Author Topic: Would You Invest in This Business?  (Read 11983 times)

joer1212

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Would You Invest in This Business?
« on: May 28, 2018, 08:53:39 PM »
My younger brother (37) is trying to convince me (48) to invest in a legal cannabis business in Massachusetts. He claims that I would be getting in on the ground floor of this flourishing field, so the profit potential is huge.

His plan is for my parents and I to go half each on the cost of a commercial property (suitable for a 5000 sq ft growing facility). We would be selling to dispensaries within the state, and maybe even open our own dispensary.

While my brother doesn't have money to invest in this business himself, his contribution is that he is providing everything needed to start the business and run it. He has done a lot of legwork in the past year, and has already set up a team in Massachusetts, including a superb grower and savvy local business manager (who will each be getting a 10% share of the net profit of the business). He's also found a property that meets the state's legal guidelines and that is perfect for our budget.
So, basically, he's done everything so far. I'll just be applying for the growers license (he's not eligible because he got a felony at 19) and contributing half the money to start the business. I will also put the real estate under my name. I can then presumably kick back and collect my share (almost one-third) of the profits, while the team runs everything.

As exciting as this sounds, it strikes me as a little too good to be true, so I'm naturally a little skittish. The total cost of getting this whole operation off the ground, including license fees and all expenses, is in the neighborhood of 350k (175k each from me and my parents), so we're not talking about a trivial amount of money. I would have to get a loan to come up with my share of the cash, because my money is all tied up in my 401(k) and other non-liquid accounts.

Should I take the plunge?


FYI:

- I've been working a civil service job in Brooklyn for over 9 years, and have accumulated a net worth of 600k. I worked hard to get to this level, so I'm not keen on spending my money foolishly

- My parents are willing to put up their half of the money in cash, which they will transfer to my bank account (they also live in Brooklyn)

- I have spoken to the manager and grower in person several times. They're both very professional and convincing. The manager, in particular, knows many important people in the area that can assist us
« Last Edit: May 28, 2018, 09:01:03 PM by joer1212 »

maizeman

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Re: Would You Invest in This Business?
« Reply #1 on: May 28, 2018, 08:59:02 PM »
The problem with investing in cannabis businesses is that if things go too far in either direction, you lose:

1) The DEA starts enforcing federal law in states that have legalized again: Potentially the property gets seized and you're out your $175,000 but still have to pay your loan. Potentially you end up with your own felony on your record.

2) Cannabis gets legalized on a federal level: suddenly you have to compete with giant multistate corporate leviathans who have much better economies of scale when it comes to production than a family owned business is going to have.

FIreDrill

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Re: Would You Invest in This Business?
« Reply #2 on: May 28, 2018, 09:11:53 PM »
I'd be hesitant to put up 30% of my net worth on such a risky endeavor.

Do you have any idea on the estimated time frame to earn the 175k back?

If you end up investing I would look at it more as an investment or gift to your brother.  Don't plan on getting the money back.  If it ends up being successful then awesome.  But I would assume it's going to fold...  I'm kinda a pesamis though...

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Frankies Girl

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Re: Would You Invest in This Business?
« Reply #3 on: May 28, 2018, 09:17:59 PM »
Nope. No fucking way.

He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.

The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.

You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.

Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)

So yeah, that's a HARD no if it was me.
« Last Edit: May 28, 2018, 09:56:41 PM by Frankies Girl »

maizeman

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Re: Would You Invest in This Business?
« Reply #4 on: May 28, 2018, 09:20:50 PM »
So other thoughts, assuming you want to go forward to this.

-Sounds like your brother, the business manager, and the grower are each going to be drawing 10% of net profits. Is that their only compensation or will they also be drawing salary (which would come out before net profits are calculated)? If they're drawing salary, who sets their compensation? If they aren't drawing salary, have you had a discussion about how long they're willing to keep working without pay until the business starts turning significant profits?

-If the business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute? And if so, would it be all five of you (parents, you, brother, manager, grower) or just the ones who have put up capital (you and your parents)? If not, if the business is out of money, but your brother thinks he can turn things around and invests $20,000 of his own money, how will you value that?

-Going into business with family is delicate. You'll want to have the answers to questions like the above specifically spelled out in the operating agreement before any money goes into the company. "We all get along and we'll work it out if any problems come up" is a recipe to lose not only your investment but your positive and ongoing relationships with your brother and parents.

-You don't want to be selling a commodity, as the further the state and federal government move towards legalization the lower the barriers to entry, and the more prices are likely to drop as more competition enters the market. Consider developing your own branding (either for the grow operation as a whole or for specific marijuana strains), so that the customers who are buying your product from dispensaries will associate it specifically with you, and it'll be a higher activation energy for the dispensary to switch to another provider that offers them a slightly lower price.

FINate

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Re: Would You Invest in This Business?
« Reply #5 on: May 28, 2018, 11:57:26 PM »
Hell no! This has bad idea written all over it.

Adding to what FG wrote (which was spot on...don't ignore it):

Do not have your parents transfer the money to your account. Why on earth?! This is bad for so many reasons. You're practically asking the feds to seize your assets. If nothing else, this could trigger a messy and expensive tax situation.

If you go against all common sense and decide to "invest" then setup a corporation owned by the investors. Let's see, you put up 50% and your parents put up 50%. Your brother put up 0%. So the owners are you and your parents. It's easy to sound professional and be convincing - talk is cheap - so if your bro and/or the manager want to be owners then they should put up or shut up. Their ownership is proportional to what they invest. Otherwise, they are nothing more than employees of the company, and the owners need to make this abundantly clear.

Which brings me to the next point. Are you (and your parents) willing to fire your brother and/or the manager if not meeting expectations? Are you willing and able to provide oversight, ensure that they are actually running the business well rather than pissing money away (it's amazing how easy it is to spend other people's money)? Also, the majority owners set employee compensation, not the other way around. What's this nonsense about them getting 10% of net profits? That's bullshit, they get a wage on par with their skills and responsibilities, any additional compensation incentives are at the discretion of the owners. This is also a terrible comp structure - an early startup needs to be reinvesting aggressively in the business but this 10% of net idea disincentivizes this.  I strongly suspect your brother doesn't understand how corporate ownership and governance works in the real world, he's looking for family to bankroll his venture while he calls the shots and retains ownership - again, terrible idea.

