Acquisitions Anonymous - #1 for business buying, selling and operating - Cherry Garcia Ice Cream Royalties - Acquisitions Anonymous Episode 113

Episode Date: August 10, 2022

Michael Girdley (@Girdley), Bill D’Alessandro (@BillDA), and Mills Snell (@thegeneralmills), talk about something a little different: We reviewed the potential purchase of royalties from Cherry Garcia ice cream, Ben and Jerry's popular ice cream flavor named after the iconic grateful founder, Jerry Garcia. We found a royalty stream too and we investigated it in depth to see if it was a good investment.-----Thanks to our sponsors!* CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.-----Show Notes:(0:00) - Introduction(0:38) - Our sponsor is cloudbookkeeping.com(2:05) - Deal listing & financials: Cherry Garcia Royalties(6:23) - How does the royalties deal work(9:36) - How does investment size impact your chance of lawyering up if things go south?(10:45) - What could make this deal more appealing?(16:32) - Who is your counterparty? Why hasn’t Unilever bought it?(20:34) - What are the factors that make investments in cash flow streams good or bad?-----Links:https://auctions.royaltyexchange.com/auctions/royalties-from-cherry-garcia-ice-cream/-----Additional episodes you might enjoy:#108 A fireworks store and a ski rental business for sale#106 A Pet Product and Saas business for sale - Which one do we like?#105 How to Make Money in the E-Commerce Game - Bill D’Alessandro gives an e-Commerce masterclass - Part 1#79 What do Investors want? - Dig into an investor’s mind with Bradford Hardin#75 SBA Loan Secrets with Heather Endresen, expertise from a Billion-Dollar LoanerSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, Michael here. Welcome to another episode of Acquisitions Anonymous. This week is a banger of an episode. We went a little different, and we reviewed the potential purchase of royalties from Cherry Garcia ice cream. So if you're familiar with Ben and Jerry's, Cherry Garcia is one of their famous brands. And this is a royalty stream that we found. And we went deep in this one to figure out, is it a good investment? When should you buy something like this? And when would you not buy something like this? So enjoy this one. We did it as a group. And before we dig into it, here's a quick word from today's sponsor.

Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com. So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud. for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call.

They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your quickbooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them. If you want to find out more about cloud bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you, make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions.

And when you call, mention this podcast. it would help us and help Charlie know that we're supporting him as well. So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode. Dude, I think this is our first. We got two first today. We got the whole band here. A second first. I haven't commented about Mills Beard yet.

And three, this is the first deal we've ever done that has a time limit that will probably hit before the episode gets published. So I'm excited to do this deal. It is an ice cream deal. So Bill, you're reading this one? I'm reading this one. So I am so excited about this one because I had this ice cream last night. And then Michael sent this deal. And I was like, oh, my God, it's so timely. So this is a deal for the royalties from Cherry Garcia ice cream. So it says collect earnings from Ben and Jerry's popular ice cream flavor named after the iconic Grateful Dead founder Jerry Garcia. So it is priced at 40,000. So it is priced at 40,000. So it. was an auction, so it's being bid. The current bid has six hours left. It's priced at $40,000. And the way this works is that you receive a royalty scream generated by the popular Ben and Jerry's ice cream flavor, Cherry Garcia.

So Jerry Garcia originally, right, licensed his name to Ben and Jerry's. And every time they sell a pint of Cherry Garcia or a shirt that says Cherry Garcia on it or whatever, you know, a penny goes to the royalty holder. It says the royalties stem from the gross sales of Cherry Garcia ice cream products that are paid quarterly. It says in the past, we've made different portions of this royalty stream available for bidding. So if you miss those auctions, now is your chance. Listing highlights, whereas a lot of terms in here that we're going to need to circle back to. It's a 35-year dollar age, consistent annual earnings, and it's remained remarkably stable over the last three years. The last 12-month earnings on this chunk of the royalty stream are $6,384, which is right in line with a three-year average of $6,44.

