Gathering Spot Faces-Off With Greenwood

A bombshell has dropped for the Atlanta business community and the Black community at-large. Ryan Wilson and T.K. Petersen, co-founders of private members club The Gathering Spot – TGS, are suing Greenwood, claiming that they are owed approximately $7.5 million in connection with an acquisition that closed in April of 2022. Greenwood, has denied their complaints, and in turn responded that the founders intentionally misrepresented TGS’ financial statements, to the tune of over $28 million.

The list of former owners of TGS who make up the sellers group represented in the complaint, include several prominent names in Atlanta.

At the same time, the founders of Greenwood, which include rapper Killer Mike as well as Former Mayor Andrew Young, are well-respected figures in Atlanta, making the dispute that much more messy.

Atlanta’s Deal of the Year

Named as one of the Atlanta Business Chronicle’s Deal of the Year, Greenwood’s acquisition of TGS in 2022 was celebrated as a rare example of Black-owned businesses coming together for collective growth.

Earlier this year in May, I spoke with CEO Ryan Glover about the company’s “buy the block” growth plan, interested to understand how and why the start-up was executing what appeared to be a Black-business roll-up strategy.

Greenwood, which was founded in 2020, has raised a total of $88 million from big names like, Citi Ventures, Truist Ventures, Wells Fargo, Bank of America and PNC, and offers Mastercard-branded debit cards, savings accounts and other services to customers, and markets itself as a digital platform for Black and Latino individuals and business owners.

Following the acquisition of TGS – a 12,000 member private club with locations in Atlanta, Washington DC and Los Angeles, Greenwood acquired Valance – a career development and job recruiting platform for Black professionals; A3C, a music, tech and cultural conference in Atlanta with over 30,000 attendees, 1,000 artists and 300 speakers; and Kinly – a neobank with over 300,000 users, focused on the Black community.

Glover shared, “our mission to close the racial wealth gap directly informs our M&A strategy….We pay close attention to companies that share in our mission and commitment to community building and wealth creation for Black and brown businesses. We see our acquisitions less as purchases and more as partnership opportunities that enable us to grow our reach and ecosystem, which will help us create an even larger impact.”

Unfortunately, as the tragedy of the Greenwood-TGS transaction unfolds, the reality appears to be very different from the rhetoric.

The Tip of the Iceberg: Mike is Hired, T.K. is Fired

On Thursday July 13th, an email was sent out to the membership of TGS, announcing that Mike McCloskey had joined the Greenwood team as Chief Financial Officer and that “all local club general managers [across Atlanta, D.C. and Los Angeles] will report directly to him.”

Up to this point, most in the TGS community understood that T.K. Petersen was CFO (he is noted on the Company website as “CFO +Co-Founder” of The Gathering Spot) and so it appeared that he was being replaced by a white man – which goes against the “for us by us” ethos at the members club.

On July 15th, TGS took to Instagram in a series of posts, titled a “Message to the Community”, to clean things up. TGS addressed Petersen’s departure, explaining that while T.K. was in fact leaving at the end of the month, he was serving as Chief Operating Officer of TGS, whereas Mike was hired as Chief Financial Officer of Greenwood. TGS further emphasized their commitment to diversity, citing statistics about the number of Blacks and minorities in leadership positions.

Members of the community quickly chimed in, expressing doubts about the genuineness of the message and vowing to cancel their memberships due to the treatment of the TGS founders, and the company’s shift away from its initial values and focus on Black ownership and Black leaders.

A Messy Lawsuit: Pay Me What You Owe Me

Changes in management are a necessary though often difficult aspect of the M&A integration process, but as it turns out, the departure of Petersen is evidence of a much bigger sore that has been secretly festering for months, at Greenwood and TGS. Despite the recent drama and controversy playing out on social media, the real issue – is less about race, and more about money.

According to court records, on February 27, 2023, Wilson, Petersen and the former owners of TGS filed a lawsuit against Greenwood, claiming that millions of dollars were owed but never paid out post-merger.

Greenwood’s principal argument in response, has been that TGS’ financial statements do not show the revenue or income that Greenwood was promised, and moreover, the financial statements produced by Petersen were incorrect and misleading, as they used a cash-based accounting methodology versus the accrual or GAAP accounting methodology required per the purchase agreement.

In its counterclaim, Greenwood states “that at no time prior to April 19, 2022 did Wilson or Petersen notify Greenwood that its financial information or calculations…were based on cash-basis accounting” and that the “financial materials provided to Greenwood materially misrepresented TGS’s financial status and outlook.”