With zero capital from your brother and his associate, you and your parents would, in essence, be starting a cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business? Do you know anything about it? What connection do you have to this industry other than being related to your brother? If your brother has a solid plan then why can't he get outside investors who already know the business, why does he have to turn to family? Ignoring the history up to this point, if you were starting a cannabis business would you even consider hiring your brother and the business manager to run it?

Finally, about the whole "ground floor" thing. Don't get caught up in this, it's all based in survivor bias. Everyone fantasizes about having invested in MSFT or GOOG in their early days so people are easily convinced that early stage companies are a sure bet. But no one remembers Wang Laboratories, Tandon Corporation or any of the many many early "ground floor" computer companies that didn't last. Every industry goes through an early stage of expansion with many small companies, followed by consolidation into a few large players. Do you honestly believe you, your parents, and your brother have the stuff to be on of the big 5 US cannabis companies? What sets you guys apart from every Tom, Dick and Harry with dreams of making it big in pot?
« Last Edit: May 29, 2018, 12:38:07 AM by FINate »

joer1212

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Re: Would You Invest in This Business?
« Reply #6 on: May 29, 2018, 12:29:55 AM »
So other thoughts, assuming you want to go forward to this.

-Sounds like your brother, the business manager, and the grower are each going to be drawing 10% of net profits. Is that their only compensation or will they also be drawing salary (which would come out before net profits are calculated)? If they're drawing salary, who sets their compensation? If they aren't drawing salary, have you had a discussion about how long they're willing to keep working without pay until the business starts turning significant profits?

-If the business is in the red, can it make additional capital calls on the owners (with the option of revoking their shares if they don't contribute? And if so, would it be all five of you (parents, you, brother, manager, grower) or just the ones who have put up capital (you and your parents)? If not, if the business is out of money, but your brother thinks he can turn things around and invests $20,000 of his own money, how will you value that?

-Going into business with family is delicate. You'll want to have the answers to questions like the above specifically spelled out in the operating agreement before any money goes into the company. "We all get along and we'll work it out if any problems come up" is a recipe to lose not only your investment but your positive and ongoing relationships with your brother and parents.

-You don't want to be selling a commodity, as the further the state and federal government move towards legalization the lower the barriers to entry, and the more prices are likely to drop as more competition enters the market. Consider developing your own branding (either for the grow operation as a whole or for specific marijuana strains), so that the customers who are buying your product from dispensaries will associate it specifically with you, and it'll be a higher activation energy for the dispensary to switch to another provider that offers them a slightly lower price.

-My brother, parents and I would each be drawing 1/3 of the net profits of the business, after the grower and manager are each paid 10% (e.g. $1,000,000 annual profit is divided as follows: 100k each to partners and ~266.6k each to my brother, parents and me).

-Yes, the partners will only be getting 10% of the net profits, nothing more.

-I haven't yet worked out the legal details of different scenarios.

-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.

One last thing. Our manager told us that this hustle will not last forever. Competition from large, well-funded enterprises are going to eventually cut into our business, along with ever-decreasing cannabis prices. He said we're going to make the bulk of our money in the first 3-5 years, after which the big boys will move in and will probably buy us out or eat our lunch. He claims, however, that, in that short time, we'll each make a couple of million, so it won't matter what happens after. Not sure if I trust his forecast; it seems like a shaky foundation on which to build a business.

joer1212

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Re: Would You Invest in This Business?
« Reply #7 on: May 29, 2018, 12:40:09 AM »
Hell no! This has bad idea written all over it.

Adding to what FG wrote (which was spot on...don't ignore it):

Do not have your parents transfer the money to your account. Why on earth?! This is bad for so many reasons. You're practically asking the feds to seize your assets. If nothing else, this could trigger a messy and expensive tax situation.

If you go against all common sense and decide to "invest" then setup a corporation owned by the investors. Let's see, you put up 50% and your parents put up 50%. Your brother put up 0%. So the owners are you and your parents. It's easy to sound professional and be convincing - talk is cheap - so if your bro and/or the manager want to be owners then they should put up or shut up. Their ownership is proportional to what they invest. Otherwise, they are nothing more than employees of the company, and the owners need to make this abundantly clear.

Which brings me to the next point. Are you (and your parents) willing to fire your brother and/or the manager if not meeting expectations? Are you willing and able to provide oversight, ensure that they are actually running the business well rather than pissing money away (it's amazing how easy it is to spend other people's money)? Also, the majority owners set employee compensation, not the other way around. What's this nonsense about them getting 10% of net profits? That's bullshit, they get a wage on par with their skills and responsibilities, any additional compensation incentives are at the discretion of the owners. This is also a terrible comp structure - an early startup needs to be reinvesting aggressively in the business but this 10% of net idea disincentivizes this.  I strongly suspect your brother doesn't understand how corporate ownership and governance works in the real world, he's looking for family to bankroll his venture while he calls the shots and retains ownership - again, terrible idea.

With zero capital from your brother and his associate, you and your parents would, in essence, be starting a cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business? Do you know anything about it? What connection do you have to this industry other than being related to your brother? If your brother has a solid plan then why can't he get outside investors who already know the business, why does he have to turn to family? Ignoring the history up to this point, if you were starting a cannabis business would you even consider hiring your brother and the business manager to run it?

Finally, about the whole "ground floor" thing. Don't get caught up in this, it's all based in survivor bias. Everyone fantasizes about having invested in MSFT or GOOG in their early days so people are easily convinced that early stage companies are a sure bet. But no one remembers Wang Laboratories, Tandon Corporation or any of the many many early "ground floor" computer companies that didn't last. Every industry goes through an early stage of expansion with many small companies, followed by consolidation into a few large players. Do you honestly believe you, your parents, and your brother have the stuff to be on of the big 5 US cannabis companies? What sets you guys apart from every Tom, Dick and Harry with dreams of making it big in pot?

Good post. It pretty much summarizes everything that's crossed my mind about getting into this business since my brother first proposed it.
We came up with the 10% figure because it is roughly commensurate with the average compensation (salary) a good grower and manager receives.

« Last Edit: May 29, 2018, 01:24:07 AM by joer1212 »

joer1212

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Re: Would You Invest in This Business?
« Reply #8 on: May 29, 2018, 12:53:50 AM »
The problem with investing in cannabis businesses is that if things go too far in either direction, you lose:

1) The DEA starts enforcing federal law in states that have legalized again: Potentially the property gets seized and you're out your $175,000 but still have to pay your loan. Potentially you end up with your own felony on your record.