So right there on the three-year average. Officially released in 1987, Cherry Garcia is a nod to the celebrated and acclaimed Jerry Garcia, along with his band The Grateful Dead. Over 30 years later, it remains one of Ben and Jerry's most popular and longest serving products. This means the winning minor will earn royalties from all gross sales of Cherry Garcia-related products. Currently, they offer five variations of the Cherry Garcia flavor, ice cream, frozen

yogurt, ice cream treats, non-dairy and light ice cream, along with merchandise. Essentially, whenever Cherry Garcia ice cream or any of its variation, are sold. You earn the royalties. It also says, finally, as a special exciting memento, the seller would like to include a unique piece of Jerry Garcia's artwork for the winner of this auction, which is pretty cool because you could hang on your wall. Like, this is like a real-life NFT. Like, you hang it on your wall and you're like owning this thing and jettles me to $6,400 a year of royalties from Jerry Garcia, Cherry Garcia ice cream. So it says, what is being sold? 10 years of payments generated by the seller's interest in the domestic U.S. only royalties derived from the

licensing of the Cherry Garcia trademark. And the current bid is $40,000, which implies, if they're doing this math, I assume it's correct, a theoretical IRA of 15%. So you pay, assuming this bid is the final bid, you pay $40,000, $40,600. And then for the next 10 years, you receive a payment of approximately $6,400, depending on the sales of Cherry Garcia ice cream. So it's basically pay $40,000 now, get $64,000 roughly over the next 10 years in equal installments, assuming people still love to eat Cherry Garcia ice cream. What do you guys think about this deal? So just so I understand, this is not a perpetual royalty.

This has a time frame on it. After 10 years, it reverts back to somebody else? That's what it says. It says after 10 years, if you hover over where it says term 10 years, investor purchases the right to collect royalty payments from the asset for 10 years after which royalty payments revert back to the seller. Okay. And then if I understand the math here, I put in $40,000 at the current price.

And then over the next 10 years, I get a total of $64,000. Correct. And I have nothing left at the end to show for it. Correct. Other than an extra 24. other than the piece of artwork that is hanging on your wall, Michael. Well, okay, I can get that off of eBay or photocopy it. I guess that's the anti-NFT argument I just made.

Well, who cares? Nobody comes to my house, so whatever. Yep. Go ahead, Mills. Well, I mean, it's interesting. The first, as we were messaging about this the other day when we got so excited about it, we were like, that sounds like a terrible royalty deal for Jared Garcia and his estate. But then when we did some more digging, this is only a partial, this is only a portion of the total royalty.

The guy, I did some digging on this, there have been multiple almost tranches, if you will, of the royalty stream that have been sold. One was sold earlier this year. And I think the person who is selling the pieces of this stream only bought them in 2020. So we usually look at operating businesses for sale. If somebody bought something two years ago and they're selling it, it usually is a rag. I don't know if this is in this case. I mean, it pays out quarterly. So he's collected a little bit of this kind of coupon, so to speak.

But this is not the entirety of the royalty. It's just been subdivided. To me, the issue, I have a couple issues with trying to quantify the risk associated with this. The biggest one is that Unilever, who owns Ben and Jerry's could just say, hey, we're discontinuing it. Now, there's a lot of people who would be mad, and I don't think they would do that, but it is a real risk. Also, you're bidding on this thing online, and the availability of due diligence is probably very limited, but I would want to see the actual licensing and royalty agreement that's in place. Is it even assignable? Is it transferable? Is it divisible? Or is it that this guy, the owner of the royalty stream, is like, hey, when I get a check, I will cut you a check and put it in the mail.

