RETAIL: Five Tips for Landing Distribution Deals
The passage of the Farm Bill has hemp-derived product manufacturers exploring distribution deals that will move their merchandise beyond local head shops and into mainstream retail outlets.
Suddenly, widespread national distribution of hemp products to convenience stores, natural food and wellness shops and big-box retailers is possible.
But how do you navigate those deals and get your hempseeds, lotions, CBD tinctures and other products onto store shelves? And, more important, are you ready?
Kevin Wachs, the president and founder of Los Angeles-based Earthly Body—a holding company that has four hemp beauty and body products brands—has been in the sector for more than 20 years.
He offered the following tips for hemp product manufacturers who want to capitalize on the Farm Bill and ink lucrative distribution deals:
Work with a group of professional brokers.
Most distribution deals aren’t closed by in-house sales reps or at trade show booths. Instead, they’re often stitched together by groups of professional brokers. Many of these brokers have domestic operations as well as overseas offices staffed with multilingual distribution reps who can leverage their global networks.
That means, for example, they can line up domestic and international distribution deals for your line of hempseed hair-care products or hemp-derived topicals. If you thoroughly educate brokers about your brand and manufacturing processes, they can be effective in attracting large distribution deals for your products.
Ask questions and read the fine print.
Distribution deals are complex, so it’s important to dissect the details. If there’s an advertising allowance—a deduction a distributor takes to advertise your products—you should ask how that money will be spent. If there’s a chargeback allowance—a deduction taken for products that are returned or defective—you should question whether it’s a fair percentage. Those details can be negotiable, but only if you know to ask.
Know the limits to both your bank account and production capacity.
Sure, there are heaps of money to be made off distribution deals with mass-market retailers. But if you don’t have the financial wherewithal, those big deals can become big mistakes. Mass-market retailers want manufacturers who play by their rules, and if you can’t, there’s another brand in line that will try.
Consider this: A retailer might place an initial order for $500,000 in product. Your contract could put you on the hook for product that doesn’t sell, say, $250,000 in product. In that case, the product could go back to you—with zero payment for the unsold goods. Can you take that hit? On the flip side, if your product sells well, a subsequent order could top $1 million. Are you prepared to meet that kind of demand?
And, in a take ’em or leave ’em deal—what you usually get with larger retailers—your “net-60” agreement could become a net-90 or net-120, meaning you won’t get paid for up to 60 additional days. Do you have the cash flow to keep going? Ask yourself those tough questions and more before you ink bigger distribution deals.
Get to know the staffers working for your distributor.
When working with a distributor, ask for contacts in their accounts payable, marketing, sales, shipping and other departments. If your product isn’t selling or you have a question about an unpaid invoice, you want answers and solutions. Don’t get lost in an automated phone system. Instead, forge connections with people throughout your distributor’s office. Once you’ve made those contacts, be sure to document everything in writing. That’s where follow-up emails come in handy. Document your conversations and confirm your understandings in emails.
Spread your bets.
Don’t count on one or several big accounts to sustain your business. That’s risky. You can build a big business on small accounts. Earthly Body built its brand with small wholesale and retail accounts. Now, larger distribution deals make up most of its revenue, but Earthly Body still works with small accounts the company has had for 20 years. There are challenges to working with hundreds of smaller accounts, but there’s less risk if you lose one.
— Joey Peña
FINANCE: Race Is On for Hemp Companies to Raise Capital
Now that hemp is a federally legal product, the door is open for large institutional investors to enter the market and pump millions—if not billions—of dollars into hemp and CBD companies.
Thanks to the 2018 Farm Bill, hemp companies that have relied on private equity or turned to Canada’s public markets to raise capital will have new direct paths to large funding pools in the United States.
Major commercial banks, investment banks, hedge funds and pension funds that have been sidelined from betting on the space will soon have a host of new investment opportunities to consider. Hemp companies also should have an easier time going public in this country.
But a question remains for hemp entrepreneurs: How can you tap the potential wave of investment dollars that appear headed for the hemp industry?