2) Cannabis gets legalized on a federal level: suddenly you have to compete with giant multistate corporate leviathans who have much better economies of scale when it comes to production than a family owned business is going to have.

Can the feds also retroactively seize my bank and investment accounts, should shit hit the fan? How likely is this?
« Last Edit: May 29, 2018, 12:55:48 AM by joer1212 »

FINate

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Re: Would You Invest in This Business?
« Reply #9 on: May 29, 2018, 12:56:19 AM »
-My brother, parents and I would each be drawing 1/3 of the net profits of the business, after the grower and manager are each paid 10% (e.g. $1,000,000 annual profit is divided as follows: 100k each to partners and ~266.6k each to my brother, parents and me).

-Yes, the partners will only be getting 10% of the net profits, nothing more.

-I haven't yet worked out the legal details of different scenarios.

-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.

One last thing. Our manager told us that this hustle will not last forever. Competition from large, well-funded enterprises are going to eventually cut into our business, along with ever-decreasing cannabis prices. He said we're going to make the bulk of our money in the first 3-5 years, after which the big boys will move in and will probably buy us out or eat our lunch. He claims, however, that, in that short time, we'll each make a couple of million, so it won't matter what happens after. Not sure if I trust his forecast; it seems like a shaky foundation on which to build a business.

Thanks for the clarification. BTW - the math on how the net profits get whacked up doesn't add up. (1/3+1/3+1/3+1/10+1/10). Really, the manager and grower are getting 10% each and then the rest is split three ways, or about 27% each.

To be frank, your brother looks like extra baggage in all this, not clear what he brings to the table. He's getting an owner's share without having put up any capital. I think it's nuts, you guys may as well just gift him a big chunk of money.

If the business did actually take off then 10% of net profits (20% for both) could be quite large. Huge upside for the manager and grower but very little downside. IMO, it should be capped at some reasonable value (they are non-owners after all).

I don't think cannabis is easy money and this whole scheme is very sketchy. Honestly, if you decide you want to be in the industry then I would start with a clean slate and lead it from scratch myself on my terms. It's your money after all.
« Last Edit: May 29, 2018, 12:59:42 AM by FINate »

joer1212

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Re: Would You Invest in This Business?
« Reply #10 on: May 29, 2018, 12:57:33 AM »
I'd be hesitant to put up 30% of my net worth on such a risky endeavor.

Do you have any idea on the estimated time frame to earn the 175k back?

If you end up investing I would look at it more as an investment or gift to your brother.  Don't plan on getting the money back.  If it ends up being successful then awesome.  But I would assume it's going to fold...  I'm kinda a pesamis though...

Sent from my SM-G935F using Tapatalk

All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.

FINate

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Re: Would You Invest in This Business?
« Reply #11 on: May 29, 2018, 12:58:48 AM »
The problem with investing in cannabis businesses is that if things go too far in either direction, you lose:

1) The DEA starts enforcing federal law in states that have legalized again: Potentially the property gets seized and you're out your $175,000 but still have to pay your loan. Potentially you end up with your own felony on your record.

2) Cannabis gets legalized on a federal level: suddenly you have to compete with giant multistate corporate leviathans who have much better economies of scale when it comes to production than a family owned business is going to have.

Can the feds also retroactively seize my bank and investment accounts, should shit hit the fan? How likely is this?

Happens all the time: https://www.dea.gov/ops/af.shtml

Will they ever go after pot businesses? They have in the past, who knows if they will going forward.

joer1212

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Re: Would You Invest in This Business?
« Reply #12 on: May 29, 2018, 01:00:52 AM »
Nope. No fucking way.

He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.

The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.

You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.

Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)

So yeah, that's a HARD no if it was me.

Most of your sentiments have crossed my mind at one time or another. In fact, I uttered exactly the same words to my brother in the beginning ("you have to have skin in the game"). I softened my stance with him recently because I felt that he set up the whole apparatus to make money, and all I was doing was investing. I kind of felt it was unfair to him.

FINate

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Re: Would You Invest in This Business?
« Reply #13 on: May 29, 2018, 01:02:31 AM »
I'd be hesitant to put up 30% of my net worth on such a risky endeavor.

Do you have any idea on the estimated time frame to earn the 175k back?

If you end up investing I would look at it more as an investment or gift to your brother.  Don't plan on getting the money back.  If it ends up being successful then awesome.  But I would assume it's going to fold...  I'm kinda a pesamis though...

Sent from my SM-G935F using Tapatalk
All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.

And what do all three have in common? Oh, right, they aren't risking any of their own money.

runbikerun

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Re: Would You Invest in This Business?
« Reply #14 on: May 29, 2018, 01:06:15 AM »
If you went to a financial advisor and they recommended that you put six figures into a single business of questionable legality, run by a guy who needs an investor because it's illegal for him to be the owner, you'd fire that advisor. For all the reasons given by everyone else, for the love of God, do not go near this with a ten-foot barge pole. This is a field in which a single wrong move can land you in prison for a decade, and you're effectively bankrolling a convicted felon. You're talking about putting in 50% of the capital and getting 23% of the profits, in a field that's not expected to exist in five years.

And as per your previous post: the figures you have for expected profits are being provided by the guys who need your money. Why should you assume they're being truthful, or even that they know what they're doing? Have they provided you with a breakdown? Shown you data on the rate of return for other growers? Accounted for the risk factor involved in doing something which may still count as a federal offence? Have you been keeping an eye on the sector itself? Do you know anything about the usual ownership structures involved?

Overall, this sounds incredibly high-risk, and it's set up in a way that loads the risk on you. You're applying for the grower's licence, you're getting your parents' money transferred to you, you're putting up a full third of your net worth. Your brother, however, seems to be doing very little for his 10%. You have a grower who produces good weed, and a manager who knows how to run the business. What does your brother contribute? You'll be risking a third of your net worth and your clean criminal record, and you'll only be getting a little over double what he does?

I'd run a mile from this.

FINate

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Re: Would You Invest in This Business?
« Reply #15 on: May 29, 2018, 01:07:48 AM »
Nope. No fucking way.

He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.

The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.

You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.

Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)

So yeah, that's a HARD no if it was me.

Most of your sentiments have crossed my mind at one time or another. In fact, I uttered exactly the same words to my brother in the beginning ("you have to have skin in the game"). I softened my stance with him recently because I felt that he set up the whole apparatus to make money, and all I was doing was investing. I kind of felt it was unfair to him.