Who is my check coming from? That's a big question I would want to answer. Is Unilever writing me a check? Or is this guy who's like in the Cayman's just going to like, you know, drop a check in the mail? Those are the red flags. Yeah. I mean, you've got this problem also where there's, there are investments below a certain size where you basically have no recourse legally because the investment is so small.

right? When you invest $40,000 and let's say the guy stops paying you $6,000 a year, it's going to cost you $30, $40, $50,000 to take them to court. So it's one of those things where people are always like, well, you can take so and so to court to get your money back, but below a certain size, like it doesn't actually work because the lawyers end up eating any potential money you're going to recover. Yep. So the thing that I, well, first of all, I found it fascinating, right? Let's say the total, let's say Ben and Jerry's pays out a million dollars a year of Cherry Garcia royalty. So they have sliced this.

This is both a fractional royalty and also a time limited royalty because it's only 10 years. So I first of all just found the structuring pretty fascinating that they're able to slice and dice this cash flow stream in so many different ways.

It also made me think of all the different cash flow streams that may be sliced and dice this way. You know, lottery winner payments, you know, medical settlement payments, you know, all that kind. I'm sure there is a whole economy here of purchasing, repackaging, securitizing, and reselling different slices of royalty payments, which I am now fascinated to learn more about. The thing, though, that really bums me out about this investment is, you know, it's basically, so it's a 10-year investment, right?

And for the first seven to eight years, it's going to take you seven to eight years to get your money back, right? So for seven or eight years, you're just getting your money back. And then the last two payments are your profit. And then at the end, you have nothing. You don't get your principal back. Your principal is gone. So this thing has to pay out for seven to eight years for you just to get your money back. And then you're hanging on for payments nine and ten. And that's a decade from now. And that is, I don't take 10 years of consumer products risk for 15% IRA. are that's entirely backweighted. I mean, that's insane.

All right. Let me give you a situation in which does make it to be a better deal for you, Bill. Are you ready? What if you could do 60% loan to value on this deal? All right. So it's 40,000 bucks. You put 16,000 down, and then you look up and you're making $6,000 a year on your yield on equity at that point.

And you have to do some debt coverage and all that kind of stuff. Is it recourse? I don't know. It depends on how stupid a lender you can find. Let's say you find a stupid lender. Let's say you find a stupid lender and it's non-recourse. It potentially gets a little bit more interesting with the huge caveat that it's still not big enough.

Put two more zeros on it, right? Like, I mean, you can't do the paperwork on this thing for, you know, you're going to make 15% on $40,000. So your profit here is going to be $15,000. That's just total. I don't know. I don't know how they're asked. works. That's not annualized IRA. That's just totally right right now they're 15 basically at 40,000.

You're pulling 40,000 costs. You're pulling 6,000 a year. It's 15% yield on cost, basically, yield on equity. Yep. But like you can't do that you can't do the taxes associated with this for a couple thousand dollars a year. I mean, it's like this is just such a small. I'm shocked that it makes sense. Like why does the guy that owns this royalty, he needs 40 grand that bad, right? But it's worth doing all of the securitizing and packaging and just freaking dealing with you for the next decade just to get 40 grand. I don't get that. This is so small. I mean, if this were, you know, put in half a million dollars and it yields 15% over time. And as Michael creatively suggested, maybe you put a little non-recourse leverage on it, you know, that maybe gets interesting because

you've got a little bit of buffer because you have to pay somebody to, you know, take the check and pay your lender and just do all the accounting for it. But geez, this thing is so small, the brain damage per dollar. Yeah, it seems like it's totally optimized for somebody that is just like got more money than they know what to do with. $31,000 is not a huge amount of money to them. They're okay to get a little bit of return. But the real return is probably that they want to put this Jerry Garcia thing on their wall. And people ask what it's about.

