Tommy: In a very short period of time, STIIIZY grew from a relatively unknown brand to being one of the most profitable and recognizable brands in our industry today. John Malone led STIIIZY's legal team and was instrumental in the business, expanding locations. He joins us today to talk about what he learned, working at STIIIZY in their pursuit of growth.
Speaker: Welcome to the KayaCast, the podcast for cannabis businesses looking to launch, grow, and scale their operations. Each week, we bring you interviews with industry experts and successful retailers, plus practical tips and strategies to help you succeed in the fast growing cannabis industry.
Tommy: You have a very unique background. You've helped some of the biggest brands.
In the U S grow in scale. What are some of the mistakes that you see companies make during their pursuit of growth?
John Malone: Yeah, first, thanks for having me, and I think it's really useful to be able to share information and help others. Case study is a big thing that I rely on, so having examples and things that I can learn from are really important. I think one of the biggest assumptions that was made in the early days of cannabis was this idea of things being a race. And like having to be out in front at all costs or expanding as fast as possible. Cool. I think as we've seen markets mature and, you know, different changes happen with industry and regulation, being nimble is probably a little bit more essential and also having cash reserves and profits and, you know, being in a position where you're growing at a steady pace rather than, too big too fast. It obviously can be sustainable if you make really good decisions, but, um, the race and then as we saw markets sort of evolve and develop, A lot of infrastructure changes, you know, a lot of distressed assets come on board. There's a lot of changes to the marketplace where being first doesn't necessarily mean, um, you're going to be there long.
MedMen's a great example, um, you know, of a recent story of, you know, they were first at pretty much everything in the eyes and ears and hearts of Americans as far as the next cannabis brand that's going to take everything by storm, and now they're filing for bankruptcy. It's pretty crazy how quick that can change, but being Really steady and not feeling like you have to race to the front of the line.
This is industry is not going anywhere and it's going to be the people that plan correctly and incrementally grow that'll capture market share and build a stabilized company.
Some of it's like trying to do everything, instead of sticking to a core competency or something that you do really well and just really honing in that process. The other thing is the need to be in, in too many markets, and to try to expand quicker than your infrastructure may be able to support or that even makes sense from a overall, brand growth and strategy.
There's certain markets that seem really good at the start and then a year later, aren't really that beneficial. I think trying to do too much at once, is probably the biggest. thing I've seen of where people just stayed steady and really followed their plan and got really good at one or two things, they could probably be in a much better position from a longterm perspective.
Tommy: In your opinion, what are some of the key things that businesses should have in place before they think about rapid growth?
John Malone: A clear defined source of capital. I mean, obviously it's unfortunate in business, but it does take money to make money in a lot of instances. So, having some plan and really good financials, I think. In every business I've seen where there is a team of somebody that knows how to model and project financial projections and really stick to that model as a baseline for the operations like core values, it's really essential because you really get into a place where you understand that if you don't have that figured out, then you're just sort of operating as sort of a free for all. Um, having a plan and those core values that you constantly audit decisions against is a really important part of it and it's like It's better to say no if it doesn't fit your plan, rather than it just being a really good opportunity, because what are you distracting from, even though it's a good opportunity?
Now, if it hits against your core values and you're doing the right things and it fits your plan, then I think that it could be a full go, but really set those standards of like, what are we looking for, how does this fit our model, and does it work within our scheme of what we're trying to accomplish, and really be laser focused on that.
Tommy: you know, what you, What you mentioned is something that we actually went through internally. We were talking about expanding to Europe. Europe is opening up and there's other aspects of our business where we had a huge opportunity with a partner to go into Europe, but ultimately we decided not to because it would have just diluted our resources into a market that's kind of unknown.
John Malone: It was like the shiny object syndrome, you know, it's like the whole thing is like, Oh my, think about how much money we could make there. It's like, well, we're making money here and this isn't done yet. So if we spread ourselves too thin, then we're not actually achieving our goals that we set out in the first place.
So I think it's really important to have somebody that understands finances and money and how to project and model out and like really keep that as your North star. And like your plan until it, maybe it doesn't work. Okay. The plan doesn't work now. We can pivot, have backups or alternatives, but that's extremely important and then I think just like having an internal culture and a team and sort of a mentality that again, goes back to those core values, like what can everyone in the organization sort of point to is that that core culture and structure of like, what are we all working towards?