You're talking about a $175k ownership share. How long did it take you to save $175k, how many hours did that represent? Is it your honest assessment that your brother did $175k worth of work setting up this apparatus? How many hours did he put into it and what is fair compensation for his time?

joer1212

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Re: Would You Invest in This Business?
« Reply #16 on: May 29, 2018, 01:13:08 AM »
I'd be hesitant to put up 30% of my net worth on such a risky endeavor.

Do you have any idea on the estimated time frame to earn the 175k back?

If you end up investing I would look at it more as an investment or gift to your brother.  Don't plan on getting the money back.  If it ends up being successful then awesome.  But I would assume it's going to fold...  I'm kinda a pesamis though...

Sent from my SM-G935F using Tapatalk
All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.

And what do all three have in common? Oh, right, they aren't risking any of their own money.

LOL, exactly.

SpreadsheetMan

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Re: Would You Invest in This Business?
« Reply #17 on: May 29, 2018, 01:33:57 AM »
Great advice from FINate.

This all sounds very sketchy. Where is the Business plan? Detailed start-up budgets and cost-of-sales projections? There is some digging to be done before this can be considered as a serious investment opportunity.

Who are the manager and grower? What is their track record in business? Are they honest? Have their backgrounds been investigated?

There are a hell of a lot of red flags here and this currently smells like a scam.

joer1212

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Re: Would You Invest in This Business?
« Reply #18 on: May 29, 2018, 01:45:10 AM »
Nope. No fucking way.

He needs skin in the game - fronting the start-up costs, going small and perfecting the business model at first and ensuring best practices, getting any legal stuff nailed down, building a strong client base and producing quality product... and then take it up to the next level - asking for investors to come in on it once he's gotten it going.

The key problem is your brother will have nothing invested himself... meaning he's a blue sky guy, not a hard worker/saver guy. It might be a great idea, but what sort of business sense does he have? Where is ANY savings at the age of 37? He's a convicted felon too? Oh hell no.

You say he's done "basically everything" um, yeah no. He's talked to a few people and looked at properties for sale. Know what? I could do the same thing in like a weekend and have the same sort of legwork done. He's had a fucking year? That's bullshit. If he's had a year to come up with his business plan, he's also had a year to work his ass off saving up every spare penny to invest in his dream idea and get it going.

Oh, and that throw away thought that he can't even have a grower's license due to the felony? LOL. Yeah, that's super fun - a guy with no real savings, a criminal past that prohibits him from doing this so he's wanting you to front the business (um, is that even legal?), where he's just going to be an employee so hey, no sweat if he does something illegal or forgets to get the right clearances for whatever since you're on the hook legally, and also pressuring his family to give him almost a half a million for his idea he's done exactly nothing other than piddle about for a year and blow sunshine up your skirt? How trustworthy is your brother that you'd let him run a business like this with you as part owner and not have daily oversight - meaning he needs to clear all things through you, you'll need outside advisors to confirm correct actions are taken and permits and legal stuff and even day to day operations, payments for supplies and employees and taxes are being handled? You assume all risk, lose out all the money (you and your parents) and have the business in your name so you're going to be legally liable for any and all violations or actions of said business, need insurance, licensees, hire attorneys and be responsible for filing business taxes and such. And didn't you say you're in a civil service job? This could be prohibited by your job even if it is technically legal, knowing you are a part owner/investor in a pot venture might screw you if you have to have clearances just from involvement in this type of thing (https://news.clearancejobs.com/2018/02/18/investing-marijuana-business-make-clearance-go-smoke/)

So yeah, that's a HARD no if it was me.

Most of your sentiments have crossed my mind at one time or another. In fact, I uttered exactly the same words to my brother in the beginning ("you have to have skin in the game"). I softened my stance with him recently because I felt that he set up the whole apparatus to make money, and all I was doing was investing. I kind of felt it was unfair to him.

You're talking about a $175k ownership share. How long did it take you to save $175k, how many hours did that represent? Is it your honest assessment that your brother did $175k worth of work setting up this apparatus? How many hours did he put into it and what is fair compensation for his time?

My brother would not be entitled to part of the proceeds from the eventual sale of the real estate and equipment. In other words, he's 1/3 owner of the business, but not of the physical property.
Since he's my brother, I'm willing to be more generous than I otherwise would with compensation. My only concern is that, without skin in the game, he isn't going to strive as hard to make the business successful as he would had he contributed some of his own money.

joer1212

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Re: Would You Invest in This Business?
« Reply #19 on: May 29, 2018, 01:49:05 AM »
If you went to a financial advisor and they recommended that you put six figures into a single business of questionable legality, run by a guy who needs an investor because it's illegal for him to be the owner, you'd fire that advisor. For all the reasons given by everyone else, for the love of God, do not go near this with a ten-foot barge pole. This is a field in which a single wrong move can land you in prison for a decade, and you're effectively bankrolling a convicted felon. You're talking about putting in 50% of the capital and getting 23% of the profits, in a field that's not expected to exist in five years.

And as per your previous post: the figures you have for expected profits are being provided by the guys who need your money. Why should you assume they're being truthful, or even that they know what they're doing? Have they provided you with a breakdown? Shown you data on the rate of return for other growers? Accounted for the risk factor involved in doing something which may still count as a federal offence? Have you been keeping an eye on the sector itself? Do you know anything about the usual ownership structures involved?

Overall, this sounds incredibly high-risk, and it's set up in a way that loads the risk on you. You're applying for the grower's licence, you're getting your parents' money transferred to you, you're putting up a full third of your net worth. Your brother, however, seems to be doing very little for his 10%. You have a grower who produces good weed, and a manager who knows how to run the business. What does your brother contribute? You'll be risking a third of your net worth and your clean criminal record, and you'll only be getting a little over double what he does?

I'd run a mile from this.

No. My brother would be getting about 27% of the net profit from the business (just like me), not 10%.

FINate

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Re: Would You Invest in This Business?
« Reply #20 on: May 29, 2018, 02:29:01 AM »
My brother would not be entitled to part of the proceeds from the eventual sale of the real estate and equipment. In other words, he's 1/3 owner of the business, but not of the physical property.
Since he's my brother, I'm willing to be more generous than I otherwise would with compensation. My only concern is that, without skin in the game, he isn't going to strive as hard to make the business successful as he would had he contributed some of his own money.

Typically the business owns the property. Unless of course you and your parents are going to start a separate company that owns the property and then lease it to the cannabis business, but I can't imagine that's the case or the 3 musketeers wouldn't have come knocking at your door for cash in the first place.

