Marcus Explores Growing West End Coffee Company
Despite the fact that this was another walk out by Marcus it offers some valuable business lessons, including one big one.
West End Coffee Company is roasting operation located in Greenville SC, serving local restaurants and specialty shops. The company was purchased by the two owners, John Brown and Becky Schramm in 2012 for $499K. We are not told how long it had been in existence prior to the purchase.
On paper the business is doing reasonably well. It wholesaled “just over 100K pounds” of coffee in the previous year for total revenues of $840K. The gross margin that Marcus is always concerned about is a healthy 50%. There’s about $100K owed to the bank from the acquisition back in 2012. The attractive two story brick building with 3500 s.f. that West End is in leases for $2750 per month.
John and Becky were in a romantic relationship that came to an ugly end a year after they purchased the business. At this point their relationship can only be described as toxic. Luckily for them the five employees appear competent and motivated. It’s clear immediately that John and Becky are the two biggest liabilities for the company.
It was never made clear what either partner was contributing to the business. Was one handling sales and the other operations? We don’t know. Even they didn’t know when Marcus asked. I got the sense that John was trying to run the business in the brief interludes when Becky wasn’t pissing him off, and that she saw her role as looking busy in order to justify a managerial title.
Complicating things further they have an odd business arrangement with Becky holding the voting power to fire John despite the fact that he put up far more of the $499K needed to buy the business than she did. Specifically, he owns 82% of the shares and she only 18%. John deeply resents Becky for having this power over him. You have to wonder why she doesn’t just fire him. The likely answer is that he’s the only one with the managerial know-how and skills to run the show.
When Marcus takes them to do a sales presentation to a local restaurant chain it becomes clear that Becky shouldn’t be handling accounts. And what’s with both of them wearing beach wear to the meeting?!
The company’s operations side appears to be functioning well despite the problems at the top. This is attributable in large part to the five employees who are behaving like adults. The only big issue is that the roasting equipment is operating at only 33% of capacity. That’s a lot of lost revenue. The most likely cause of this situation is that John and Becky are too consumed by mad squabbles to bring in new accounts.
Marcus sees the potential if they can start selling as much coffee as they can make.
Those of us in television land will have to trust Marcus that the product is good.
Marcus’s Growth Strategy
Marcus top priority is to get the utilization of the plant’s capacity as close to 100% as possible. This means bringing in more accounts. He also wants to dump the middleman distributor and sell direct to accounts. He also spots an opportunity to implement a proper inventory management system and dump non-selling stock.
If he can gear up both production and sales, he sees revenue jumping from $854K to $3 million with a 50% gross profit.
Marcus offers $200K for 51% of the company. Half will be used to pay off the bank debt and half will go into working capital. This then assigns a valuation of only $400K on the company which is rather low. Marcus justifies it by explaining that he fears John and Becky might sink the company with their incessant feuding.
He also demands that Becky to give up her right to fire John to which she agrees. She then dragged her heels on the paperwork.
The episode ends with Marcus concluding that the company is too much of a train wreck due to the animosity between the owners and walking out. My only question is why did it take so long?
-The first lesson here is never invest in a company where the owners are at war. Not only is there the risk of one or both of them torpedoing the company but it’s also just extremely unpleasant to be in such a situation.
-Never go into business with a close friend or, even worse, a romantic partner. What was John thinking? He could have found the $77K she invested elsewhere. (There should have been some seller financing that could have covered this amount.)
-John found himself in a situation where his minority partner could fire him either because he didn’t use a lawyer or because he used a very cheap one. Always pay for a good lawyer to review the paperwork when doing anything significant like buying or selling a business or adding a partner.
-I disagree with Marcus about John talking to a business broker. He most likely felt that the deal was going to unravel and was therefore developing a “plan B” in case Marcus bailed. And Marcus did bail.
The Big Lesson
Now here’s the big lesson that I promised at the start. This will be especially relevant to anyone looking at investing in, partnering with, or consulting to a small business.
There’s a huge difference between an entrepreneur and a small business owner. The former wants to build his or her business as big as possible in as short a time span as possible. The latter typically only wants to stay at a comfortable level even though they may not be conscious of it. I got into an argument over this a few years ago with a business prof who was claiming that the two terms pointed to the same animal. No they don’t. The vast majority of small business owners are actually Be Your own Bossers. What this means is that their primary goal in life is to be their own boss and therefore in control of their income. They then build their business up into the $500k to $1 million range and stay there. To get bigger would mean having to hire managers and delegating responsibility to them. This subconsciously scares the heck out of Be Your own Bossers because it means losing some of the precious control they hold onto like Gollum. They are control freaks. They will talk about wanting to grow but like John and Becky will sabotage any attempts to actually do so. Recall how Becky didn’t do a thing with Marcus’s new inventory system and then rationalized it away with “It’s just the way we’ve always done it.” John in the meantime didn’t follow up with new accounts to get P.O.s. Those are dead giveaways that you are dealing with a lost cause. You can invest in these companies, sign up as a partner, or consult to them but don’t expect them to ever do anything that might actually grow the business and loosen their death grip over it.
If you want to do anything with small businesses, go with the ones that have surpassed a million in sales and therefore have a manager or two to help the owner run things.
West End Coffee Company looks like a great little business with plenty of growth potential if only it could have people in charge who wanted to actually grow it. John and Becky are not these people. I will add that the company might have a chance if Becky removes herself from the picture. She could agree to become a silent partner in order to give John a stress-free environment from which to calm down, think straight, and implement a growth plan.
But I won’t hold my breath.