A Brief Lesson in M&A: A Little Cash Now, More Later

Most mergers involve multiple components of compensation to the sellers – not just a lump sum cash payment. So before jumping into the specifics of the lawsuit, I’d like to offer an explanation of some common terms when it comes down to understanding the purchase price in a typical M&A deal:

• Base Cash Consideration is cash paid up front, but subject to a post-closing adjustment or “true up”, based on buyer’s review of the financials post-acquisition. The components of the Base Consideration typically include cash, debt (i.e., loans, promissory notes), seller transaction expenses (ie, legal, accounting and banker fees) and importantly working capital (i.e., assets minus liabilities).
• Closing Statement is delivered by the buyer to the seller, 60 or 90 days after the deal closes, reflecting any adjustments to the Base Cash Consideration. Any major adjustments are often disputed and therefore, the parties will carefully negotiate an estimated closing statement delivered prior to closing, outlining the exact components, assumptions and accounting rules that will govern the final closing statement.
• Rollover Stock is when equity holders in the seller “roll” a portion of their ownership stake over into the buyer, instead of receiving cash proceeds. This kind of arrangement is attractive to a buyer because it reduces their cash outlay and helps align investor and management team incentives, as the latter will continue to have “skin in the game” post-acquisition.
• Earn-Out Payments are when the buyer factors in any risks or concerns in the deal, by placing contingencies on the seller receiving the full purchase price. The contingencies are usually very carefully negotiated performance metrics that the seller must reach over a period of one to three years.
• Escrows or Holdbacks are where a bucket of money is set aside from the purchase price and placed into a third-party escrow account (or alternatively, retained by buyer as a holdback), to cover any financial risk that buyer may face like taxes, litigation or capitalization or ownership structure. Once the risks have been overcome, and after a predetermined period of time (usually eighteen months), the monies are released.

Sellers’ Claims: You Owe Us $7.5 million

Based on a review of the court documents (the actual purchase agreement has not been publicly disclosed), the purchase price paid by Greenwood to TGS was structured in three parts:

• Base Cash Consideration, subject to certain set-offs, adjustments and holdbacks;
• Rollover Stock in Greenwood; and
• Earn-Out Payment to be paid over time based on meeting certain revenue milestones

Wilson, Petersen and the former owners of TGS – collectively, the TGS Sellers – are alleging that Greenwood breached their agreement by failing to deliver the closing statement when it was due – by February 14, 2023 and then, failed to pay an element of the Base Cash Consideration. Specifically, Plaintiffs allege that the Los Angeles location met the expected net income outlined in the purchase agreement (no less than $0) and so they are owed $900,000 – the “Los Angeles Operating Reserve Amount.”

Earn-Out Payment

According to court documents, the parties agreed to an Earn-Out Payment totaling $5 million, which was to be paid out to the TGS Sellers before March 31, 2023, if TGS’ total revenue during the 2022 calendar year was equal to or greater than $15 million. Plaintiffs allege that they are owed the full Earn-Out Payment of $5 million, because they achieved the agreed-upon $15 million revenue target during the period from January 1 through December 31, 2022.

Holdback Payment

Finally, TGS Sellers claim that they are owed another final component of the Base Consideration – a “Holdback Amount” of approximately $1.65 million.

Without having access to the purchase agreement, it is not clear whether there was a specific period of time the parties agreed to, after which the Holdback Amount would need to be released. However, assuming the typical time period for an escrow or holdback of eighteen months, any demands for release of the Holdback are likely premature.

Greenwood’s Counterclaims: You Owe Us Over $28 million

As mentioned above, Greenwood is not only disputing the TGS Sellers’ claims, it is counter-suing for payments owed to it, alleging TGS materially misrepresented its financial statements leading to unforeseen obligations exceeding $28 million.

Los Angeles Operating Reserve

First, Greenwood claims that it did not have access to TGS’s financial information, including TGS’s bank accounts, credit card accounts, payroll, and point-of-sale system, in order to prepare the closing statement by the deadline of February 14, 2023. Second, Greenwood alleges that “the financial statements provided by Petersen related to the Los Angeles location’s performance were materially misleading and inaccurately inflated the Los Angeles location’s performance” because Petersen used a cash accounting methodology versus the agreed-upon accrual account methodology. And that Wilson and Petersen “misallocated corporate expenses of TGS and the expenses of TGS’s Los Angeles location in order to inflate the income and profitability of the TGS Los Angeles location in order to benefit themselves.” Greenwood claims that when accurately accounted for according to GAAP, as required by the contract, the TGS Los Angeles location actually performed at a significant loss of at least $2.4 million.