And they get to say, oh, I own a portion of the royalties for Cherry Garcia ice cream. Tell all their friends. I think this is truly a use case for an NFD. That's the whole value here. It may be. So I was just in Burlington, by the way, which is the home of Ben and Jerry's and where they were founded. And we went by their original store. And my son got to hear a wonderful lecture about what happens to wonderful brands that are beloved

when they get bought by evil multinationals like Unilever. That's the good times my kids get them on vacation. I have been there, Michael, and the cognitive dissonance in that video is insane. So you go there, and it's, you know, Ben and Jerry's is like counterculture, like, very left-wing company, but that espouses like all of these left-wing beliefs. And then they sold out for a bazillion dollars to Unilever, right? And so you go there, and they're the video that they show. you is about like the evils of capitalism and how Ben and Jerry stands against it. And the whole

time I'm going, this is owned by Unilever. Like, hello. Is anyone paying attention to this? Yeah. It's ridiculous. I think it is interesting that there have been 34 bids on me and it's only been bid up, you know, $9,000. Like that kind of tells you that this people are just like not underwriting this as a true investment, but they're just like, this is kind of fun. You know, like, let's just try it and see. And there have been 34 iterations. There's only 29 approved bidders, it says, and there's six hours left. So by the time this airs, someone will be the proud owner of a piece of artwork and a hope

and a dream to get $6,400 a year paid out quarterly. So what do we, I guess we don't know with the total amount of royalties paid for Cherry Garcia each year is, but it's been fractionalized because we've seen there was another auction here that did 166,000, another one did 100,000, another one, 881,000, just listed as a similar auction. So I got to believe there's more of these, more of these out there. I wonder how much they're paying a year in royalties. Well, the interesting thing is you look at those auctions, they seem to have settled around a 9% IRA, 9 or 10% IRA on bigger chunks. So the 100,0001 settled at 9% and the $170,000. settled at 10%. And then a smaller one, $81,000 of it settled at 16% IRA. So like this is probably

going to get a bit. Like I just can't imagine taking all of this risk for a decade to make 10%. Well, and then I think I think the other thing we got to at least talk about here, even if you're, even if it sells at 40,000, you're getting 15% yield on cost. Okay, well, that's not that not terrible. Right. And if you can lever it up, that's better. But, you know, this is. is in essence running into the same problems that all the lenders are running into, which is they're loaning you money now and you're going to be paying it back and inflated dollars over the next 10 years. And with, if you believe inflation is 5 to 7 percent, like, that's a huge chop into your yield here. Now, you would hope maybe the payments go up a bit and Cherry Garcia is, you know, tracks,

tracks inflation, but who knows, right? Like, you don't know what's going to happen to the royalties here. Yeah. I mean, there's, you, Mills made a really good point. like who is your counterparty? Is your counterparty directly Unilever? In which case, I feel a little bit better. But if your counterparty is some sort of middleman here,

you've got embedded credit risk, which is also scary. I wonder why Unilever hasn't bought this. You know, like what Unilever could run the math and go, hey, we're paying all this money out to the estate and, you know, all of these, you know, sub derivative licensees.

Why don't they just take it out? like take out the master you know master royalty or they could they could scoop these up and go you know what we feel confident about the brand and the revenue and put this money back in their their pocket i maybe maybe it's just too small it's not even on their radar and it's just kind of something they laugh about at the office but uh i bet they don't even laugh about it i bet there's some accounting corner of the accounting department that doesn't even think about this and it's a as my grandfather probably used to say a bump on a pickle. Nobody even cares. There's some, there's some accountant in Raleigh, uh, who's in their back office stuff and he, he's,

you know, whatever. And he just deals with this and it's point 0.001% of the revenue from Cherry Garcia year, which is 0.1% of the total revenue for, for the entire Ben and Jerry's brand, which is 0.1% of the entire unilever portfolio. It's just noise. This type, any savings from this, I think just wouldn't be worth a headache. I've just seen this over and over with big companies. There's just, nobody's even thinking about this leak. They do say that Ben and Jerry's total revenue was $936 million from this product. And if this is, yes, yeah. Well, no, no, no, no, Ben and Jerry's total. So it says, according to Statista, Ben and Jerry's was the second top ranked ice cream brand in the U.S.

in 2021 with about 936 million worth of sales. So just the whole brand Veningerries. And then if this is one of their more popular flavors, I don't know what the distribution curve is like across their sales. But I mean, this, I don't think Cherry Garcia is generating $500 million. It's no chunky monkey. Let's just be real. Or fish food or, you know.

