Jon Sandelman says he’s trying to position AYR Wellness (pronounced “air”) for when big CPG companies enter the cannabis market. When that happens, he plans to have the best product with the best customers their money can buy. CEO and founder of a company that’s only been operating in the U.S. since 2018, Sandelman’s company has been winning notice as one of the most acquisitive companies in cannabis.
Starting with licenses in Nevada and Massachusetts in 2018 and tightly focused on flower quality and revenue during the early pandemic, for 18 months AYR won plaudits among smokers and investors for great weed and great returns. But this year, AYR has been racking up purchases left and right. Since the start of 2021, the company has made dispensary and cultivation acquisitions in Arizona, Florida, Illinois, New Jersey, Ohio, and Pennsylvania.
In this interview, Sandelman discusses what makes a good AYR acquisition target, what he thinks of the California, Illinois, and Michigan markets and why he thinks THC beverages are a winner.
This interview has been edited for grammar and brevity.
Grown In: You come from managing derivatives and other securities for Bank of America and then creating one of the first cannabis SPACs. You’re a finance guy, right?
Jon Sandelman: The negative on Jon Sandelman in the industry for a while, and I think we’ve proven that I’m more expansive, is that I’m a finance guy. I’m not an operator. But the reality is that for 30 years, I’ve been in finance and an operator. And that’s why I’ve had very successful businesses and frankly I’m just following my play book over 30 years and just applying it to a new industry.
Grown In: You’re running one of the most acquisitive cannabis companies out there. When you look at a potential acquisition, what makes a target interesting, and what are red flags for you?
Sandelman: My basic principle in life and business is that talent is free. For me, when I compete and I’ve looked at other industries, the companies that tend to win have the best talent on their team. It’s all about the people and the talent and the culture. I’m a culture guy.
With a strong vision and a good culture, it’s a gateway to attract excellent talent. It’s all about the people. A perfect M&A deal for AYR is where we get a great business, a great asset, and because I’m such a lover of talent, in addition to it being a great business, I get more partners. I extend my talent pool. Every single business, we have bought, and we’re the most aggressive in the industry in M&A – the question that should be asked is, “Why Jon, everytime you buy a company, do the folks in that business stay at AYR?” They don’t look to leave. And that’s what makes us great.
Grown In: What is it that you’re looking for specifically?
Sandelman: We’re looking for a great business with great, great talent. That’s one. Two is, how do you define a great business? It first starts with who we are and what we want to be as a company. We have stated goals. What we’ve said consistently is, cannabis is nature’s medicine. We believe in the wellness of this plant. We don’t believe it’s the box – a lot of competitors talk about their branding and their box – we believe it’s the contents of the box.
And we understand that when we look at traditional CPG, we don’t buy Nikes in our daily life because the box is orange. We buy it because we think it’s the highest quality running shoe. I don’t buy an Apple phone, which I think is the best phone, simply because the box is white. The best have the best tech and product and they deliver that quality consistently.
We want to be the largest scale grower of quality cannabis offering good value to our customers. That’s our present. Then as you move from state to state looking at businesses, you have to find businesses that are consistent with that message.
In every state that I go into, we are vertically integrated, because of our stated goal of being the large-scale highest quality cultivator. I have to control the whole process from seed-to-sale.
First, I identify the states, and then I look for best in class businesses within those states. And then I have intensive conversations. We do intensive due diligence, because we’re finance people.
What is it that has resulted from intensive due diligence? It’s resulted in the fact that we’re one of the few large MSOs that have never renegotiated a deal. I’ve told you reputations do matter. I’ve always been focused on my personal reputation and morality. I come from a world on Wall Street where we don’t do contracts. We do a handshake and the next day we close. If you didn’t close the next day once in your life, nobody would transact with you again.
We’ve never renegotiated a deal because we do intense due diligence. The price is what we think we should pay.
And because I care so much about my talent pool. I don’t look to strike an overly aggressive financial deal for the AYR shareholders. Because if I want you to be my partner, I want you to feel good about the transaction. Otherwise you’re not going to be my partner. You’re going to be bitter.
Grown In: So, most of your sellers have an earn out period.
Sandelman: Yes. Almost 100 percent.
Grown In: When you look at potential threats from adjacent industries, like beverages, tobacco, pharma, hospitality, what do you pay the most attention to?
Sandelman: Let’s start with the positive. I don’t know if you’ve seen a new product we’ve launched, a beverage called Levia. I’m super excited about this. This has been 12 months in coming.