Unexpected Net Losses, Debt & Transaction Expenses

One of Greenwood’s jaw-dropping counter-claims is that TGS’s financial misstatements, and incorrect accounting methodologies, resulted in $27.7 million of unexpected debt on the books, that was not taken into account when valuing the businesses and pricing the deal. According to court documents, only approximately $2 million of debt was actually factored into the Base Cash Consideration and the ultimate purchase price.

In addition, Greenwood alleges that on the day of closing, Wilson and Petersen paid out approximately $494,000 in employee bonuses, and in June 2022, authorized $70,000 in transaction-related legal expenses to their law firm. In other words, an additional $564,000 should have been factored into the $150,000 of “Transaction Expenses” that the parties actually agreed to – and deducted from the Base Cash Consideration.

As added insight, seller’s legal fees associated with the transaction are always considered “Transaction Expenses”. However, most businesses offer “change of control” payments and “stay bonuses”’ to key personnel, to reward hard work for getting the company to an exit, and also to incentivize retention, and it isn’t necessarily the seller who bears the cost for these payments. It is a point of negotiation. Nonetheless, the dollar amounts of the bonus payments (and any agreements relating to the payments) should have been disclosed to the buyer in the seller’s disclosure schedule attached to the purchase agreement.

Finally, Greenwood claims that the financials provided by Petersen prior to closing, projected a profit of over $1 million for all of TGS for 2022, however, “Wilson’s and Petersen’s management of TGS led to expenses that far exceeded their pre-acquisition budget and projections,” leading to a significant loss in net income rather than profit.

Clawing Back the Earn-Out, Holdback and Stock Consideration

Given its liabilities of over $28 million, stemming from the unexpected debts, additional Transaction Expenses, and net losses, Greenwood alleges that the purchase agreement entitles it to offset the money owed to it, by withholding the $5 million Earn Out Payment, retaining the $1.65 million Holdback Amount and clawing back a portion of TGS Sellers’ Rollover Stock in Greenwood. 😳 Talk about going scorched earth!

Summary Judgment: This is Bad for Business

In this game of “he said, he said,” who is right?

Unfortunately, without having the full picture – including the purchase agreement, disclosure schedules, and complete court documents (several records have been filed under seal), it’s impossible to draw a conclusion as to which side is correct.

But, based on the information publicly disclosed, it is obvious that both sides rushed the deal – by failing to align on important details that go to the heart of the transaction – the valuation of the business. And, it was sloppy to leave so much ambiguity in the contract, leaving the door open for opportunistic behavior post-closing.

I wonder, whether Greenwood obtained a Quality of Earnings (QofE) report from a third-party accounting firm during due diligence? This is standard operating procedure in M&A transactions and would have addressed the accounting issues that were raised only after the closing.

Similarly, did Wilson, Petersen and the other TGS Sellers not read the terms of the purchase agreement, which specified that GAAP accounting standards were required? A close read would have necessitated an exception to certain language in the purchase agreement be made, since TGS claims it has always used cash-based accounting.

Either way, as to the question of what can be done to clean up the mess, the parties should put aside ego and agree on a settlement, out of the public’s prying eyes. Legal disputes are emotional, contentious and bring out the worst in people – the opposite of what TGS and Greenwood set out to do when they decided to merge.

And most importantly, the dispute is bad for business.

Atlanta-based venture capitalist Shila Burney, who is a founding member of TGS shared her thoughts on LinkedIn. “As a person who built Zane [Ventures] from the ground up at the club, this is not how we foresaw the future of a place we called ‘TGS’…Everything about this is hurtful, sad and most of all unbelievable.”

Moreover, founders talk – and Greenwood’s reputation for how it treats its acquired companies is spreading like wildfire. As such, the dirty laundry of this transaction continuing to be aired for mass consumption, will most certainly hamper any future acquisitions should Greenwood wish to continue its roll-up strategy.

And, thanks to the Rollover Stock component of the purchase price (likely applicable for all of Greenwood’s acquisitions to date), if Greenwood struggles financially, all of the founders and businesses that it has acquired will suffer as well.

When I interviewed Greenwood’s CEO earlier this year, he said that the shared ethos for all parties throughout the acquisition process is best summarized by the often cited African proverb, “If you want to go fast, go alone, but if you want to go far, go together.”

I hope all parties involved in this lawsuit can remember this powerful message without letting money stand in the way of the mission.