Half-baked, whatever you like. What's the Willie Nelson one? Yeah, yeah, yeah. Yeah, so this, I think this seems like one, if you're just looking for a lark and it seems like something good to talk about at parties and you have more money than you know what to do with and you love Chera Garcia, you got stoned once and ate a whole pint by yourself. And that's a special moment you want to memorialize. It's probably a good deal for you. But, man, it seems like there's better ways to go make some money, especially with what's going on real estate and the future there. and then just even private equities or public equities.

Like, I put tons of place I put money before I put it in this deal. So have you guys done much looking at investing in royalties or cash flow streams or things like this? I mean, I imagine there's a whole category of investments that kind of fit this mold with all kinds of different flavors, no pun intended. Have you guys ever looked at anything like that? Yeah. And for not to get us off topic, but we actually found this on royalty exchange.

Royalty Exchange.com, which is a place you can buy and sell these types of royalties that are there. So, you know, I've read a lot of the articles about him, Bill. Like you see things where like David Bowie's music catalog trades and, you know, I guess who was recently Elton John sold his future royalties. And then there's kind of the old classic, like, story that Michael Jackson actually made more money when he bought the Beatles catalog in the 80s than he did from his own, like publishing. Don't quote me on that, but it's some sort of story.

like that where like the biggest thing in his estate wasn't his music. It was actually the Beatles catalog that he had bought. So yeah, Royalty Exchange.com is where we found these. So what makes, what makes, I mean, I don't know if you guys know, what makes a royalty investment or participation in a stream of cash flows a good investment versus a bad investment? I mean, obviously, like there's the IRA, right? So obviously you would want a better IRA. But what are the other things? Like the IR 15% on this one, 15% investment isn't bad, but there are other reasons we hate it, right? What are the factors that make an investment in a stream of cash flows good or scary? Bill, you remember Ali Hamid at Capital King?

We talked about buying the royalty streams off of some YouTube, you know, different YouTube. Or I think he was actually providing financing to somebody who was, but it was, there was an aspect of it where they really targeted timelessness. So like how to tie a tie videos. are, you know, better than, you know, what did, you know, Adele wear last week to the gold globes kind of thing. And so the timeless nature of something, I think, is a big, how long and how significant is the tail is, I think, a big criteria, right? People are going to keep eating cherry. Well, that's sort of the thing that bummed me out about this is that they capped your upside upside after 10 years, you know, like, after 10 years. So it's really just you hold on for the 9th and 10th

payment and then see you later. You know, but if it's a perpetual royalty stream, you know, that's the type of thing that if it has staying power might be more interesting. Yeah, this is another one I just pulled up on Royalty Exchange. It's all the music from the award-winning Shrek film franchise. So, um, okay. Yeah, and this one's this one's perpetual. And the royalty exchange folks, actually to your point about the Lindy nis, L-I-N-D-Y,

nis of this stuff. They actually do this thing called dollar age, which is their custom, basically estimation of how long they think the royalties will continue at their current rate. And so here they think that if you were to buy this music from the award-winning Shrek film franchise,

it's listed for $900,000, so 11.5 times last 12 months revenue. So it did $78,000 last 12 months. They think that will go on for another 20 years. So basically after year 12, you'll get into profit.