It’s such a small segment right now, why do you care? The answer is, I was reading analyst reports talking about the hard seltzer business and how it was just exploding. I thought about that: Why is there a generational shift? What is the paradigm shift away from beer to these low calorie hard seltzers?
The answer was, younger people wanted to session drink. That trend has been well established. You walk into your liquor store, [hard seltzer] dominates. I see that trend, then I say to myself: What’s the demographic for that consumer? What percentage of those folks also enjoy THC? From my polling, a large percentage of people drinking hard seltzers also enjoy cannabis.
The hard seltzer companies have done the hard work of converting these people from beer to seltzers, all we have to do is tap into the 50 or 60 percent drinking them that also enjoy cannabis, and offer them an alternative.
What I’m doing is bringing it to a national brand as quickly as possible, I’m building canning lines in every state we’re in where it’s legal. Move it out to 8 or 9 states. Establish the brand, because I’m nationwide and in more states than anyone else. And what we’ve seen with big beverage, whether it’s beer or Coke or Pepsi: They use companies like ours as incubators for them. They let folks like us get it to scale, and then they come in and say, you know what, there’s a really big market, our distribution and our brand, no matter what we pay for it, on our trucks and storefronts, we could really accelerate the growth here.
I see all these mature CPG industries really focus on THC. And what we hear from analysts or bankers, these companies are all trying to get up to speed on these products. So they are prepared and they have their strategy prepared for if and when it goes federally legal. People who deal in cans will like Levia…they’ll go where they feel comfortable.
Grown In: You said back in April that you want to be in only 10 or 12 states. What would it take for you to want to be involved in the west coast states?
Sandelman: I am focused on California, although it’s been harder to identify an asset that’s managed and has similar characteristics to AYR. It’s a difficult market because of the illicit market and the tax regime, and several other factors. It’s an interesting market for AYR at some point, there are other states, we’re just entering Illinois now. I don’t really want to be in a state unless I can control the quality of what’s in our box. We need to be vertically integrated in Illinois. We’ve looked at Michigan. There’s several other states that we’re focused on that hopefully we’ll be able to announce in the future.
Grown In: Michigan is an interesting place, since there’s not a lot of MSOs participating there. When would you get in?
Sandelman: Michigan is not a limited license state. It feels similar to California where there’s still a significant illicit market, which they haven’t controlled yet. With the caregivers. It’s not easy for us to figure out. We’ve spent time on it, we’ve tried to get smarter, we look at it all the time. You don’t see a lot of the large MSOs there.
You kinda feel like it’s so large you have to be there. Then you look at the economics of the individual businesses, and nobody’s doing that well. I don’t have an easy answer for that state.
Grown In: You said you wanted to be vertically integrated in Illinois. There’s the 20 cultivation licenses there, but those are kinda locked up. Then there’s the craft grow licenses coming online. Would you consider pulling together three craft grow licenses?
Sandelman: Could you string three of the craft grows together? I think the canopy is limited to 14,000 square feet. You could. But would that really supply – if you got 10 stores in the state, I don’t really know if that would be big enough.
Are there people that would consider some of those original 20? I think the answer is probably yes. And then the question is: It’s always about the supply and demand. Of all the big MSOs that can afford to pay a big price, who isn’t in the marketplace? They’re all there. Then you have to think about: If all the biggest folks are already there, who’s left to bid? There’s just a handful of us who have the capital to be able to buy cultivation at scale.
So that to me is an interesting dynamic.
Grown In: A number of studies show that underground sales comprise about 65 to 75 percent of the total market. Underground dealers have the advantage of lower prices and a fluid supply chain, whether it be from Mexico, California, or Michigan. At some point, the legal industry will have to address this if it wants to grow. How does that get done?
Sandelman: I think it’s a difficult question. If you think about the State of California, they said make it legal and tax it. If, as you say, the majority of the business is going untaxed, what was the purpose of doing that?
What scares me more than taxes, as consumers you can buy it 25 percent cheaper because it’s tax free. But what really concerns me it’s not the taxes, it’s the quality of what the consumer is buying in the illicit market, versus the legal market. Ours is organic, it’s tested, it’s high quality. If I was a regulator, I would want to make sure my citizens were getting the highest quality product and they understood what they’re getting.
I’m rooting for the day that the states get more rigorous around the illicit market.
