had less sleep than them, but yeah, we we both participated in them.
• 27:17
  SPEAKER_01: Yeah.
• 27:18
  SPEAKER_00: Yeah.
• 27:19
  SPEAKER_00: Well, by then, hopefully that means that you know you were able to trust them and so that you wouldn't be uh you know taken advantage of while you were uh with with the sleep hangover.
• 27:28
  SPEAKER_01: Uh I'll give I'll give you some credit on that too, and and as being one of many um, you know, I think the thing that we kind of I haven't talked about in this, and part of what gave me confidence in saying no during the times you said no, in understanding when the deal was right, understanding the real value of the business, building the um infrastructure in the business, the the components of the business that it's easy to overlook, but you understand really uh provide sound business practice, transparency for new partners is having great people around you and your set of advisors.
• 28:05
  SPEAKER_01: And you know, we've been friends a long time, and you've been another advisor even longer.
• 28:10
  SPEAKER_01: And having the, you know, having this circle of people around me who had been there for some time, I mean, 10, 12 years, right?
• 28:20
  SPEAKER_01: Like that that gives you this sounding board and this resource and this network on which to draw from.
• 28:28
  SPEAKER_01: So while you get to take credit for the good, right, for the good decisions, it really is a it's it's a it's a community of people who put time, energy, and something into the business and in sort of the the the just my framing and understanding of.
• 28:41
  SPEAKER_01: So right.
• 28:42
  SPEAKER_01: I mean, I'll call that out and you know, I, you know, I don't, yeah, as as a as a as a as a as a as a friend, a participant in that, you know, I I I appreciated all those lessons and the small right, those moments over the years.
• 28:55
  SPEAKER_01: And they all added up into us really making the right decisions for us at the time, you know.
• 29:01
  SPEAKER_00: Oh, thanks, man.
• 29:02
  SPEAKER_00: I you you didn't have to say that, but certainly appreciate that you that that you're expressing that.
• 29:07
  SPEAKER_00: And you know, from the from the opposite side of it, you know, you you guys are always great clients.
• 29:12
  SPEAKER_00: And from uh I learned a ton, you know, with you guys.
• 29:16
  SPEAKER_00: It was just it, I think it was really great, you know, on both sides.
• 29:20
  SPEAKER_00: And yeah, that's that's why we're still friends.
• 29:22
  SPEAKER_00: Um but but getting back to the topic.
• 29:24
  SPEAKER_00: So the deal closes.
• 29:26
  SPEAKER_00: Um what what are you really thinking about, you know, once that deal closes, how do you react professionally, how do you react personally?
• 29:35
  SPEAKER_00: You know, what what what was going on with you?
• 29:41
  SPEAKER_01: I mean, like you're you're in some ways it's it's a lot of what you you know, it's a lot of what you build business for.
• 29:49
  SPEAKER_01: I mean, you're trying to be able to create generational wealth, opportunities, options for yourselves and your family, right?
• 29:55
  SPEAKER_01: And and we're significantly closer to being able to really be at that point.
• 30:00
  SPEAKER_01: And that's exciting, right?
• 30:01
  SPEAKER_01: So I I think I think if you probably made a deal and you're not excited about the outcome, you probably made a bad deal.
• 30:08
  SPEAKER_01: Right.
• 30:09
  SPEAKER_01: So there was a good there was a great level of excitement there.
• 30:11
  SPEAKER_01: We we were, you know, I I come from, I mean, my dad was a uh a bus driver, my my mother was a school teacher her entire career.
• 30:19
  SPEAKER_01: Like I was from a blue-collar family.
• 30:22
  SPEAKER_01: He didn't, you know what I mean?
• 30:23
  SPEAKER_01: I I didn't even understand like that was possible, those kind of numbers were possible.
• 30:28
  SPEAKER_01: And that's right, what a what a what a what a blessing, right?
• 30:32
  SPEAKER_01: So that that was all a part of it, you know.
• 30:34
  SPEAKER_01: Uh, but you know, I think entrepreneurs, if you built a real business, if you build a great business, you love that business.
• 30:41
  SPEAKER_01: You're invested in that business.
• 30:42
  SPEAKER_01: That's a part of you.
• 30:43
  SPEAKER_01: You put everything into that.
• 30:44
  SPEAKER_01: Um, 12 years a long time to invest in that.
• 30:46
  SPEAKER_01: And the people that I did that with were, I mean, they were family.
• 30:50
  SPEAKER_01: We've got right, some of the people that we have just had been there the whole time.
• 30:56
  SPEAKER_01: Yeah, not just the partners, you think.
• 30:57
  SPEAKER_01: Not just the partners, no, the employees.
• 30:59
  SPEAKER_01: I mean, we had, you know, like the first employee we ever had is still an employee there, you know.
• 31:05
  SPEAKER_01: The, you know, we have uh a number of people in a business that's only that had only been open for 12 years, who'd been there for 10, 8 to 10 years, right?
• 31:13
  SPEAKER_01: I mean, I was really proud of and had gotten to be able to call them my friends.
• 31:18
  SPEAKER_01: And so it was important to me that they um, yeah, that they that I it was a relationship that I wanted to keep.
