Let me cut straight to the chase and answer that question up front.
No, but I’ll explain why some people might think so – and why they’re wrong.
But first, this article assumes you know who Marcus Lemonis is and took my advice last month to watch his show on CNBC called “The Profit.” (It’s on Tuesday nights at 10 PM.)
Lemonis takes his own money and buys into struggling businesses. He takes control of the business’ finances permanently and the operations long enough to get the business from intensive care (and failing) deep into the profit zone.
In the first three episodes, he’s one for three.
In all three cases, he massively improved the business, but two out of three times, his partners – to be blunt – screwed him.
So doesn’t that make him an idiot?
After all, isn’t it the sign of a business genius to never get screwed?
It might be – in Fantasyland – but in the real world you’re going to find over and over again that character and even basic sanity are in short supply.
You can do a lot of due diligence on people, but at the end of the day, the only reliable way to find out about someone is to get involved with them. Then you find out a lot – and fast.
Here’s one lesson from the show I recommend you bank right now: When people you’re doing things with start acting squirrely or don’t do what they say they’re going to do, confront them right away – not in an antagonistic way, but in a clear way.
You may be at fault for not being clear or the other person may be at fault for violating an agreement. It doesn’t matter. The point is to sort out expectations and draw a line in the sand quickly about what is and what is not acceptable.
You don’t need flakes in your life and the first time someone “flakes” is the first time to call them on it. Anything else it to invite and prolong misery.
Perspective on cash
Cash is king and if you’ve got it it should be treated that way, especially when a business is on its death legs.
Does it make sense to put $100,000 or more into a business before you really know your partners?
Yes…if you’ve got $2 billion in net worth as Lemonis does.
$100,000 is 0.005 % of $2 billion. (That’s the proportional equivalent of $50 to a person with $1 million.)
Does it make sense for you or me? Probably not. In fact, certainly not…but there’s a number that you can risk without risking your financial life and sanity.
Know that number and do not exceed it.
Futures traders say that never bet more than 5% of your position on any one idea. That’s not a bad place to start thinking about the issue, but keep in mind, if you’re wrong ten times in a row – and it can happen – it’s going to hurt and hurt a lot.
Is Lemonis a gambler?
In one sense, yes. He’s gambling that the business owner is honest, sane and competent.
In another sense, no because he is absolutely not gambling that the numbers of the business can be fixed.
The deals he picks have massive upsides and limited and predictable downsides.
If he’s wrong on the people, he loses a month of his time and $100,000 (the time is worth far more to him that the money.)
But if he’s right…
The popcorn deal
Let’s look at one deal.
The company manufactures and retails popcorn at amusement parks. They were grossing around $ 2 million a year in sales.
The owner claimed to be losing money (at least that’s what she told her mother who mortgaged her home to keep the business solvent.)
Lemonis’ deal was to put in $100,000 for a 50% share of profits and use his expertise to get the business to $10 million a year in sales rapidly and from there – who knows how high?
Not a bad offer for a failing company at death’s door.
Some forensic accounting revealed that instead of losing money, the company was spinning off $400,000 in cash (that turned out to be missing.) Weird, but not unheard of.
Being conservative, assume that $10 million in sales (4x the sales) would only double that amount from $400,000 to $800,000.
If so, then Lemonis’ one time investment of $100,000 a year and some sweat equity on the front end and ongoing deal making and advice, would yield him $400,000 a year (and up) ongoing.
Let’s see: $100,000 in and $400,ooo a year ongoing…
That’s a deal to jump at. That’s a risk/reward ratio that makes sense.
Unfortunately, the popcorn lady turned out to be a flake (or worse) and the front end investment of time and money went down a black hole.
But remember, this was chump change to Lemonis and the upside was well worth the risk. Realistic potentials like that don’t grow on trees.
What Lemonis is doing very, very right
Real money is made by owning businesses. Not by stock speculating or real estate flipping or multi-level marketing or any other number of fantasy businesses.
(Yes, there are people who can make things like this work, but they are few and far between and they are a lot more circumstantial than most “successful” practitioners would like to believe. Also, the financial graveyard is full of “successful” traders and real estate operators who leverage themselves to death.)
Business owning, if you’ve got the stomach and guts for it, is where it’s as a wealth building tool. Just ask Warren Buffet. The world’s most successful “investor” is in reality, they world’s most successful business collector.
Let someone else run it – the money is in the deal making
Owning businesses can be massively profitable. On the other hand, operating businesses much less so.
For one thing, it limits your opportunities. Operations and deal making just don’t mix. If you’re fixing the broken washing machine in your laundromat, it’s kind of hard to be out looking for new laundromats to buy.
And even if you had the super human energy to deal with the endless daily operational issues of a business and be out beating the bushes for new opportunities, you wouldn’t have much of a life – and, even if you could , that level of energy expenditure is not sustainable by anyone in the long run no matter how energetic.
