Poor, poor, pitiful me. - Linda Ronstadt
We finally got a really good episode from a business lessons perspective! I really liked this one, folks, even though it was infuriating in some ways. (More on that later.)
Sweet Pete's is a Jacksonville, Florida based candy artisan owned and operated by married couple, Allison and Pete Behringer.
Watch Sweet Pete's here.
It's the best episode of the year so far because it has everything: a great little business with strong potential for growth, passionate owners who you want to see succeed, and, unfortunately, a troublesome hanger-oner. You simply can't cram more drama than that into 43 minutes. Watching the episode you really get the sense that this thing is ready to explode from potential. All that's been holding the partners back is a lack of resources and a ball & chain around their ankles.
Let's do a quick Marcus Lemonis-style assessment:
As I have never had much of a sweet tooth, I will take it on faith that Sweet Pete's candies are truly top notch. There's no reason not to. Besides there's the tip off that almost anything that's designed and created by someone as passionate as Pete is very likely to be great stuff. He definitely comes across as a mad scientist type ... but in a good kid friendly way. I also have to give props to any man who can wear his hair that way. I have been fortunate enough to know a few Petes in my day (myself included). They are all good people and often just big kids who absolutely love what they do. On top of that Allison makes a strong business partner.
Go team, go!
The process involved in delivering the product to market has two major problems. First, there is the bad location in a house in a sleepy residential neighborhood. The area looks pleasant but as one would expect there is no foot traffic. No doubt all of you have heard that the three keys to success in retail are location, location, location. It's pretty much true especially for impulse goods like candies.
The second problem is that the interior of the old house simply cannot accommodate the commercial style kitchen and work flow space required for higher production volumes. Sweet Pete's desperately needs a real commercial space if it's to ramp up production and follow Marcus's growth strategy.
It's also very important to understand that house is a personal investment for their AWOL partner Dane Baird and not an asset owned by the candy business itself. In other words, Dane was clever enough to spot a good buy and then find a tenant who could be locked into a multi-year lease. It's odd when you think about. If you're also a 50% shareholder in the tenant company why lock it in for that long? Maybe Dane never truly believed and was more interested in having someone cover his mortgage payments? Partners are expected to make sacrifices on behalf of their company early on when cash is scarce. It's hard to see how Dane is anything but a greedy landlord here.
Now here we come to the biggest problem of all for the enterprise at this stage. People. But before we get into the specifics I just want to clarify that the two owners and their staff come across like a great crew. When the big order came in it was all hands on deck with everyone being willing to work round the clock to fill it. (Well, all with one notable exception.) The scene reminded me of some past experiences with startups where we had to call friends and family up to and including third cousins to finish the order on time. Few events build a genuine and lasting team spirit like big orders that can make or break a small company.
On the downside, we have a partner who really should not be there anymore. Indeed he's hardly ever seen. Serious partnership problems always arise when someone grossly overestimates their contribution and value to a venture. In my experience, certain people are incapable of seeing the reality in a situation due to a combination of huge ego and a sense of entitlement, all wrapped up in a victim mentality. In their minds, they should get all the credit yet the world has turned against them and wants to steal their just reward. That's when you see the lower lip start to quiver as a big pout sets in.
One of the really infuriating things about the story is that Dane didn't want Pete and Allison to be paid for any of the long hours they put into running the business. Then when he was confronted about why he was hardly ever seen at the shop he mumbled something about not being able to justify working for nothing. (facepalm)
As they say in the South, why bless his little heart.
It didn't take long for Marcus to correctly assess the situation and come up with the right offer. He would invest $750K into the new Sweet Pete's for a 50/50 split in ownership with Pete and Allison. Dane who owned 50% before was left out in the bitter cold. No surprise there. When he inquired about equity, Marcus told him that he would have to work for it and prove that he was worth it. His compensation was to be limited to commissions on any sales he managed to generate. On top of that if he actually performed he would be eligible to pick up a 5% equity stake in the company each year for the next three years to a maximum of 15%.
My hunch is that Marcus structured it this way because he hoped that Dane would quickly disappear if made accountable to the business. As I keep saying, when it comes to people what you see is what you get. Don't count on anyone changing. In psychology there's a school of thought that one's basic personality is cooked by age 5 and readily assessable by the teens. So if you ever need to get rid of a "skater" just assign a task to them that they are solely responsible for and in which the results are quantifiable. A commission sales job is ideal for this tactic. Oddly enough Dane agreed to this new deal.