How do we all find alignment and feel good about what we're doing and working together towards? Not having culture can really lead to high turnover and those replacement costs are really difficult retention issues across the board with top talent There's a lot to be said about making sure you have the right team in place And I know it's never an easy thing to do, but it's it's you know higher slowly fire fast If somebody's not really good fit and you can tell that they're not a good fit Then it's probably better to move on now and find somebody that is that ideal fit but Build the synergy in your team. I think that really includes, like, you know, some books I've read and other mentors that I've listened to is bringing in the right people to tell you what to do, rather than trying to have top down leadership telling everyone what to do all the time. I'd rather bring in smart people, you know, and not try to do everything in the business and really let the subject matter experts thrive and really help grow their teams and departments to help, you know, You know, everyone take on a delegated load rather than it being bottlenecked and centralized.
Tommy: Hey, you hit the nail on the head because as a, as a business owner, when you first start a business, you're the jack of all trades, you do everything. And as your business grows and scales, you have to replace yourself with somebody that's smarter in that subject matter, that's the only
John Malone: of times with some of these cannabis companies, there's a very, fortunate or unfortunate, you know, in the legacy days, it was just a few people that were the risk takers at the top, making all the decisions and making everything run with a team around them, but not obviously corporate professionals because they weren't really in that space. And so letting go of some of that need for tight control, which is totally understandable in a day of traditional marketplace or where you were running an enterprise that wasn't, fully embraced by the government. But, nowadays, Harvard Business Review is popular for a reason, and it's because a lot of those studies and how to build culture and do all those other things are what helped businesses get to the next level.
And, adopting some of that when it comes to leadership and internal expertise is really important in my opinion.
Tommy: You mentioned culture. How important is it to have a competent HR leader?
John Malone: I think that's another critical, essential thing that people don't understand early on in the life cycle. If you wait to hire somebody with competency in HR, the only thing you're doing is increasing your liability as a company. There's so many HR professionals, and then there's people that really know what they're doing in HR. So, finding that balance between, and to me it's worth spending the money on early on in the process. Thank you If you're hiring a core team, the early phases should be a very competent HR director or leader. Often times I get overlooked and somebody that's sort of in over their head is put in that position to try to manage that.
But, you know, employees and labor is such an essential part of the business. And having somebody that understands all the nuances, and I'll say especially in California. That's where I live now and do a lot of my practice and a lot of my clients are in California. The regulatory environment here is very tricky. A lot of people call it pro labor, because they do have a lot of, you know, protections in place. But if you're not really well versed in the ins and outs of labor and compliance in California and other markets, you're just setting yourself up for unnecessary lawsuits. And it's not difficult stuff, it's just very, like, time consuming and systems oriented and making sure you have the right systems in place to audit things and just keep track of what all the labor and compliance is. But I would certainly recommend as far as like early hires in the business a very high quality HR director, somebody that is seasoned, knows what they're doing, knows systems, knows how to implement onboarding and programs and cultural things and really get that buy in because it just you're saving on risk and you're also increasing efficiency and retention at a time in this business when that's probably pretty difficult for a lot of companies to maintain employees and things like that.
Tommy: :Yeah. And I always think about a business. When they start the owner, the founders, they're more or less the HR people too. And at a certain stage that, expertise is needed to grow in scale. What made STIIIZY really successful in their culture and their growth?
John Malone: Like one of the internal mantras was act like an owner, and so like everyone sort of had this mentality when you're walking around the place of like, if I was the owner of this company, you know, how would I want it to be treated? And so there was definitely a culture, especially like our main corporate office was based out of the vertical, uh, licensed facility at the start in, uh, downtown LA. And so the entire staff at the C Suite level and like within the company all the way up and down from manufacturing to retail, we were all at one facility and customer facing. And so like daily we'd be walking in. I'd hold the door for a couple minutes for customers coming in. I'd say thank you when people were leaving, like just building an environment and a culture there where it felt like, you know, everyone sort of had that customer service hat on when we were interacting with each other.
And I think that positivity goes a long way. It's not certainly the only thing, but building that mindset of like, let's keep this place looking and feeling good for everyone around here, because, you know, we've got to take pride in it and don't let things slip and really look at the potential to be like a trendsetter in the industry.
