We hear about the term “optionality” a lot these days. And, you may wonder exactly what it means. In the context of business building, optionality is creating a company where you have lots of different avenues for reaching your goals.
Having optionality is the opposite of putting all of your eggs in one basket. And, it’s the cornerstone of building a valuable business. Take it from us. We’ve studied over 55,000 business to learn exactly what makes them valuable.
In the early days of your business, optionality may be about having lots of marketing channels that you can dial up or down depending on which one is working. It may also mean outsourcing those things that don’t drive value.
As a cannabis entrepreneur looking for growth capital, you should consider optionality. Why? It allows you to create negotiating leverage over potential investors and acquirers.
How Josh Delaney earned optionality for himself
Josh Delaney started FAB CBD, a CBD e-tailer in 2017. By 2020, through a combination of savvy marketing and good fortune, FAB CBD had risen to more than $10 million in annual sales.
One of the secrets to his success was having a diversified set of marketing channels. Delaney optimized his website for ranking on key search terms, built an in-house email list, bought paid ads, and partnered with affiliates to promote his CBD products.
His affiliate marketing was particularly successful, driving 30-40% of his sales. Delaney cultivated a portfolio of affiliates to ensure he was never too reliant on one influencer.
Leave sentiment behind
As he grew FAB CBD, he never got too sentimental about his business. As he talked about on The Business of Kush™ podcast, he believes too many founders get overly romantic about their business. And, when they do that, they become emotionally attached. When your company becomes part of your soul, it is hard to sell or raise money. These were both options Delaney wanted to keep open.
When it came time to sell, Delaney continued his obsession with optionality by attracting seven “letters of intent.” Each formal offer had a different set of terms. And the trick here is those offers gave him options. Options for how much of his proceeds he would receive up front versus how much he was willing to accept tied to future performance.
“You saw what it takes to build a business. A million dollars can be gone overnight, so we need to be smart about how we scale.”
– Josh Delaney
A $26 million exit
In the end, he agreed to be acquired by High Tide, a Calgary-based cannabis company. They offered him $13 million in cash plus $8 million in High Tide shares in return for 80% of FAB CBD (an implied valuation of $25.8 million).
Here again, Delaney focused on ensuring he had optionality. He negotiated a schedule whereby he was allowed to sell his High Tide stock at specific points in time, starting four months after the deal closed. As it turns out, he hasn’t sold any of the stock because he believes in the long-term prospects for High Tide, but he has the option to.
The value of optionality
Delaney even negotiated a put option on the 20% of his shares he chose to keep in FAB CBD. After a 12-month holding period, Delaney has the right to force High Tide to buy his remaining shares. And he can do so at a value of six times trailing twelve months EBITDA. Based on the success of FAB CBD, he’s unlikely to trigger his put—but again he has the option to.
At every turn, Delaney focused on having optionality, which should be the ultimate aspiration of just about any founder.
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