Shortly afterwards, when a big order came in and it was time for all hands on deck, Dane had a huge opportunity to disprove the general feeling among staff that he was little more than deadweight. Instead he blew it by telling everyone after an hour or so that he was going home to pout over his exclusion from free equity. However, I doubt that anyone was surprised to see him exit stage left so quickly. I saw it coming as soon as everyone was asked to help.
So why was Dane there at all? Well, he bought the building as a personal investment, put a grand total of $2,000 into Sweet Pete's for the starting inventory, and claimed to have put 5000 hours of personal work into it. (No giggling, please!) Let's see, 5000 hrs / 40 hours = 125 full weeks. That's roughly 2 and a half years of full time work since 2010. If this was anywhere near plausible, I rather doubt that Pete and Allison and the staff would have had any problems acknowledging his contributions despite the personality issues. He's also received a monthly lease payment from the company of $1400 since day one. On top of all that he finally tells Marcus that he is willing to go away for $150K.
Is your blood starting to boil?
- Although a lot of details are missing due to time constraints, it appears that Sweet Pete's is a corporation or LLC which owns the recipes. As a result it's going to be a bit more difficult to dislodge Dane but our hero came up with a legal way to do it. It would be done by issuing more shares in order to dilute Dane down to almost nothing. As I said in the Skullduggery post it's not that difficult for the majority shareholders to divert all earnings to themselves so that a minority shareholder receives nothing.
- If you are going to appear on The Profit or anywhere on television, please "mind your optics." This means be conscious of how you come across to the public. There are two types of jerks in this world. There are those who can instantly morph into the sweetest of angels as soon as a camera or any recording device is rolling and then are those who can't adjust their personalities even for a brief period when it's really critically important to do so. The Worldwide Trailers episode has another example of the latter type.
- Based on the information available to viewers, I would have handled the situation differently than Marcus did. I would have met with Dane in a public space, such a restaurant, and explained as tactfully as possible that he didn't fit in and then pulled out a certified check for $10K and a simple one page in plain English agreement stating that he was relinquishing all claims on the business and agreeing to never be heard from again in exchange for the money. I would have also explained that if he didn't accept the offer he would most likely have to lawyer up and face substantial legal fees. There's something about a certified check sitting on the table that triggers the desired effect in these situations--especially when the alternative is a long legal battle.
As Kenny Rogers reminded us, "sometimes you gotta know when to fold them."
- Finally, it's really important to have a good lawyer advising you in this type of situation because one wrong move can result in painful and expensive consequences.
It Was Deja Vu All Over Again
Let me share a final reason as to why this particular episode was so infuriating. It reminds me of a former friend and prospective business partner. Let's call him "Enrique." Oddly enough, Enrique bears an uncanny physical resemblance to Dane: same look, same attitude, same mannerisms, and same pout whenever he doesn't get his way. Enrique also had this solipsistic world view in which everyone is merely a supporting actor in The Amazing Enrique Show. For example, if a friend attempted to confide about having tested positive for a terminal illness, he would sit there impatiently waiting for them to pause in order to draw breath and then immediately hijack the conversation with a tale about how one evening back in 1984 he had stubbed his big toe on a coffee table leg. You could see his eyes getting watery as a tide of self-pity washed over him from the mere recounting. Everything always had to be about Enrique. He was particularly obnoxious in restaurants because he would joke loudly and then bray like a mule after each one as a way of signalling the other patrons that they too should be laughing at his wit. I once asked him why he turned up the volume to 11 in restaurants and he explained that it was to let everyone know that his table had the funnest group. If he didn't get his way or all the credit for a job well done, a wounded rabbit look would appear on his face followed by a pout that a 5 year old would find ridiculous.
Enrique chased me for years with business ideas and proposals. Each one started off with grandiose promises and commitments as to what he would do but rarely did he follow through on anything after the first week. When confronted over these failings, the response was always along the lines of "You don't understand how much time I have put into this so far. You don't appreciate me." Then the pout would set in. Nothing was ever his fault. It was a frustrating relationship which I finally ended a few years ago. Beware of people who want all the credit but never any of the blame for group projects.
So watching the episode gave me an eerie sense of deja vu.
The point here is be very careful about who you partner up with. Test them first for as long as possible before awarding any equity. Avoid narcissists at all costs. Avoid passive-aggressives. If you do take on a partner make sure that he or she has clearly defined roles and that there is a way to measure their actual performance and contribution on a timely basis. None of this "I put 50K hours into it" nonsense is acceptable.
Best of luck to Allison, Pete, and Marcus with this venture. It reminds me of Mr. Green Tea.
Click the above link to go to Sweet Pete's.
Could you be the next Marcus?