And I think we really all took that pretty seriously. Culture is an interesting thing, especially as you get pretty big because the executive team is typically working. On stuff that is so disconnected from the rest of what the actual operations is doing. And so I think as we scaled and grew, if there was any area where, um, there could have been maybe better synergy would have been that sort of cross, uh, tiered system of really understanding how that was working together.
Cause you had the HR team sort of running ops and building that culture. And then there was a separate sort of what was going on from a higher level perspective. And I think it was almost like there was two separate companies at some times. Both of them had their own solid culture within them, but the brand was sort of different than the corporate parent. Um, and it, it always a little bit felt like there was two separate, uh, groups of people coming and going on a daily basis, which, uh, was a little bit interesting.
Tommy: That is interesting. I'm guessing that's a by product of how fast the business grew.
John Malone: Yeah, I mean, when I started, there was 90 employees and within three years, I think we had over a thousand or three thousand employees. So the rapid growth, retail store expansion, the leaders of the company certainly had a vision. And I think that's the other thing as far as culture. There was never a moment where, regardless of my personal opinion of what they were doing and decisions, I never questioned their vision, you know, like the, the leadership team had a clear vision.
They had goals. Everyone knew what the goals were. They were clearly articulated and like, this is what we're doing right now. You know, and it comes down to risk takers and decision makers making those decisions and putting, you know, the train on the tracks there. But, it was always clear, like a clear directive, like this is our focus right now. You know, and I think that that was really helpful. There was never a time where I was like, I don't know what we're doing. You know, or we don't know what we're doing.
You know, whether it worked or not is a separate question. But there was good, strong leadership and decision making, uh, that always happened, I think, on a regular basis.
Tommy: I want to go back into our conversation on the importance of having somebody strong in HR. Why is it important to keep detailed labor records, for example, in California?
John Malone: Yeah, and, you know, when I was an associate at the firm before I, I was in house at STIIIZY, um, I did some help on some, like, labor employment practice work and some of the litigation and cases there. And it was just amazing to see, um, You get huge logistics companies and other businesses that are like known, you know, like household names and other things like that across different industries. Maybe not like the UPSs of the world, but like other just well known just different brands and companies with labor complaints and, you know, driver violations and all these other things. And they're getting sued for millions of dollars, you know, and you're like, If they don't have it figured out, how are these cannabis companies figuring out when they're paying every employee in cash or like, you know, going through the early days of not having time systems or companies that would work with them to even track hours and things like that? Um, I'm sure there was tons of overtime violations and all sorts of other things. And these are such low hanging fruit of things to correct and get right that, um, It's an unbearable task when it's manually operated and reviewed by human labor. But with technology being able to be inserted to help organize data, create reports and audit, and like, you really just streamline.
It's not, is compliance happening? It's, if it's not happening, how quickly are we fixing the problem? And how quickly are we implementing best practices and policies among staff to know how to steer clear of the problems in the first place? And I think that's one of the most critical things is that the, the risk of noncompliance in California from a labor perspective, it can be devastating to a business. Um, there's something called PAGA, which is Private Attorney General Action in California. It's not the same in other states. Some states do have it, but essentially any employee can, can sue on behalf of the state of California for labor violations. Um, so in most states, the Attorney General would have to bring those claims based on reports or, you know, whistleblowers.
But in this case, the employee can sue and employee gets a portion of the, the lawsuit damages too as incentive to bring these actions. So like, you know, if you're mismanaging overtime and not paying time and a half, if you're not understanding California, it's not. Total overtime, it's every hour per hour over per day, you know, so like if I'm working nine hours in a day I have to get paid overtime for that ninth hour, even if I didn't exceed 40 hours for the week. These are all little nuances that you have to keep track of in California and having computer systems or software in place that are really tracking that, you know, then the benefit, you know, gift and curse of having mobile devices to be able to help track and You know, employee logins, logouts, you know, understanding meal and rest breaks. It's just a whole ecosystem of compliance that a strong HR person with good software tools needs to be able to grapple. And then it's just like, okay, it's kind of on autopilot. It's really managing reports and audits and making sure that, you know, any anomalies are being flagged. If somebody misses a meal break or something like, okay, what happened here?
How can we fix this? And then it's not a systemic problem. You know, you mess up with 30 employees for 12 months on a technicality, and now you're looking at multiple layers of damages that anybody in the company can bring, and then it's likely going to lead to even more scrutiny, and uncovering more issues on the labor side. You know, it's not rocket science, but it is something that requires diligent oversight in really good systems to make sure that you're auditing that on a regular basis. very
much.
