Deal To Watch: Bringing Trust To The CBD Market

Key Stats:

Summary

Franny’s Distribution Incorporated has been selected as a “Deal To Watch” by KingsCrowd. This distinction is reserved for deals selected into the ​top 10%-20% of our deal diligence funnel​. If you have questions regarding our deal diligence and selection methodology, please reach out to ​hello@kingscrowd.com​.

Problem

Cannabidiol, better known as CBD, is a non-psychoactive chemical compound derived from the cannabis plant. With legalization underway in the US due to the 2018 Farm Bill, a whole new industry of consumer products is emerging.

However, we are still in the early days of a budding industry that is expected to grow to $20B by 2024 at a CAGR of 49%. This rapid market growth can be attributed to the expanding legalization of CBD beyond the initially approved nine states, allowing the introduction of CBD products into more traditional retailers/distribution channels.

In many ways this new, budding industry is still the Wild Wild West, and everyone and their mom seems to be trying to get in the game. To make matters worse, CBD sales are not regulated by the FDA. 

In this immature market, unsubstantiated benefit claims, misstated ingredient facts and the ‘stoner’ brand image hurt many companies trying to capitalize on the CBD craze. There is an unmet need just beginning to be tackled by companies like Frannie’s Distribution, Feals, and HATH, companies that focus on accurate claims, ingredient transparency, and branding products around wellness vs the stoner image.

Those who can reenvision the CBD market as a professional, well regarded portion of the wellness industry are those that will win out in this fast-growing, multi billion dollar market. 

Solution

Franny’s Farm is located in North Carolina, where hemp is legal under the industrial hemp pilot program. 

Unlike competitors, Franny’s Distribution is a CBD consumer product company vertically integrated (meaning they control the entire supply chain, from growing hemp to selling product) with farms, manufacturing and distribution.

By controlling the entire CBD supply chain, Franny’s can control both quality and price of the final products sold to consumers in a way others cannot. Franny’s Distribution handles every step of its production line with the intent of ensuring high-quality products, a spotless reputation, and prevention of any expected problems associated with CBD production. 

In under a year, Franny’s Distribution went from a local sales store to a nationally-recognized brand. Moreover, in just five months, the team has driven nearly $400K in revenue. The team has a significant foothold in the market coupled with a quality product line and experienced management. 

The team is already expanding both its product offerings, as well as access to its product through retail stores and franchises. Franny’s is an early mover in the CBD market and is quickly capitalizing on the greenfields of opportunity.

Franny’s is hoping to sell to 10-15 franchises in 2020, which will become new wholesale accounts and provide more reach and distribution for the organization. 

Why We Like it

1. Early Market Entrance: Franny’s Distribution has entered a rapidly growing space where regulations are quickly improving market access which opens a huge opportunity for this team to quickly expand sales. While there is competition, many CBD companies are still in the early days, and few have control of the process from plant to sale, which puts Franny’s products in the upper quartile in terms of quality.
2. Strong Product Line Traction: The company is well established and have $385K in revenue from both wholesale and retail operations in a short five months. Now, the team is reinvesting in new product line offerings, as well as expanding its reach through retail and franchise offerings. 
3. Large Addressable Market: Franny’s Distribution can thrive within the entire CBD ecosystem (skincare, pet, baby products, etc.). Regulations are providing tailwinds as CBD products become more readily accepted by various states. With this franchise model, Franny’s Distribution can be agile in scaling to more states. The CBD market is projected to reach $20B by 2024 and is driven by the growing popularity of CBD products and reliability of manufacturers like Franny’s. This is a terrific time, if executed correctly, to become a household CBD name. 

Management

Frances “Franny” Tacy is co-founder, vice president, and director of Franny’s Distribution. Before becoming a business owner of Franny’s Farmacy, Frances owned and operated her farm for nearly seven years. She has experience in sales and marketing from GlaxoSmithkline and King Pharmaceuticals and as an educator about CBD.

She knows how to manage an agriculture-based business and has a business sense thanks to her more traditional career experience. 

Jeff Tacy is the co-founder, president, and director of Franny’s distribution. Before directing Franny’s Distribution, Jeff earned his Master’s in Engineering in Construction Management from the University of Alabama Birmingham. He is a licensed general contractor and a project management professional. 

While this might not entirely be the expected management team of such a fast growing brand, we think the rapid growth of the company shows an ability on the part of management to execute. As the company grows, it will be important to bring in more business experience to help support scaling. 

The Rating: Deal To Watch

Franny’s Distribution Inc. is a Deal To Watch. Franny’s experienced management team has produced a fast growing company that is effectively producing results with minimal capital. The team is also differentiated in the market because of its vertically integrated supply chain.

In 2020, the goal is to launch a franchise offering and open 15 new franchises. Additionally, product line expansion will include pet, baby, and personal care products. An opportunity to become a $20M+ annual revenue company seems more than within reach. 

As the space heats up, it will be a market ripe for acquisition, which can set Franny’s Distribution up nicely for an attractive exit at a 5 to 8X multiple on annual revenues. 

Nonetheless, investors should proceed with caution because of the risks and concerns surrounding CBD from a regulatory standpoint, which can grind the market to a halt.

Alternatively, if and when regulations are improved, which is very likely, more capital will enter the space, putting Franny’s under pressure from highly funded competitors. Getting to cash flow positive sooner rather than later will be key in staving off impending competition. 

Nonetheless, this is an intriguing entry point for investors looking to partake in the rapid rise of the CBD industry with a team that has shown early signs of success.