Buy “way below wholesale”
The highest price you’ll ever pay for anything is to go into a high end retail story and pay the full price on the sales ticket.
No one does that voluntarily – even millionaires – unless they’re in a mad rush to get something.
Yet every year thousands of people with very limited means pay absolute top dollar for businesses and shares of businesses.
They’re intimidated, uninformed and/or over eager.
Of course the owner thinks his business is worth a fortune – or wants you to think that too so you’ll pay one.
Don’t do it.
Smalls business are VERY hard to sell.
The market is super thin. It’s not like a house where anyone of hundreds of families could happily own it. You may well be the only potential buyer on earth. That puts you, not the seller, in the driver seat. Get in it and stay in it. Your cash is king and their alternative might very well be zero. Keep that in mind at all times.
Don’t buy the shiny profitable business. The sellers, usually, aren’t going to give you any deals. Instead, buy broken business that can be fixed – easily and cheaply. The good news is that many can.
Most small businesses are horribly mismanaged and neglected. Some, in spite of that, are sitting on very real gold mines.
Sometimes all that’s needed are some very simple improvements to go from cash burning dog to a money machine. Just on the marketing side alone, I’ve participated in overnight transformations of businesses (and careers) dozens of times. It’s not rare.
Product improvement, personnel improvement (new people and/or better training and incentives), and operations improvement are other areas where a dead business can often be brought back to life very quickly with a relatively small investment.
That’s the zone that Lemonis is playing in. That’s where you want to play too if you’re buying a business or buying into one.
Look at LOTS of deal
This is an essential lesson of business and life.
Too many people stumble onto something, fall in love with it, and then tie their future to it without doing any meaningful research or exploring lots of alternatives.
Falling in love with a business is a disaster in the making.
If a business is not solidly in the black or has the potential to get there fast, pass and go on to something else and do it today.
I cannot tell you the number of people I’ve seen waste years and years of precious time, hoping that something that cannot and will not work is suddenly going to improve.
The only way to fall into this trap is to have a scarcity of opportunity – and the only way to have that is to be passive, wait for deals to come to you and not be out there every day talking to people and looking at other potentials.
I think the average person has no idea how many “deals” you need to look at to find a good one. Of course, you can be lucky, but if you assume 1 out of 100, you’ll be in safe territory.
“The mine is bigger than the gem.” People who find gems have systems for digging and sifting through lots and lots of dirt. And they work very hard at their systems whatever they are.
As a guy who has made his money on the bleeding edge of technology, I envy the people who are in “forever” businesses. In fact, I’ve transitioned from tech to businesses like that and I’m running about 50/50 right now.
Lemonis is in “forever” businesses that are also relatively simple to run (i.e. you can hire people to do the work while you find more deals.)
Look at his first three deals:
– A company that buys (and then re-sells) used cars from consumers
– A high end florist in a prime retail location in a prosperous US city
– A company that sells popcorn in amusement parks
Tell me, when are these businesses going to become “obsolete?”
When, short of a direct asteroid strike, are people going to: a) stop needing to sell their used cars fast without getting skinned by a traditional used car dealer, b) stop buying flowers for weddings, funerals, parties, gifts, and life in general and c) stop going to fun places and buying snacks.
The only company that’s vulnerable to the ravages of time is the florist. The city he’s in might go bad and its currently valuable location and market might be worth a whole lot less – but the company’s methods are portable and can be leveraged into dozens if not hundreds of outlets in more favorable locations long before that happens.
Is the business you’re going into “forever” or is it a pet rock…or a VHS rental store.
Finally, the biggest lesson of all
I don’t know Lemonis so I can’t tell whether I like him or not. How could I based on a television portrayal?
But here are two things I like about him a lot:
1. He’s not afraid of work
2. He’s not afraid of getting bloodied
Two of the three deals didn’t work. So what?
Too many people: a) wildly underestimate how much time and energy it takes to make things happen and b) put a small effort into one thing and then cry into their milk for the rest of their lives when it doesn’t work out just they way they hoped it would.
The world doesn’t work that way. Like the rest of humanity, you probably won’t “get lucky.” In the pursuit of a better life you’ll stub your toe, get knocked down, get rear ended at a stop light etc. more than once.
You can turn these events into tragic events that define your life (“The popcorn lady screwed me”) or you can get on to the next thing and the next thing and the next thing until you find the things that do work.
The mine is bigger than the gem.
If you want a “gem”, get out your shovel and pick and prepare to use you muscles (in business your mind) like you never used them before.
Oh, and learn to read a balance sheet. Lemonis clearly can – and so can Warren Buffet. Most business owners are allergic to them. Don’t be one of them. That’s where score is kept – but that’s another article for another day.
– Ken McCarthy
P.S. If you think you learned something useful here and want to learn more, 57 more lessons just like this here: Check this out.