Tommy: The worst people to be in charge of administrative monotonous tasks are the owners. They're by far the worst. When I get into an environment, I'm like, you're in charge? Oh no, you're too busy. You know, there's, there's so many fires going on. This is always the last priority.
John Malone: And a lot of owners don't even understand what's at stake.
You know, like the layers of labor compliance in California are so, you know, it's a multi tiered cake and a lot of people see, okay, everyone's getting paid on time. You know, like people don't know in California when you terminate an employee, you have to pay them all final wages at the time of termination. You know, states, other states, it's within 72 hours or you can make an agreement on the final paycheck, run with payroll, like. It's so different in every state, but California specifically is very strict. Um, and so all these little layers, if you're leaving it to a multi hat person, there's no way that they had the subject matter expertise, let alone to just be on top of the changes in the rules that are happening on a regular basis to make sure they're getting out in front of it and setting up systems to ensure compliance.
Tommy: What are, what are some of the common issues facing cannabis companies and labor compliance?
John Malone: Meal and rest break compliance. So in California, I don't have the statute in front of me, but it's, it's something to the effect of, you know, you have to have at least a 30 minute meal break provided for every six hours of labor, but if you work six hours, the break has to be provided before the fifth hour is worked. It's, again, I'm parsing the statute itself, but it's along those lines. So, figure if you have a staff and you're managing multiple stores, say you have a staff of 25 people at the retail, You got to schedule all those rest breaks to make sure that they've been made available or sorry meal breaks and rest breaks on a timely basis and you almost have to force the staff to take them. It's like today your break is at 1130 to make sure that you're in compliance within the five hour window. And so like what are you going to hire one person to just sit there and hound each person? No, you need a software system. That can analyze the schedule of the employees, the high demand of, you know, the rush time of the store and to know that, Hey, during this high demand rush time, if we don't have extra part time staff that hasn't reached that fifth hour on hand, we're going to have 10 people that have to take a break right now.
And what really is easy is the management at the local level doesn't understand the compliance and they're under pressure, right? And they're just like meal break. We got a hundred people online. You're not taking a meal break right now. And it's that simple. That one thing happening and now that person's like, that's a violation, you know, and then they don't say anything right away.
But then that happens for multiple months and then other employees like, oh, yeah, that happened to me too. I didn't get my meal break and then it's a paga suit waiting to happen, you know. And then you got a class action employee lawsuit against your company for damages for not properly, you know, doing meal and rest breaks. I think what's so interesting in California, I say this all the time to my clients. If you're not showing proof of detailed records in compliance. There's a presumption, not a, I won't say there's like a, uh, legal presumption like in court, but generally speaking, the judge will have a presumption that your lack of systemic control means that you're not in compliance. If you can't prove that you're in compliance, your word isn't very good that like, Oh, well we were doing it that way. They, they want to see data. They want to see records. Otherwise the presumption is the employee's right. You know, your word against his, the employee's right. You can't prove that you were taking meal breaks and auditing it, then the employee's
Tommy: Even if you were doing it, you have to prove that you were.
John Malone: I mean, I'm not going to say that a court will always end up in that way, but systemic non system compliance with just like showing data and that you're tracking it, there's going to be a presumption that you're not doing what you're supposed to because it's too complicated to not have records. You know, you don't have driver logs.
Okay, well, it's your word against his that he took that break. You know, prove it.
Tommy: Is there a difference, I know a W2 employee is an employee and a 1099 is a contractor, what are the differences between the two in relation to the cannabis industry?
John Malone: So, this is probably an area of labor compliance that a lot of people get wrong every time. Every single client I have, I tell them they're a W2 employee unless you can prove to me that they're not. The courts apply a ten fact, a multi factor test. It's not like a Brightline rule. But, the presumption here is always towards W 2 employee, unless you can clearly show that they're performing a function or something outside the scope of the core business. And, just because you and the employee or, or labor agree to do it 1099, doesn't mean it's 1099. Um, and this is what really hurts companies a lot of times, because everything's great when nobody complains. But let's say, you know, I'm a lawyer and I hire you as a paralegal to my firm, And I pay you as a 1099 contractor and it's great because, you know, you're not getting the same taxes taken out and everything.