Also, the whole point of the scheme is to get rich quick on the profits before the big players consolidate the business (which I think is dubious at best), but you're greatly diluting your returns by adding an additional 1/3 owner who's not really an owner and who hasn't ponied up the $175k.

From a business perspective (and this from someone with an MBA) it's nonsensical to structure a business around net profit payouts, or to try and separate property from profits. Who owns property acquired while the business is in operation, since this affects net profits? All this emphasis on whacking up the net profits is a clever scheme to hide the fact that you're financing a business that other people will effectively control.

Focus on ownership first, that's the most important part. Ultimately the owners make all decisions: who to hire, fire, purchases, marketing, and so on. Most importantly, the owners decide what to do with the assets of the company, including dividends and retained profits and property. If you "invest" in a corp that separates ownership of physical property (your capital) from the day-to-day business then you've effectively lost control of your "investment" - you've granted ownership functions to non-owners. Do not enter into a contract with an employee that limits your ability to terminate them or change their comp. After ownership is sorted out, then the owners can decide how and how much each employee should be compensated.

The current plan is setting you on a course for a bitter battle with these quasi/non-owners who I guarantee will think they are in charge and who'll believe they are entitled to their perceived percentage of the business.

I still say it's a terrible idea. You and your parents carry almost all the legal and financial risks, which are enormous. You have a lot to lose: Accounts seized, loss of job, prison time, ... not worth it.
« Last Edit: May 29, 2018, 02:31:50 AM by FINate »

FIreDrill

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Re: Would You Invest in This Business?
« Reply #21 on: May 29, 2018, 06:33:22 AM »
I'd be hesitant to put up 30% of my net worth on such a risky endeavor.

Do you have any idea on the estimated time frame to earn the 175k back?

If you end up investing I would look at it more as an investment or gift to your brother.  Don't plan on getting the money back.  If it ends up being successful then awesome.  But I would assume it's going to fold...  I'm kinda a pesamis though...

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All 3 of them (brother, manager, grower) are claiming that we should easily break even within the first year. After that, it's all profit.
If you do this.... Your brother should start out with no more than a 10% stake in the company.

I'd probably give him a 5-10% stake with the option to buy up to 27% in the first 2 years for the sum of 175k.  IF the business will be as amazing and successful as they say, then he should easily be able to pony up the money by the end of 2 years.

Like others have said.... He doesn't have any skin in the game.  At this point he shouldn't get an equal share.

I still wouldn't take the risk though.

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tralfamadorian

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Re: Would You Invest in This Business?
« Reply #22 on: May 29, 2018, 06:50:26 AM »
Leaving the legal issues aside for a moment (though they would make the answer an instant hard no, for me), have you all decided how to deal with the cash issue and whether that $1M profit figure is pre or post 280E taxes?

Non bankable:
http://www.businessinsider.com/no-1-problem-facing-legal-weed-businesses-2016-4

280E:
https://www.accountingweb.com/tax/business-tax/marijuana-and-taxes-is-there-a-way-around-section-280e

Carting around millions of dollars in armoured trucks and getting audited every year while paying up to 90% in taxes? While waiting to Jeff Sessions to decide to make an example of you, ruining your and your parentsí lives? Sounds like a real slam dunk of a business.
« Last Edit: May 29, 2018, 07:22:45 AM by tralfamadorian »

radram

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Re: Would You Invest in This Business?
« Reply #23 on: May 29, 2018, 07:54:55 AM »

-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.

Medical legal in at least 1 state since 1996. Recreational in at least 1 state since 2012. Why in the world isn't your "phenomenal" grower a multi-millionaire several times over already. Why does he need your money?

maizeman

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Re: Would You Invest in This Business?
« Reply #24 on: May 29, 2018, 08:50:01 AM »
cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business?

I think FINate has found the crux of the matter. As currently structured,* there is no incentive for the business manager or grower (or your brother) to stick around the minute the business hits a rough patch and doesn't turn a profit for the month or is turning a profit less than 10x what a good pot grower can pull down in salary at a competing business (I have no idea what that number is, but I'm guessing it's a lot?).

So do you want to know just own, but also run a cannabis business?

*If they either had their own capital on the line or were drawing a salary instead of profit sharing they'd have an incentive to try to turn the business around. But right now, if you're profit sharing is less than they could make somewhere else, why not walk away?

More technical and obscure question: if the plan is for the business to make all of its money in 3-5 years, are you and your parents going to get to depreciation your initial capital investment on a 3-5 year time frame before calculating net profits? (You obviously wouldn't get to claim the depreciation to the IRS) That could make a big difference in the payouts your brothers/grower/manager could expect to see.

affordablehousing

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Re: Would You Invest in This Business?
« Reply #25 on: May 29, 2018, 10:32:14 AM »
Heck yeah, just make sure you diversify and put another third of your net worth in something safe like bitcoin ;)

Seriously, it might make sense. You're buying some assets that in a liquidation you could probably recover some money from, and you and your parents hopefully 1) love weed, and 2) love risk. If 1. and 2. are correct, I say go for it. I think the notion that you're making a passive investment is a silly notion. Investing with family always becomes full frontal, and if I were in your shoes, I'd be prepared to get deeply involved, and realize that in certain situations I might have to either hire a new key staffer, or do the job myself.

At the same time, this might be the chance you get to escape the rat race.

MustacheAnxiety

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Re: Would You Invest in This Business?
« Reply #26 on: May 29, 2018, 10:49:15 AM »
Many people have made good points about the legal and financial risks of this venture.  Even if everything works out to bring in the millions predicted in 5 years (however unlikely that may be), making this investment will damage your relationship with your brother and your parents.  For that reason alone, I say do not do it.

Once you, your parents, and your brother become co-owners of a business that will define your relationship.  There will be discussions of the business, how things are run, what is coming next, etc. at every family get together.  There will be information you want to know and should know and every time you go out for a nice dinner will be a convenient opportunity to get an update.  This happens whether things go well or poorly. 

This was the advice that convinced me not to invest in an existing family business with detailed financial records that was a great deal.  But I want a sister, brother, and niece that I love and have fun with way more than a business partner.

For what it's worth, this could also be the diplomatic explanation to bow out of the deal. 

joer1212

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Re: Would You Invest in This Business?
« Reply #27 on: May 29, 2018, 11:34:22 AM »
Do not enter into a contract with an employee that limits your ability to terminate them or change their comp.

