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This week, Darren Gleeman, managing partner at MBO Ventures, joins the Cannabis Equipment News podcast to discuss how employee stock ownership plans (ESOPs) solve the 280E riddle for cannabis operators while increasing employee retention and productivity.
Gleeman is an ESOP evangelist, quarterbacking some 400 deals over more than 25 years — collectively valued at around $22 billion — but until recently, he had executed ESOPs in just about every industry except for cannabis; those deals, he said, are typically a better fit for more mature industries.
But about three years ago, some colleagues started asking about ESOPs in cannabis. Gleeman thought the market was still too hot to make it work. However, he soon learned that things had cooled down.
To many, ESOPs sound too good to be true. The plans are a way to gain tax incentives by selling the company to employees, which can be very lucrative in cannabis. Because of the 280E tax code, cannabis operators get taxed on gross profit; no deductions or credit is allowed for any amount paid or incurred during the taxable year, including traditional deductions like expenses, salaries or rent.
However, when owners sell the company to their employees, they pay no federal or state tax. And, when you're paying no taxes, 280E becomes a non-issue. These deals follow the letter of the law. Gleeman says you are not getting around 280E; you're just rendering it obsolete.
The 280E code significantly impedes cash flow for cannabis operators. According to Gleeman, while businesses in other industries typically see effective tax rates of 40% to 45%, cannabis operators can see up to 70%. The effective tax rate is the percent of income that a company pays in taxes.
Traditionally, ESOPs also help with employee buy-in, retention and work ethic. According to Gleeman, employee retention increases by more than 300% after an ESOP transition, and productivity increases by 2% to 3%.
Jump around:
- An ESOP explained. (4:05)
- Why ESOPs are lucrative for cannabis operators. (5:02)
- Why the ESOP is the best way to combat 280E. (7:55)
- The first ESOP in cannabis. (10:20)
- What's the catch with ESOPs? (11:44)
- How do employees buy into an ESOP? (15:00)
- How ESOPs help improve employee retention and productivity. (22:33)
- Common ESOP myths. (33:38)
- ESOP success stories in cannabis. (40:41)
Please make sure to like, subscribe and share the podcast. You could also help us out by giving the podcast a positive review. Finally, to email the podcast or suggest a potential guest, you can reach David Mantey at [email protected].