And then I fire you and it ends on bad terms. Well, now you have a claim that you can go down to the Labor Department and say, I was misclassified the whole time I was there. And I'm going to say, well, that's not fair. We agreed to it. You were okay with it. Labor doesn't care. State doesn't care. They want their tax money.
They want other things. They want contributions. They want all the other things that come with W 2 employment. And so even if both parties agree, that doesn't have any bearing on it, and you actually leave yourself exposed because they have a built in lawsuit, labor lawsuit, waiting, and that's one of those things where like, that person goes to a labor attorney on the plaintiff's side, and they go, Oh, they were misclassifying you?
What else were they not doing? And now it's a demand for that, and then in discovery they find out all this other stuff, and then they add claims on. And so it's just like, don't take the risk. In most cases, they're employees in almost every instance. There's ways to structure around it. There's certainly legal and valid ways to structure around it. If you wanted to start your own, you know, paralegal advisory company and I hired your LLC to perform those services, certainly the people performing them would be your employees then. So like somebody's hiring employees, but. Um, generally speaking, you know, my bright line rule is they're employees unless you can convince a labor lawyer otherwise. Um, and that's a good bright, that's always on the safe side, in my opinion.
Tommy: Yeah, because that, does that open the door to PAGA lawsuits if that's the case? You're not paying overtime, all these things.
John Malone: Yep. All that if they're misclassified then that would open the door to overtime violations, you know Fail to provide meal and rest breaks all sorts of stuff like that. And then you're even getting into failure to properly withhold you're getting into employment compensation and Unemployment issues for failing to register employees There's just there's a lot of stuff that you expose yourself to and that can in that context So it's very tricky now. I will say like A lot of times you see it in like the temp context where it's like, okay, we're going to bring this person on for a month or two to see if they're a good fit, and then we'll hire them after that. You know, generally the probably risk of non compliance there is low, but you still should probably just hire them as a, you know, DirectWTO employee and just do it that way. It's just safer, in my opinion.
Tommy: There are so many lawyers right now that are coming into this industry claiming they're an expert in cannabis. How can listeners or how can people spot what is a good lawyer in this space and why is it so important to align yourself with a good cannabis lawyer?
John Malone: That's a great question. Um, I really think first it comes about asking about their experience, you know, what are your needs as a client and has this person worked on projects like that before and getting good referrals, um, making sure, you know, that they can describe to you in detail the type of work that they've done to give you the comfort. Um, there's a lot of layers to cannabis and the different business aspects of it. And There's a different type of lawyer that can be useful in a lot of different situations. Like, one of my limitations as an attorney is I don't do any litigation. And so, like, when we are in house, I'm not a litigation expert.
So, I certainly have been part of litigations before and have worked through trials and things, but not as a lead. And so, every time we had to farm that out to somebody else. Now, maybe some general counsels have a ton of litigation experience, but have no M& A experience. So they're going to farm a lot of that out to a private firm and, you know, get some help and support there. But I think making sure that the general counsel has enough experience in the areas that are most critical to your business so that you are using it for what it's for, and that's to save money. Um, having an internal lawyer that you're paying on payroll or something on a set monthly retainer to be sort of a jack of all trades legal for you, Is to save billable hour time that you'd otherwise be paying to a firm. And so that person needs to be able to do that. They need to add value. They need to make sure that Hey, instead of having a firm spend 15 hours researching this that person's going to do that and you're paying them salary So, you know, it doesn't matter how many hours it takes them that they're going to figure out the problem um So making sure that the person is competent to really do it and I think it's asking about deals They've been a part of in my in my personal opinion In cannabis, you need somebody that has a lot of experience with detailed and, um, unique deal structures because the regulatory environment is very complicated. Oftentimes there is limitations on who can own what equity, how deals can even be made. And so having somebody that has a general working knowledge of corporate structure and transactions I think is very important. Um, litigation knowledge is equally as important, because as we've seen, and I'm sure as you know other people, there's lawsuits all over the place in this industry. Partner disputes, you know, claims of, you know, rigging licenses, and just general across the board of just general corporate lawsuits. Um, there's just a lot of that going on, so having somebody that understands that process too. Um, the regulations aren't that difficult, to be honest. It's like Anybody who's had to read through a statute or understand what regulations are, the cannabis statutes aren't that complicated, um, compared to any other industry.