This is a major concern for me. If at some point I'm not satisfied with the performance of the grower and/or manager, my ability to fire them is hampered by the fact that they're officially part owners of the business-- they're not merely employees.
« Last Edit: May 29, 2018, 12:20:17 PM by joer1212 »

joer1212

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Re: Would You Invest in This Business?
« Reply #28 on: May 29, 2018, 11:50:41 AM »
Leaving the legal issues aside for a moment (though they would make the answer an instant hard no, for me), have you all decided how to deal with the cash issue and whether that $1M profit figure is pre or post 280E taxes?

Non bankable:
http://www.businessinsider.com/no-1-problem-facing-legal-weed-businesses-2016-4

280E:
https://www.accountingweb.com/tax/business-tax/marijuana-and-taxes-is-there-a-way-around-section-280e

Carting around millions of dollars in armoured trucks and getting audited every year while paying up to 90% in taxes? While waiting to Jeff Sessions to decide to make an example of you, ruining your and your parentsí lives? Sounds like a real slam dunk of a business.

My brother told me that there are financial institutions that are not federally funded (nor insured, I presume) that will accept cannabis money. Not sure who these are or how they operate exactly. It sounds like a grey area, replete with its own risks and inconveniences.

joer1212

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Re: Would You Invest in This Business?
« Reply #29 on: May 29, 2018, 12:03:49 PM »

-Our grower is phenomenal, that much I can say. He produces high quality, exotic strains (with densely frosted crystals). This may be our angle in an increasingly competitive market.

Medical legal in at least 1 state since 1996. Recreational in at least 1 state since 2012. Why in the world isn't your "phenomenal" grower a multi-millionaire several times over already. Why does he need your money?

He has a felony on his record (marijuana related) and he's dirt poor. He's also been taking care of his ailing mother for the past few years.

YttriumNitrate

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Re: Would You Invest in This Business?
« Reply #30 on: May 29, 2018, 12:10:42 PM »
I'd be leery of any projections on cannabis businesses right now because the prices are still very much in flux. For example, prices in Oregon have dropped by 50% (http://www.bbc.com/news/business-44237305). To make matters worse, the floor could really drop out on the market if we start to see mechanized outdoor production with interstate shipping.

joer1212

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Re: Would You Invest in This Business?
« Reply #31 on: May 29, 2018, 12:15:14 PM »
cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business?

I think FINate has found the crux of the matter. As currently structured,* there is no incentive for the business manager or grower (or your brother) to stick around the minute the business hits a rough patch and doesn't turn a profit for the month or is turning a profit less than 10x what a good pot grower can pull down in salary at a competing business (I have no idea what that number is, but I'm guessing it's a lot?).

So do you want to know just own, but also run a cannabis business?

*If they either had their own capital on the line or were drawing a salary instead of profit sharing they'd have an incentive to try to turn the business around. But right now, if you're profit sharing is less than they could make somewhere else, why not walk away?

More technical and obscure question: if the plan is for the business to make all of its money in 3-5 years, are you and your parents going to get to depreciation your initial capital investment on a 3-5 year time frame before calculating net profits? (You obviously wouldn't get to claim the depreciation to the IRS) That could make a big difference in the payouts your brothers/grower/manager could expect to see.

I'm having trouble understanding your last question.
As for your earlier points: I forgot to mention in my original post that the grower has agreed to sign a contract whereas he will ONLY work for us as long as we're in business. He cannot defect. I'm hoping I can get the manager to agree to same.

mozar

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Re: Would You Invest in This Business?
« Reply #32 on: May 29, 2018, 12:41:40 PM »
Sadly I think the manager and the grower are trying to scam your brother. If the opportunity was that great than the manager and the grower should be able to find their own investors.

Quote
He has a felony on his record (marijuana related) and he's dirt poor. He's also been taking care of his ailing mother for the past few years.

He is an easy target, he's probably tired of being poor and told his buddies how rich his brother is.

Quote
I'm hoping I can get the manager to agree to same.

There is no "hope" in business. Either he will sign a contract or he won't. My bet is the manager is going to take the money and run.

If you really want to help your brother, give him a gift of 10k and call it a day.

ketchup

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Re: Would You Invest in This Business?
« Reply #33 on: May 29, 2018, 12:49:52 PM »
cannabis business. There's a good chance that your brother and the business manager will not be around in a few years. Do you want to own a cannabis business?

I think FINate has found the crux of the matter. As currently structured,* there is no incentive for the business manager or grower (or your brother) to stick around the minute the business hits a rough patch and doesn't turn a profit for the month or is turning a profit less than 10x what a good pot grower can pull down in salary at a competing business (I have no idea what that number is, but I'm guessing it's a lot?).

So do you want to know just own, but also run a cannabis business?

*If they either had their own capital on the line or were drawing a salary instead of profit sharing they'd have an incentive to try to turn the business around. But right now, if you're profit sharing is less than they could make somewhere else, why not walk away?

More technical and obscure question: if the plan is for the business to make all of its money in 3-5 years, are you and your parents going to get to depreciation your initial capital investment on a 3-5 year time frame before calculating net profits? (You obviously wouldn't get to claim the depreciation to the IRS) That could make a big difference in the payouts your brothers/grower/manager could expect to see.

I'm having trouble understanding your last question.
As for your earlier points: I forgot to mention in my original post that the grower has agreed to sign a contract whereas he will ONLY work for us as long as we're in business. He cannot defect. I'm hoping I can get the manager to agree to same.
Have you ever tried to enforce a non-complete clause? From what I have heard they're basically worthless.

There are lots of red flags and this is only one.

This grower who's so fantastic, has he grown at scale before?  My mom can make a damn good pie, but would she be any good at making 100 pies a day?  Or, would she be great at it but be burned out in a year?

Does everyone understand the overhead involved with every step of the business?  The "make it back in first year or two and the rest is pure profit" ethos seems to imply that they are underestimating that.

Your brother needs skin in the game, and you need to want this business if it turns into a headache and he (or any other key player) drops out since the incentive to stay when it gets tough is not there.

It might take a few years for you to really iron everything out.  It might be too late (large multi-state growers taking over and killing your margins) by the time you get your shit together.