• 31:26
  SPEAKER_01: It was a relationship that I wanted to make sure they were gonna be okay.
• 31:28
  SPEAKER_01: I was just trading them off to somebody else, and you know, it was gonna go, it was gonna go all kinds of ways, or or maybe people wouldn't understand and value them, understand their value in the way that I did.
• 31:38
  SPEAKER_01: You know, so um yeah, I I think that was that was part of my consideration.
• 31:44
  SPEAKER_01: Um, I had a lot of confidence in I had a lot of confidence in their understanding of of cannabis space.
• 31:53
  SPEAKER_01: You know, for an outsider, I talked a bit, you know, I I even though we didn't take investment from a ton of people, I talked to a million conversations over the years, right?
• 32:01
  SPEAKER_01: Um, and you know, probably uh probably the lesson I should have learned earlier is just don't take the phone call.
• 32:07
  SPEAKER_01: But um, I took a lot of phone calls and I learned a lot during that process too.
• 32:12
  SPEAKER_01: It wasn't just there's the brain rape phone calls, and you know, you gotta you have to move on from those, right?
• 32:17
  SPEAKER_01: Quickly.
• 32:17
  SPEAKER_01: But there's also you're trying to understand what are you looking for and what do you what do you understand?
• 32:21
  SPEAKER_01: And you know, it's like it's almost like a dating process, you know.
• 32:24
  SPEAKER_01: So um, you know, we had um, yeah, we had we had seen a line.
• 32:30
  SPEAKER_01: This was by far the the the most nuanced understanding of the cannabis space, um, which is an incredibly nuanced space.
• 32:37
  SPEAKER_01: So um I felt good about that.
• 32:38
  SPEAKER_01: It gave me a lot of uh it gave me a lot of um uh uh a lot of confidence.
• 32:44
  SPEAKER_01: Our board of directors was really strong when I met them.
• 32:46
  SPEAKER_01: They were very smart people.
• 32:48
  SPEAKER_01: It wasn't just they're here on paper, they brought a lot to the table.
• 32:52
  SPEAKER_01: I thought that was great.
• 32:53
  SPEAKER_01: Um, and you know, the people that uh on the other side that I met, so there this was uh I guess we call it kind of a roll-up play, right?
• 33:03
  SPEAKER_01: I mean, there was a set of set of laboratories in Colorado.
• 33:06
  SPEAKER_01: Um they were purchased first, then they purchased SC Labs in California and Oregon.
• 33:10
  SPEAKER_01: Um immediately, I think that that closed in February of 2022.
• 33:15
  SPEAKER_01: By June of 2022, there was another lab acquired in Michigan, and then by April of 2023, there's another lab acquired in um in Arizona.
• 33:25
  SPEAKER_01: Imagine I had participated in building two labs over 12 years and you know, working down to the finest grain of sandpaper that I that I could at the time.
• 33:38
  SPEAKER_01: And you know, the new labs, it's rough when you just put a lot of stuff together.
• 33:42
  SPEAKER_01: And I think that was as as great as I saw the like the deal at the moment of the deal.
• 33:49
  SPEAKER_01: I understood the challenge that you know you can't you can't throw them all together and think you're providing a consistent product.
• 33:57
  SPEAKER_01: You know, we're service business.
• 33:58
  SPEAKER_01: Labs are a service business above everything.
• 34:01
  SPEAKER_01: Yes, you have a requirement to the accuracy, the consistency of your the quality of your science, the integrity of your data, all of that is there.
• 34:10
  SPEAKER_01: So we we do have a North Star around West to Rally, but we're not, you know, in cannabis, we're not just the lab.
• 34:18
  SPEAKER_01: Like when you think of you know your blood work, you're gonna go to the lab, they have a very finite job they're doing for you.
• 34:23
  SPEAKER_01: It's a piece of paper with some numbers on it.
• 34:25
  SPEAKER_01: The interpretation of those numbers is up to the medical practitioner, the doctor, the whoever it is you're you're engaging with.
• 34:34
  SPEAKER_01: In cannabis, there is no doctor, right?
• 34:36
  SPEAKER_01: They come back to the lab and go, I don't understand this.
• 34:39
  SPEAKER_01: This isn't what I think it would be.
• 34:41
  SPEAKER_01: This is wrong.
• 34:42
  SPEAKER_01: And we have to have a certain level of engagement.
• 34:44
  SPEAKER_01: We have built a business on that.
• 34:45
  SPEAKER_00: And education I mean, the engagement is education to a large extent.
• 34:50
  SPEAKER_01: Exactly.
• 34:51
  SPEAKER_01: Some of our clients are very sophisticated, they're their own science and quality teams, and others do not at all, right?
• 34:56
  SPEAKER_01: It's a it's a that they've never seen anything like this, they just expect a number, they don't understand.
• 35:01
  SPEAKER_01: So, right, I mean, we're educating broadly at a consumer level, but at a brand level and a producer level, we're also educating, we're educating our clients, and we're trying to be as supportive as possible.
• 35:11
  SPEAKER_01: And then beyond that, what you're trying to do is not just say, hey, you have high blood pressure.