Here are some top considerations from New York-based Viridian Capital Partners for firms as they prepare to go on their fundraising roadshow:
- Focus on fundamentals: “Investors are putting their thinking caps back on, and businesses need to show them what they’re going to do to create sustainable value,” said Harrison Phillips, vice president at Viridian. Companies that don’t have their financials in order—or are predicting unrealistic returns—will be passed over by savvy investors.
- Build your thesis: Beyond articulating where your business is headed, operators must be able to educate potential investors on what’s likely ahead for the industry. “Lay out a plan that gets investors into your mind,” Phillips said. “If an investor asks you why you’re investing so much into cultivation when at some point wholesale product is going to be available nationwide, you should have a really good answer with forecasts that are conservative and not just hockey sticks on a chart.”
- Round out your executive team: Investors want to back operations run by management teams that have had success in the past. A board and executive team that blends industry expertise and experience leading successful companies outside hemp will have a big advantage luring the capital needed to scale and grow, Phillips said.
At first blush, the investment opportunities for institutional investors appear promising. The Farm Bill is expected to usher in rapid growth as major consumer packaged goods (CPG) companies consider CBD-infused products in their portfolios and thousands of U.S. chain retailers hustle to stock the goods on theirs shelves.
“It’s a booming market with a lot of opportunity,” said Smoke Wallin, CEO of Vertical Wellness, which is planning to launch an initial public offering (IPO) in the first half of this year.
The business was formed in January after Vertical Companies—a Los Angeles-based medical and recreational marijuana company with multistate operations—spun off its hemp-based CBD assets.
Vertical Wellness already has sunk $60 million into its operations—capital raised through family offices and high-net-worth investors.
The firm is now planning to list on the Nasdaq with a target of raising $50 million-$100 million ahead of going public as it works to scale its production and footprint.
“We are well-positioned and believe we will be able to attract institutional capital and large hedge funds to back this endeavor,” Wallin said.
Scale and Capital Are Critical
Vertical Wellness has inked farming contracts for up to 5,000 acres of hemp production that could yield an estimated $1 billion worth of CBD oil, Wallin said. The company is also investing in expanding its 90,000-square-foot facility in Kentucky to process hemp and produce a variety of hemp-based CBD products.
“We plan to be the major ingredient provider to mainstream CPG companies,” he said. “The second (that) Nestle and Coke (enter the market), they are going to need incredibly large quantities of this product. We want to be in a position to be their reliable domestic source.
“To be among the elite group of companies that are going to be able to do this at such a large scale, you need a lot of capital. It’s a race to raise right now.”
Funding Floodgates Open—Sort Of
With the Farm Bill’s passage, hemp companies that include no marijuana connections are no longer on the list of operations banned from uplisting to the Nasdaq or the New York Stock Exchange—the world’s largest public exchanges.
While the Farm Bill’s passage paves the way for hemp firms to tap public markets in the U.S. and larger pools of capital, making the move from a private company to a public firm is an enormous undertaking.
Launching an IPO and listing on a major U.S. exchange require loads of financial disclosures, transparency and corporate responsibility.
Companies considering going public should carefully consider the following:
- Does your company meet the exchange requirements? For example, in order to list on the Nasdaq, firms must adhere to strict corporate governance rules and have a minimum of 1.25 million publicly traded shares at the time of their listing.
- Firms that win approval for their public listing have often put in the hard work ahead of time on their private funding efforts. Companies should carefully consider how they market to institutions and these types of shareholders. Will your firm solely target institutional investors, or are retail investors allowed to participate?
- Going public is a pricey venture, with legal fees and other costs. Firms can expect the move to easily carry a seven-figure price tag.
— Lisa Bernard-Kuhn
CULTIVATION: The Do’s & Don’ts of Hemp Cultivation
The Farm Bill opens a raft of opportunities for would-be hemp cultivators including marijuana growers and smaller, traditional crop farmers. But doing it well will require shrewd planning and savvy dealmaking.
When mulling a foray into growing hemp, consider
- Ask for payment up front when making a deal to cultivate on behalf of another business such as a processor or a manufacturer of products like hemp lotions or CBD oils.