There's a lot to go wrong here.  I say walk away.

robartsd

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Re: Would You Invest in This Business?
« Reply #34 on: May 29, 2018, 01:10:49 PM »
How much have you talked about this with your parents without your brother. I wouldn't accept the terms he's proposed and would want to make sure my parents didn't get involved on bad terms either. If brother had other investors lined up for the business, I might consider investing in the real estate and leasing it to them at a rate that takes into account the increased risk associated with the use. I would never consider a business where I was personally named in the license as a passive investment.

patchyfacialhair

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Re: Would You Invest in This Business?
« Reply #35 on: May 29, 2018, 01:38:07 PM »
This seems like a scam. Here in CO, the pot businesses have to deal with a TON of regulation, and those regulations are always changing. And, this is a state where recreational has been legal for a while.

I wouldn't touch the product (personal choice) and therefore wouldn't get into the business until the legal frameworks and protections are established and in place. Sure, you could say that by then, the large companies would price out the mom and pop shops, but the way I see it, I work really hard to provide for my family (as does my wife), and putting ourselves in a position where we could be charged with a crime?! Absolutely not. We'll take our corporate drone jobs...

OP, I'd only do this if you're truly passionate about the product and willing to involve yourself, and once the compensation for the non-owners is set up to where they're paid a normal wage, then bonuses on top of that. I wouldn't allow someone with no skin in the game a cut of any profits unless the profits were high.


FINate

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Re: Would You Invest in This Business?
« Reply #36 on: May 29, 2018, 01:39:27 PM »
Do not enter into a contract with an employee that limits your ability to terminate them or change their comp.

This is a major concern for me. If at some point I'm not satisfied with the performance of the grower and/or manager, my ability to fire them is hampered by the fact that they're officially part owners of the business-- they're not merely employees.

Let's try thinking about this a different way. Set aside the legal concerns, and the fact that your bother is involved (family ties usually muddle objective analysis). Random Stranger approaches you with a business opportunity in industry X:

  Random Stranger: "Industry X is ON FIRE right now! I have an incredible opportunity for you to get in on the ground floor. You need to strike while the iron is hot, don't let this once in a lifetime opportunity pass you by."
  You: "Uh, ok. Tell me more."
  Random Stranger: "We have a plan, and some people, and maybe some properties lined up. But we need capital to get started. That's where you come in."
  You: "How much are we talking about here?"
  Random Stranger: "We need $350k to get things off the ground."
  You: "Uh, ok. So I would invest $350k in your business. What do I get in return?"
  Random Stranger: "You get 50% ownership."
  You: "I see. Is this business a going concern?"
  Random Stranger: "No, we haven't incorporated or anything like that. That's why we need funds to get it started."
  You: "So no inventory, no product, no customers?"
  Random Stranger: "Correct"
  You: "Do you have any of the required permits or regulatory requirements?"
  Random Stranger: "No"
  You: "So, um, what exactly would I be investing in?"
  Random Stranger: "A great idea. And 'human capital' - there are three of us. One is an expert in producing the product. Another is good at business stuff. The third guy, well, we don't quite know what he will do yet as he has a history that limits what he can do in X. But he's super motivated, so there's that.
  You: "..."
  Random Stranger: "Oh, and because of some, uh, reasons we're going to need you to be the legitimate face of the business."

Let's think about this. How much is a business idea worth? Approximately $0. This is not a going concern, so there's no value in customers, supply chain, distribution channels, or anything. The business doesn't actually exist outside of the imagination of a few people. The business valuation is approximately $0. You're being asked to "invest" $350k, which means, after your investment, the company will be worth $0+$350k=$350k. However, you only get 50% ownership, so in effect you transferred $175k to these strangers. Don't be fooled, no matter how much they try to convince you that you retain full ownership of your initial investment, it doesn't work this way. If the entity (if it actually existed) were dissolved tomorrow its assets would be split 50/50 between the owners. The only reasonable amount to invest in a company worth $0 is $0. If it was already a going concern, and an independent appraisal valued it at $350k, then a $350k investment in exchange for 50% ownership could make sense (assuming everything else checks out and you think it's a good investment).

Give that, the only reasonable response to this "opportunity" is:

  You: "Get off my property or I'm callin' the cops!"

Now, since this is your brother, you can be nice about it. But whatever you do, run far far away from this. You are already on a path to FIRE, this is guaranteed to derail the trajectory you're already on.

One final thing: It's worth asking what your brother brings to the table from the POV of the manager and grower. They both have skills (presumably), so why are they willing to give your brother a cut of the action, and at a percentage almost triple their own? The most likely answer is that he's your brother, he has connections to family members with money. He is being used to pull you and your parents into this scam.
« Last Edit: May 29, 2018, 02:32:54 PM by FINate »

frugaliknowit

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Re: Would You Invest in This Business?
« Reply #37 on: May 29, 2018, 01:48:46 PM »
Absolutely not.

1.  You are talking about borrowing against your 401K, which I assume is traditional/non-Roth.  What happens if the business turns bad AND you need to or choose to change jobs?  The loan has to be repaid OR is treated as an early withdrawal (10 % penalty PLUS gets added on to your taxable income, so, for example, if your tax rate is 25%, you will owe the IRS about $17,500 + $43,750 for a total of $61,250).

2.  While you have a GREAT net worth for your age, you are pretty thin for investing that much capital.

3.  Your Bro has no skin in the game.

4.  Assuming 1-3 are corrected, I am sure there' many, many more angles to be looked at.

Best of luck, either way!!

joer1212

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Re: Would You Invest in This Business?
« Reply #38 on: May 29, 2018, 01:59:13 PM »
Heck yeah, just make sure you diversify and put another third of your net worth in something safe like bitcoin ;)

Seriously, it might make sense. You're buying some assets that in a liquidation you could probably recover some money from, and you and your parents hopefully 1) love weed, and 2) love risk. If 1. and 2. are correct, I say go for it. I think the notion that you're making a passive investment is a silly notion. Investing with family always becomes full frontal, and if I were in your shoes, I'd be prepared to get deeply involved, and realize that in certain situations I might have to either hire a new key staffer, or do the job myself.

At the same time, this might be the chance you get to escape the rat race.

I'm invested in a 401(k), 457(b), Roth IRA and Vanguard taxable account. The bulk of my money is in stocks, bonds, and REIT's.
Another 5% of my net worth is invested in a basket of 39 cryptocurrencies (including Bitcoin).