at that point. But this one actually goes for the life of the rights. So this is permanent and perpetual. It's not like what we saw with the Cherry Garcia where it blanks after 10 years. I guess that's more interesting. Yeah, because I think that's, you know, I mean, on one hand, Bill, I think you have auctions are always going to be very efficient, you know, marketplaces and to some extent inefficient on the side of the buyers, right, because of human emotion and irrationality and stuff like that. So you have to hope that you can find some sort of asymmetry of knowledge here where, like, you know that based on, you know, you're feeling for the market or what you're seeing and happening in trends that Shrek is going to come back, right? And Shrek's going to be

a big deal. Or they're going to be doing another round of, you know, donkey and Shrek films. and this would become more valuable based on that. That's the only real way I think that you could really make great money in this is if you go back through and you have some sort of kind of knowledge to overcome kind of that efficiency of the auction marketplace setup. I had a client, a guy that I advised one time negotiate a licensing agreement. He had a patent on a product and somebody came to him and said, hey, we want to, you know, take this into, it was like paint related, like Sherman Williams

Lowe's Home Depot. And he was kind of cash strapped. So I said, well, you know, you can pay me X amount of dollars or I'll just take a piece of the royalty stream, you know, for for X amount of years or whatever. And it was fairly simple, it's fairly clean cut, like both for me, you know, as a participant, but also for him, it's a pretty simple agreement. You just have to, the doubles in the details, like big box sales versus, you know, retail sales and things like that, that you delineate e-commerce and things like that. But it was fairly, it's a fairly simple structure versus him trying to sell the intellectual property. And he's like, well, I mean, how much is the intellectual property worth right now? I don't know, not that much. But if they generate a lot of revenue, then, you know,

I want to, I want to be able to benefit off of it. And it's done, it's done pretty well. But that, that's my only personal experience with it. Here are the, I pulled up another one. Here are the film royalties from the classic comedy trading places with Dan Akroyd and Eddie Murphy. And if you're familiar with that movie, La Bohem, it's an opera. Anyway, I've seen it a lot. They sold, they sold for $140,000 and the royalties were $8,000 over the last 12 months.

So I got to do the math there, but it's really high. What is that like, 18 times? Yeah, that's not a good yield. Well, that's sort of illustrates, again, a gotcha property of all deals, which is that if it's cool, you're going to pay too much, right? Like, the royalty is for your favorite movie or for Cherry Garcia ice cream. Like, there's non-economic benefit to owning these things. So if you care only about the economic benefit, it's just not, doesn't work, right?

Because somebody is going to get non-economic benefit and outbid you. So you kind of, you almost don't want to own any asset that is sexy, fun, or cool. because by definition, if you own it, it means you outbid someone who is describing non-economic value. Totally. Well, I don't know if it's not universal. The royalties for Listering Mouthwash sold for $560,000, and the last 12 months earnings were $32,000. So it's like 7% yield. It's terrible.

Terrible. Yeah, I mean. Not economic value. I own all the royalties. to Listerine. I have a note for whoever bought this. It will not help your halitosis. Oh, I'm going to sign up, I'm going to sign up for the mailing list for these guys.

And there's more interesting ones show up. Yeah, share the interesting ones. And maybe we could find something fun. But I think you bring a, you bring a good point, Bill. Like there is, you know, basically you're, this level of securitization you can do amongst a lot of things. and you have to start to wonder what other things are out there that, you know, an aspiring entrepreneur or an enterprising entrepreneur could take and run with.

It makes some money around kind of securitizing this way. So I'm sure it's out there. And kudos to this marketplace because they're, you know, they're creating a marketplace, which is sucking a lot of the value out of this. If somebody just randomly came to and was like, hey, I need to monetize my royalty, you know, on Cherry Garcia, I don't think the markets, obviously, as efficient, And so you could probably extract more yield out of it. But something like this, it makes it public.

And there goes a lot of the value. There goes a lot of the yield. Yeah, they're taking a 1% closing fee on everything, it looks like. I tell you what I want to own. I want to own royalty exchange.com. Exactly. So when are those guys available? All right.

And here, this is my public email address, everybody can see it. I am a moron. Okay, yes, send me the details now. awesome all right well i think we're we've killed this one and this is this is an awesome one to dig into lots of corners of the universe to go find some yield and and make some money and so this was a good one to kind of make our toes in and go from there all right we'll see you guys next time