They're, they're just black and white texts of what they are. They're voluminous, like that's the main thing. There's just a lot there with references back and forth, so it takes a lot of just careful reading and understanding what's there. Um, I think it's not like FDA or anything else yet where you need a highly specialized lawyer for that.
Most people can figure out the regulations by reading them. Um, it's really about figuring out what's not in the regs and how that fits with growing a business that I think is the most essential part and really understanding that strategic planning, um, that goes into it. So, you know, I really would just vet the person and make sure that they have enough relevant experience to what your core needs are going to be. And that you trust them to manage the things that they're not good at in a way that's cost effective in helping identify how to solve problems.
Tommy: Can you talk a little bit about the advantage a company or a cannabis company would have in aligning themselves with a really great cannabis lawyer in terms of growth?
John Malone: Yeah, so it depends on what phase of the company, uh, the cannabis company's in. If it's in startup mode, uh, again, not to, to toot my own horn, but just given I've been in cannabis for almost 10 years now as a legal practice, um, I've I know a lot of people and I have good connections and good relationships.
So if you're starting out and building something and you're looking for, you know, manufacturers in other states or, um, partners on different professional expertise, accounting advice, labor advice, all these other things, having somebody that is experienced in an industry is definitely going to help you build those bridges faster. Um, and then just understanding traditional deal flow, I think. Uh, is really important and having attorneys that other teams have worked with before so that they know that it's like a legitimate deal and building that comfort there. Um, I think it's really important to look at the role of what the attorney can play for you in a sense of strategically planning your business and helping you avoid mistakes that others have made in the past. Um, and that comes with experience like anything, but you know, on the legal side, I like the idea of, even if it's somebody in private practice, of having an attorney that would have had some general counsel experience to just understand what it takes to be an entrepreneur. You know, like what I hated when I was at a big firm, clients would ask us for our advice and opinions and we'd give them the options, you know, and it's like, he's like, no, I'm asking like, what would you do?
And the firm was very like, well. You know, given the risk, and I just want to be like, tell him you do option A, you know, like that's what I would do. Like, just tell him that's what you would, I would roll the dice on that. And too many times there's not enough lawyers that I think that are willing to appropriately balance that line, um, to really just like be a partner with, with your clients and like help put yourself in their shoes and help guide them in a way that is strategic, knowing that they're not going to hold you to the decision as if you made it for them, but They want to hear what you think.
They want to hear that you're capable of empathizing with their situation and really trying to figure out what they should and could do in the situation. I think it's really important too.
Tommy: You mentioned something earlier that I want to dig a little bit deeper in is the complexities of certain deals in the cannabis industry and why it's not necessarily black or white and based on the regulations, deals have to be structured a certain way in order for things to work. What do you mean by that?
Yeah.
John Malone: example, um, cause it's a good case study. And I mean, this applies to a lot of different states too, but in New Jersey, once the, a retail store, any license is operational, um, 51 percent control cannot be transferred for at least two years. So just think about it. Like, let's say you want a retail license and it's in a great location.
And you're like, man, I'd love to sell this thing. And I come in as a buyer. I can only buy 49 percent right now. And I can contract with you to acquire a hundred percent after two years total. But as we've seen in this industry, like what happens in two years? You know, like in two years, the whole market falls apart.
It's true. Me as the buyer, I'm better off just walking away, even though I should have to buy that from
Tommy: Yeah.
John Malone: And like, it just gets really tricky from like a pure capitalism standpoint. All of these regulations and things are put in place with like good intentions. But by and large, the biggest thing holding back the cannabis industry is nonsense regulations and all of these schemes and structure that are based on a fear that never existed in the first place.
It's like. Cannabis has not been ruining people's lives and communities for decades. It just hasn't been happening. But everyone thought it was, and everyone treated it as though it was, and everyone's treating legalization and the structures that are a fallout of that as if we still have to protect against that. And it's just this, like, fake idea that permeates society that just isn't true. And it's like, the sooner we can get to a place of treating it like a normal business, the sooner we Then they can be a normal business and like it can thrive and be normal. But there's no reason why I shouldn't be able to buy a business and sell a business just because the government thinks I should hold 51 percent for two years. You're hurting my ability to realize the exit that I want. Maybe I take that 3 million. I just got to know I'm set for life and have generational wealth. Like why does the state care? You know, I just don't understand. And it just creates these situations where you have to have really. Delicate understanding of how and when to close transactions, how much money to hold back, you know, terminating certain other agreements, you have to put management agreements in place in the short term or for those two years so that you collect the economics. It just requires a lot more lawyering at the end of the day and, um, somebody that's been through it and known and seen a deal go through and close, um, to really understand, well, what went wrong and what should we do next time? And then the added layer on top of all that is the regulators are going to want disclosure of all of those deal documents. And so if you go to close and the regulator is like, well, this isn't an arm's length deal, we're not approving this. Well, you've put down a deposit, maybe you already spent money, and now they're not, after two years, going to approve the 51 percent transfer. Now what do you do?