- Research who you’re buying your seeds from and where they’re coming from. You want to avoid being duped into buying marijuana seeds or another undesirable type of seed.
- Follow the wine industry’s lead and market your hemp with a focus on terroir, emphasizing how factors such as climate and soil can affect the quality of the plant.
- Be aware that growing acres of hemp is labor intensive and will require more employees than the typical agricultural or marijuana cultivation operation.
- Instead of shelling out big bucks to start a large operation, begin small so that mistakes won’t sink your business.
“Do it small, and do it right” said Cory Sharp, CEO of HempLogic, a consultancy in Moses Lake, Washington. “The farmer has to control his own destiny.”
Lock Down Your Money
Sharp recommends that a hemp grower who contracts with a processor should first secure in writing that the processor will pay at least $1,000 an acre for the crop. Next, the grower should get that money up front.
If the customer isn’t going to provide you with the genetics—either seeds or clones—then add that to the cost per acre. Seeds can cost up to 80 cents apiece and clones around $4 per plant.
Also, work out a deal to get a “kicker,” where, for example, you’re receiving an additional bonus of $1.50 per pound per 1% of the CBD you produce. If you’re contracted for $4.50 per pound for a CBD content of 3% but your plants come back at 4%, you should get an additional $1.50 per pound—for a total of $6 per pound. Make sure to get that in writing before your crop leaves the field.
“Don’t get involved with somebody who just wants you to grow for them and they’re going to promise you all these riches at the end of the year,” Sharp advised. “Make them pay you up front.”
Avoid Seed Scams
Would-be hemp growers also need to be wary when securing seeds for their crops. In short, you want to avoid getting scammed.
Two common scams for buyers of hempseeds are:
- Seeds that are male rather than female. Female seeds create the flowers that hemp cultivators want; male seeds, by contrast, produce seed pods.
- Seeds that are, in fact, marijuana—versus hemp—with a high THC content.
Joe Frey, co-owner of Western States Hemp, a cultivation operation in Fallon, Nevada, sidesteps getting conned by making sure he knows the seller through a first- or second-hand source, such as a trusted business contact.
He also knows that a quality, high-CBD seed should cost 50-80 cents.
“I’ve shied away from any deals that seemed too good to be true,” Frey said.
A good alternative if you can’t trust your seed seller is to plant clones sourced from a well-established, reputable nursery.
“You definitely pay up front for that,” Frey said. “But in the end, that pays off.”
For comparison’s sake: Frey planted a crop with seeds at 80 cents apiece, with an 80% germination rate, and removed about half the male plants. He estimated
his cost per plant, with labor included, totaled up to
$6 per plant.
He also planted a field with clones that he purchased for $4 each and lost less than 5% when he transplanted them. Moreover, the consistency he achieved with the clones created a denser canopy, thereby naturally controlling weeds and cutting down on labor costs.
Follow the Wine Model
As the field of hemp growers gets more crowded, one way to differentiate yourself is to highlight the unique qualities of the region where you’re growing.
Consider it similar to what the wine industry calls terroir—the taste and flavor given a wine by the environment in which it is produced.
“If you live in Happy Valley, you need to take that and market your farm as Happy Valley CBD,” Sharp said. “Just keep banging that drum, because that’s yours.”
And be aware that hempseeds sourced in other regions may not perform well in your region if the climate is dramatically different.
Marijuana is Not the Same as Hemp
As wholesale prices for marijuana slide downward, more recreational MJ cultivators in states such as Oregon are pivoting to hemp production. The phenomenon, which was occurring even before the Farm Bill’s passage, allows marijuana growers to diversify their crop and reduce risk.
In Oregon, marijuana farmers have a number of incentives for making the pivot. In the case of hemp, the state doesn’t have the same rules limiting how much growers can cultivate. Hemp cultivators also don’t face the high licensing and application costs seen with marijuana. Plus, the cost of production is much lower. You’re growing outdoors, for one, with far less energy costs than an indoor cannabis cultivation operation. For hemp, you’re looking at a cost of about $5 per pound; with marijuana, it’s about $300 more per pound.