• 35:15
  SPEAKER_01: I'm trying to tell you, and here are the things you can do about, right?
• 35:19
  SPEAKER_01: And so we have that level of integration into their business and their process.
• 35:24
  SPEAKER_01: And so imagine that we had been very specific about our business model, how we were going to differentiate as a business, as a laboratory, the level of service we were going to provide, the level of education and sort of professional engagement, the support.
• 35:39
  SPEAKER_01: I'm never just gonna put out a fail, I will engage you and try and do root cause analysis with you.
• 35:44
  SPEAKER_01: The other labs had been, you know, the other labs had been transactional.
• 35:49
  SPEAKER_00: Right.
• 35:50
  SPEAKER_01: Well, some more so, some less so, but definitely imagine that we had all had our own perspective on how to build the best solution to the puzzle, which was regulators have determined that cannabis brands and producers need to meet a specific set of regulations.
• 36:08
  SPEAKER_01: And as a laboratory, you can either provide them strictly data, you can help try and build a stronger stickiness to clients by getting them past these struggles to a point where, hey, everything's passive.
• 36:21
  SPEAKER_01: Great, easy client to manage, everything always looks good, but we helped you get there, right?
• 36:25
  SPEAKER_01: So um I think that was the biggest struggle.
• 36:27
  SPEAKER_01: And then, of course, different instrument platforms and blah, blah, blah.
• 36:30
  SPEAKER_01: So that's where I think we moved from like this honeymoon phase of, hey, this deal closed.
• 36:37
  SPEAKER_01: I personally, my family's in a much better position.
• 36:39
  SPEAKER_01: I feel like there is even almost this amount of like uh uh recognition of the of the work that we've done for all those years.
• 36:47
  SPEAKER_01: We're still participating, we're still stakeholders.
• 36:50
  SPEAKER_01: I get to maybe step back a little bit from my CEO position and take a more strategic advisory position, maybe get some shorter hours, maybe get some more sleep, you know what I mean?
• 37:00
  SPEAKER_01: Like all that was that was where my head was at.
• 37:03
  SPEAKER_01: And so that's a beautiful scenario.
• 37:05
  SPEAKER_01: Some of it real, not all of it.
• 37:07
  SPEAKER_01: And then we get into this, okay, back to business.
• 37:12
  SPEAKER_01: We sort of made this more complicated.
• 37:14
  SPEAKER_01: Okay, how do we solve that?
• 37:16
  SPEAKER_01: Right, and then sort of back to you know, solving this at all different levels.
• 37:21
  SPEAKER_01: Uh, I will say, you know, the one thing I probably didn't was a little naive about was that um, you know, nobody invests this sort of money to just be patient and see what happens.
• 37:37
  SPEAKER_01: There's an expectation that results come fairly quickly.
• 37:42
  SPEAKER_01: The word synergy is going to be used a lot, you know what I'm saying?
• 37:45
  SPEAKER_01: Like, get to how do you get from here to there quickly?
• 37:49
  SPEAKER_01: And the explanations of why it's complicated are less important than the results of solving for those complications.
• 37:59
  SPEAKER_01: And so that was a struggle because again, all the things I said earlier about cannabis being a hard space, it was still a hard space.
• 38:06
  SPEAKER_01: It may maybe this is an easier process in businesses where you know every rising tide, right?
• 38:12
  SPEAKER_01: But that wasn't what was happening.
• 38:14
  SPEAKER_01: Certain markets were collapsing, certain markets are right, certain certain markets are growing, a lot of markets are collapsing, our clients are going bankrupt.
• 38:22
  SPEAKER_01: Like it was a struggle, and there's no money in the industry because nobody has access to capital.
• 38:26
  SPEAKER_01: So there's no, right?
• 38:27
  SPEAKER_01: And so it's all that all that change within that challenge, right?
• 38:32
  SPEAKER_01: And that's probably where so that was the up and down of welcome to the new business, you know.
• 38:37
  SPEAKER_00: On the next episode, definitely the the fortunes of the industry just could change on a dime, the the regulatory environment changed on a dime.
• 38:48
  SPEAKER_00: You know, you expect some a particular set of rules to come out, and something kind of different can't comes out, you know, those those sorts of things, which just make it incredibly difficult.
• 38:57
  SPEAKER_00: Uh, what are some of the things that you did differently when you know you had you had a you know a second shot at it?
• 39:02
  SPEAKER_00: I mean, you touched on something, you know, the the founders were family and uh you know, a found family, and they you know, the leadership and control and it was all of the things, uh, you know, including the the composition of the board.
• 39:16
  SPEAKER_00: I mean, what were all four of you always aligned?
• 39:19
  SPEAKER_00: So in in in in this adventure, what were what was a particularly high point and a particularly low point?
• 39:27
  SPEAKER_00: Listeners, thank you for tuning in.
• 39:29
  SPEAKER_00: This has been an episode of Max Value.
• 39:31
  SPEAKER_00: Find us on YouTube, Apple Podcasts, and other streaming services.
• 39:35
  SPEAKER_00: Please like, subscribe, and follow.
• 39:36
  SPEAKER_00: And we'll see you for the next.