You know,
Tommy: god.
John Malone: it's like, It's government having a role in business that it has no business being in.
Um, all it's doing is creating complexities and risk of, you know, can you imagine if you spent two million and then two years later the government revoked the license altogether and now you don't even have a business?
Tommy: Yeah.
John Malone: And you sell the lease, you know, that you're tied into, and what are you going to walk away from the lease now?
How are you going to pull that off? You know,
Tommy: Yeah, it's definitely the wild, like we live in the wild, wild west right now. Mhm.
John Malone: touched on the lease side of it. It's like, that's a whole nother element of this business that most people just have no experience and that's on the real estate side. You know, your whole business is subject to a license that renews annually. You know, for any technical reason, you lose that license. It's not like you can just terminate your lease. You know, and now you're stuck in a business that can't operate with the lease for five years. And you're paying premium rent most likely because there was a hundred people that wanted that same piece of real estate in a short timeline application window.
So it's like, there's no let up like across the board when these businesses don't go well, it's a travesty for a lot of people that have a ton of economic interest in it and it just always ends in lawsuits and people suing each other. And it's just a mess and it doesn't have to be that way. Like there's so many, if regulators would just like talk to the business owners that have been through it now. And just be like, all right, well, we realized what we wanted to do and it has been a colossal failure. What should we do? And you know I think it'll probably be another five to ten years before the regulations unwind themselves to liberalize even more Legalization is certainly a start. But um, they certainly did their best to muck it up as Ignorantly as possible I would say
Tommy: You've mentioned something that I think encapsulates what somebody should look for is somebody that's seen the story before. I've seen the future before and I can counsel you on the things that I've seen, i. e. this lease right here. It's, what are you going to do? It's, it's overvalued.
They just opened up licensing. Everybody's vying for it. Do you want to be left with it or should we, find another location that's more economically suitable to your business?
John Malone: Yeah, absolutely and I I always am thankful. I had the benefit of being in california Others that are in Michigan would probably say the same thing. The markets that are mature, that are really robust, and you see what happens to price compression, you see what happens to oversaturation of licenses, you just realize that there's certain factors that you can overcome, if they're expenses or other things.
But once the market's mature, if you're not building your assumptions, again, I mentioned at the very beginning, case study. Like, we have the case study now. We know what happens in mature markets. We know that a grower getting 3, 200 a pound right now is going to end up getting 1, 200 a pound when all said and done. Um, it's coming for every single market. And then that's not even counting interstate commerce. If they ever lower those walls, California is going to destroy every major flower market because of our growing cycle. If we can ship across state lines. Nobody will be able to compete with the California outdoor grows and everything else.
I mean, some will. There will be some local markets and things for craft, but like, like wine, you know, Virginia has its wine and other places too, but it's going to be very delicate when those changes happen. And if you don't understand what's coming and you're building assumptions in every new market based on the fact that like, yeah, I can charge 70 for an eighth of normal weed. Well, in California, I can buy a half ounce for 50. So it's like, if you don't understand what's coming and build the business around those assumptions, um, now ride the wave while it's good, but build the business model around the more realistic future. And that is like, everyone wanted three to 5, 000 square foot retail stores.
And we're willing to pay premiums on rent. You know, now it's like 1500 to 2200 square feet is just fine. So You know, having a lease rate under 10, 000 a month is critical. You know, I can't tell you, there's so many retail stores. I've talked to people trying to sell in California and they're like, just take over the lease and I'll give you the license. You know, they're paying 22, 000 a month in rent. And there's four stores within a mile of them.
Tommy: Yeah.
John Malone: goes back again to regulations like Corona, for example, their local jurisdiction in California. They limited zoning so much to where there's like seven stores within a four block radius of each other.
Tommy: Oh my God.