But if you are planning to diversify into hemp, avoid taking on too much land, at least initially, Sharp advised. It’s easy to underestimate the labor needs for an acre of hemp. Commercial hemp farming equipment is slim to none, and planting, weeding and harvesting hemp farms requires a lot of manual labor.
During planting and harvest, Frey estimates he needs about two workers per acre. The rest of the year, he employs one person for every 2 acres.
“It’s very labor intensive,” he said.
— Bart Schaneman
GOVERNMENT DOLLARS: Landing Tax Incentives and Grants for Your Hemp Business
Savvy hemp entrepreneurs can snag free government dollars that are virtually out of reach for marijuana businesses.
And now that the 2018 Farm Bill has become law, an even bigger checkbook awaits in the form of Uncle Sam.
“The big money is the USDA,” said Jonathan Miller, a lawyer for the U.S. Hemp Roundtable, a Kentucky-based hemp advocacy and lobbying group.
But the opportunities available through the U.S. Department of Agriculture may take a while to sort out, so hemp businesses should keep tabs on the situation as it evolves.
“We’re not going to know anything until the dust settles,” Miller said, referring to the newness of the federal hemp law and additional delays caused by the federal government shutdown.
Look in Your Own Backyard
In the meantime, tap state and local economic-development experts for tips.
Steve Bevan, president of GenCanna Global—a Kentucky hemp producer and manufacturer—said local and state officials were eager to help when his company recently looked to expand its hemp-processing operations.
In fact, when GenCanna settled on the city of Mayfield for a hemp-processing facility, Kentucky Gov. Matt Bevin announced the deal in a news release in December, and the state’s Economic Development Finance Authority gave preliminary approval for up to $1.8 million in tax incentives. The state touted that
the $40 million investment would create 80 jobs.
GenCanna’s Bevan said entrepreneurs must be patient, however, because many government agencies are working with the hemp industry for the first time.
“Communicate with the local folks first, because they tend to have the best knowledge in the agricultural field,” he suggested.
Kentucky, one of the country’s leading hemp producers, clearly is courting such businesses.
Hemp as an Economic Driver
But Samantha Walsh, a founding vice chair of the National Hemp Association and a veteran lobbyist, said most states don’t have specific hemp programs. As a result, hemp companies need to see how they can fit into existing economic-development programs.
Colorado, for example, recently opened a $40,000 fund for farmers to hire interns. All farmers can apply, including those licensed to grow hemp.
Walsh said hemp businesses should find out what grants are available for rural development, new processing, manufacturing and job creation in a state or local area, then work to fit those programs.
“Every state has an economic development office, and they all want to see their communities prosper and thrive,” Walsh said.
Adin Alai was on a state of Colorado email list last year when he spotted a request for applications under Colorado’s Advanced Industries Accelerator grant program.
The program is designed to bolster startups that use innovative technologies.
Alai, whose company, 9Fiber, plans to process hemp and marijuana waste into bioplastics and other products in southern Colorado, said he thought, “On the surface, this qualifies. What the hell? Let’s give this a shot.”
He added: “I knew our odds were very slim. I didn’t go into it thinking we’d win. In fact, I went in thinking I’d get laughed at.”
Patience Can Pay Dividends
But Alai pursued the endeavor, got letters of recommendation from sources, including industry players in the area, and spent months putting together an application package.
Walsh, who now runs a public-affairs company, assisted Alai in making connections and getting support from the Pueblo City Council and Colorado state Sen. Leroy Garcia of Pueblo.
“All (of the work preparing the application) helped prove to the (selection) committee that this was not a pipe dream but a viable business deal,” Alai said.
In December, 9Fiber won a $250,000 grant, and Alai hopes to open a 2-ton processing plant in Pueblo by spring 2020 that would employ roughly 25 people by the third year of its operation.
“The stigma of hemp is challenging to overcome,” Alai said. “You need to demonstrate that you’ve got the capability to execute on your vision. The business plan has to be as solid as it can be.”
And, he added: “You need to present yourself as professionally as possible so you overcome that stigma and people take you seriously.” Wearing flannel, for example, might not cut it these days.
— Jeff Smith