My reasons for even considering the cannabis business are to not only help myself escape the rat race, but also my brother to escape it. However, if my brother wasn't involved, I would simply pass.

ketchup

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Re: Would You Invest in This Business?
« Reply #39 on: May 29, 2018, 02:07:26 PM »
Heck yeah, just make sure you diversify and put another third of your net worth in something safe like bitcoin ;)

Seriously, it might make sense. You're buying some assets that in a liquidation you could probably recover some money from, and you and your parents hopefully 1) love weed, and 2) love risk. If 1. and 2. are correct, I say go for it. I think the notion that you're making a passive investment is a silly notion. Investing with family always becomes full frontal, and if I were in your shoes, I'd be prepared to get deeply involved, and realize that in certain situations I might have to either hire a new key staffer, or do the job myself.

At the same time, this might be the chance you get to escape the rat race.

I'm invested in a 401(k), 457(b), Roth IRA and Vanguard taxable account. The bulk of my money is in stocks, bonds, and REIT's.
Another 5% of my net worth is invested in a basket of 39 cryptocurrencies (including Bitcoin).

My reasons for even considering the cannabis business are to not only help myself escape the rat race, but also my brother to escape it. However, if my brother wasn't involved, I would simply pass.
This should make you stop and think.

Jouer

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Re: Would You Invest in This Business?
« Reply #40 on: May 29, 2018, 02:42:44 PM »
If you do this, Joe Pesci will be playing your brother in the movie. Di Nero will play you. It'll be like Casino but with pot.

In all seriousness...like you, I am much older than my brother. I'm like half dad, half brother. He's broke. I'd be afraid to invest in a business idea of his unless all the business planning has been done properly and put on paper. Your brother and his buddies are trying to cut corners, which seems like a bad idea starting up any business, but especially one selling pot. And even more especially since he has a previous pot felony. 


snapperdude

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Re: Would You Invest in This Business?
« Reply #41 on: May 29, 2018, 03:24:02 PM »
Wait, so both your brother and the grower are convicted felons?

MJseast

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Re: Would You Invest in This Business?
« Reply #42 on: May 29, 2018, 06:25:40 PM »
I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.

As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.

And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.

I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.



« Last Edit: May 29, 2018, 06:29:08 PM by MJseast »

radram

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Re: Would You Invest in This Business?
« Reply #43 on: May 30, 2018, 06:10:01 AM »
I've been in the legal cannabis industry for years. I hate to tell you, but are already a little too late to the game to be able to come in without any experience and be able to turn a profit in the first 3-5 years.

As someone else mentioned, you really need to read up on 280E. Your reply to that comment only had to do with legal banking - that's not the problem. The problem is that you can only write off COGS. With a grow, many things (but not all) can be put into COGs, but that doesn't help much in a vertical integration scenario when you open a dispensary. I guarantee your federal taxes are going to be way more than you think they are going to be. I've had years where we've paid more in taxes than we made in profit.

And FYI, every grower is "phenomenal grower". They ALL grow the dankest weed ever and it's everyone's competitive advantage ;). And it turns out that the market doesn't care about that - the market wants cheap weed.

I disagree with others who think there is a big risk to lose assets because it is federally illegal. But there are other problems such as:
- Expect to be audited by the IRS every year, business and personal
- Expect that you will not be able to get a mortgage for a building for production or sales of cannabis
- Expect that your investment company may drop you just for being involved in the industry, even though none of your 401K money was tied to cannabis
- Expect that everything will cost 3Xs as much as normal because as soon as people hear you're a cannabis biz, their risk goes up to deal with you and so does the price. That includes the attorneys and CPAs that you'll be using way more than you think you will.
- Expect that your startup costs are going to be WAYYYYYY more than you're projecting, especially for an indoor grow.

OP, you might as well close the thread with this post. I think you owe MJseast a beer, what with saving you at LEAST $175,000.

Are you the kind of person who can walk away after dropping that kind of cash, or would you continue to throw more money in to "protect your investment"?

MJ, thank you for your insight into what seems to be a fascinating and sexy industry. Do you give tours? :)


ChpBstrd

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Re: Would You Invest in This Business?
« Reply #44 on: May 30, 2018, 06:14:09 AM »
Run for your life.

Richardp10

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Re: Would You Invest in This Business?
« Reply #45 on: May 30, 2018, 06:56:09 AM »
Echoing the thoughts of everyone else, walk away!

Iím guessing none of the 3 people grower, business manager or your brother have any track record of succeeding in business. So why trust them to use you and your parents 350k in a startup?

I doubt from the light background info given if these people would even be employees you would pick for the business but definitely not business partners and the people you choose to trust with a big chunk of your net worth.

MJseast

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Re: Would You Invest in This Business?
« Reply #46 on: May 30, 2018, 10:08:45 AM »

OP, you might as well close the thread with this post. I think you owe MJseast a beer, what with saving you at LEAST $175,000.

Are you the kind of person who can walk away after dropping that kind of cash, or would you continue to throw more money in to "protect your investment"?

MJ, thank you for your insight into what seems to be a fascinating and sexy industry. Do you give tours? :)

Haha! I am happy to help. I've seen good people lose so much in this industry because they were being hopeful (and naive) and it's really sad to see. I could probably write a book with all I've learned (and am still learning!). Hmmmm..... ;)

I have so much more I could say about it, but I'll leave it at this: If you really want to get into the industry at this point, look to ancillary businesses to the industry - real estate, business solutions, tracking and point of sales systems, etc. But even with those you should partner up with someone who has a background in the cannabis industry as it really is its own beast.

All this makes me realize that I really should get more serious with my consulting on the subject, so thanks for helping me realize that! :P




ketchup

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Re: Would You Invest in This Business?
« Reply #47 on: May 30, 2018, 11:09:18 AM »
I have so much more I could say about it, but I'll leave it at this: If you really want to get into the industry at this point, look to ancillary businesses to the industry - real estate, business solutions, tracking and point of sales systems, etc. But even with those you should partner up with someone who has a background in the cannabis industry as it really is its own beast.
This is a good tip in general.  During the gold rushes, the real money is in pickaxes and the like...

maizeman

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Re: Would You Invest in This Business?
« Reply #48 on: May 30, 2018, 11:15:43 AM »
Haha! I am happy to help. I've seen good people lose so much in this industry because they were being hopeful (and naive) and it's really sad to see. I could probably write a book with all I've learned (and am still learning!). Hmmmm..... ;)

Now THAT sounds like a viable plan to make money in this field!

joer1212

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Re: Would You Invest in This Business?
« Reply #49 on: May 30, 2018, 11:20:46 AM »
If you really want to get into the industry at this point, look to ancillary businesses to the industry

My brother's plan also included possibly opening a hydroponic store (cannabis supplies). No regulations to deal with.