John Malone: how can any of those stores, unless you're like a major brand, like cookies or something where you're like really pulling in traffic because of your brand name, the rest is a joke. Like I know two or three people that have just shut their stores down because they were like, it's not worth it.
Tommy: Yeah.
John Malone: And so you really got to understand if you're in a limited license market, it's clear you're going to have that advantage. You definitely want to have a five to ten thousand square foot store to handle the volume because otherwise There's no other way to get through a thousand patients a day, you know, like or you know, three to five hundred a day You will have that problem and you need the infrastructure for it But if you're not in one of those situations, you got to plan for you know, a Good restaurant, you know, like that's how you have to it's like it may make three to five million dollars a year You know Um, in revenue and you gotta act accordingly.
Your costs have to line up to that because not every store is a unicorn like it was in the early days when there were so few and there was just like a limited access and you had tons of people going to these bottleneck stores. Um,
it's more
Tommy: How has, how has the legalization of hemp farming impact the industry so far?
John Malone: It's impacted cannabis for sure as far as sales go. Um, the fact that Whether it's legal or compliant product or not, there's enough nobody knows what's going on, what the real rules are, that people are buying and selling, you know, basically cannabis called hemp on the internet now and just mailing it to people.
So, you know, we're an e commerce society in a lot of ways, so if people cannot leave their homes and get Amazon to deliver weed to their house, I'm sure that would be a preference of a lot of people. Um, a lot of people might not take that risk. They might not trust giving their credit card to whoever They're buying it from until it really materializes into like well known brands that are doing it But it certainly impacted in the short term Deviating a lot of customers away from the traditional retail experience That chapter is not written yet.
I mean There is talk right now of amending the farm bill this fall Which is basically the the mechanism at the federal level that created this entire marketplace Maybe they punted another year and don't actually amend it But it's like a sort of a pivotal moment in history for cannabis of what happens with that farm bill That I don't think anybody really knows what's going to happen A lot of lobbying dollars have yet to been spent to really influence how that is going to be actually written and implemented I Wrote about it the other day.
It could decimate cannabis or it could decimate hemp One way or another, like it's going to have a profound impact or it could create a really seamless path to a multi tiered system where low dose options are available, like alcohol and the higher dose stuff is available in dispensaries,
um, whatever the case may be. My personal feeling is that like the liberalization of access is important. All of these silly. License caps and limitations and all this stuff is, is hurting the industry in a way that is unnecessary. So the idea that you can buy and sell through the mail and other things is important, but I think there needs to be strict accountability with that. You know, clear product testing, clear brand accountability, you know, making sure that across the board that it's done in a way that is, um, consumer friendly.
Tommy: Thank you so much for coming on. You dropped so much knowledge to everyone listening. How can our listeners find you?
John Malone: Um, you know, I'm, I'm on LinkedIn a lot. I do a lot of, uh, posting and talking about current stuff on there. Um, I have a website, jmalone. law, um, where people are interested in engaging or learning more about the type of support I can provide. Um, that's the fastest and quickest way. Um, and, you know, connecting with me on LinkedIn or reaching out through the website, through my email. Um, you know, that, that's normally the best way to, to get started and see if there's a way. And, you know, I really like building relationships with clients. That's like my first and foremost is I don't charge extreme legal fees like a lot of firms and other things do. I like to see my clients be successful and build long term relationships with them because I'm in it for the experience of it.
You know, I'm fortunate to have a really strong legal practice. And have a pretty nimble approach to business and like to think of things entrepreneurially. And, you know, if a client's successful and I'm a part of that, that's sort of what I'm in it for rather than, you know, just getting a legal invoice and growing the firm itself.
Tommy: That's awesome. Thank you so much for coming on and you, we have to have you back on to talk about what you've seen other businesses do that you've helped grow and scale and become fantastically successful.
John Malone: Yeah. I really appreciate you guys for having me and, look forward to many chances to connect with you in the future. Thank you so much.
Tommy: I hope you guys enjoyed that episode. We have to have John back. He's such a wealth of knowledge and there's just so much more to unpack. Until next time everyone take care.
Speaker 2: Thanks for listening to the KayaCast podcast. We hope you enjoyed the show. Don't forget to subscribe to our podcast in your favorite podcast app, or visit our website to learn more about our guests and to access the full archive of episodes from the show. Join us next time as we continue to explore the world of cannabis and help you grow, launch, and scale your business.
