It was great to see so many old friends and make a few new ones at the recent NAMA show in Las Vegas. One thing that struck me as interesting was to see a couple of booths hosted by old clients of ours who, after getting into coffee roasting at some point in the past decade, have decided to branch out and try selling to others. Heritage Coffee actually co-packs for several roasters in areas where they need support, or where the economics make sense, so we welcome our new potential clients to the fray.
My dad, Stuart Daw, published a tongue-in-cheek article many years ago; and although it does not involve getting into roasting, it certainly pertains to the unforeseen pitfalls involved in any young entrepreneur's journey from startup to successful business. Enjoy!
Why do many new, small operators, seem to last for a while, then sell out? Good question. Let's look at one possible scenario: Young man gets job selling for a coffee service. Good salesman, does good work, gets well paid, has nice car, nice home. Doesn't know squat about accounting -- thinks a balance sheet is something a butcher puts on a scale before the meat gets weighed; thinks gross profit minus his wage equals net profit. Thinks boss has the really good life.
Young man gets Napoleonic complex, thinks he'll go into business for himself. Boss trusted him; no non-compete agreement. Salesman has lots of customers who are "good friends" that he knows will buy from him. Arranges equipment leases through manufacturer. Gets 30-day credit line from coffee company.
Attempts to place machines on location, finds he doesn't have as many friends as he thought. Surprised he has to cut prices and furious that old boss keeps cutting right beside him. Annoyed that "friends" seem willing to stay with old boss, and that the ones that do change want upgraded coffee machines. Very expensive. Gets a few locations at low prices -- after all, he knows where all the high-volume accounts are. But he has to spend more and more time servicing accounts -- special deliveries, equipment repairs, something called collections. Competitors won't leave him alone -- he forgot other people were also in the business. Finds the wide range of allied products needed to compete with others are not that easy to buy -- takes time, too. Wife has to quit her job -- going to have a baby. Roof seems to be falling in.
Runs out of money. Can't understand why. After all, he had borrowed $5,000 from his father-in-law as the capital needed to run a business -- should have been enough. Goes to the bank. Gets bad vibes. Stunned to hear bank manager saying negative, hurtful things. Finally has to go through trauma of mortgaging his home.
Personality subtly changes. Not the nice man he used to be -- his mother tells him so. "What happened to my carefree little boy?" Doesn't sleep so well at night either. Looks tired, haggard. In old selling job had his work day down to four hours on the road, actually two hours of effective production. Now does 12 hours a day at least, even slugs it out on weekends. Finally gets business up to 250 machines. Decides to bail out.
What was missing in his plan? At the risk of being a bit simplistic, this is likely what happened. Assets are needed to support sales. In any business, some assets in one form or another are always there before a sale can take place. A listing of them is what we see on the left-hand side of that thing called a balance sheet.
In coffee service, one will find there is a fairly constant relationship between assets and sales, perhaps between 40¢ and 50¢ in assets for every annual sales dollar; e.g. $500,000 in assets for sales of $1 million. The exact ratio will be dictated primarily by average account size, how well receivables are collected, and the care with which equipment is handed out.
Now, what about the numbers on the right-hand side of the balance sheet? And why do there seem to be two basic categories there, while there's only one on the left side? Well, those assets on the left side didn't fall out of the blue. They had to be financed, either by money that the owner(s) injected into the business or by borrowing from others such as creditors, banks, relatives, leasing companies, etc. The former is known as equity, the latter, liabilities (debt), and the more of the former, the better.
REVENUE IS NOT ENOUGH
By the time the young man cited above got a few machines on location, the equity was negative and there was a lot of debt. At first, he and his wife had to be very frugal with the household money. But as sales grew, and even though he was stringing his suppliers out well beyond 30 days, they began spending more. In fact, they spent all the seemingly available cash from the business on personal consumption. After all, they had "sacrificed" so much in the early days. The bigger car they bought was nice for the young capitalists, too.
Equipment lease payments piled up. The balance sheet still balanced, but only through a "balancing act" involving a towering debt and still no equity (the father-in-law wants his money back some day, too, it seems). Breathing strength into an exhausted balance sheet through leaving some money there in the form of retained earnings was a foreign idea to the young man.
He begged at the bank, only to hear the manager mutter something about debt-to-equity ratios, and that his was terrible. And liquidity? What the heck was that? The bank told him it should be two to one, and pointed out that the young man's ratio of one to 10 just wouldn't cut it.
A mild recession hits. Average per-machine sales drop 15%, and the young man realizes he's in deep trouble. If he is lucky, a large coffee service operator will appear over the horizon waving his checkbook. But he may have to seek out a buyer, usually from a group of competitors who can afford to be laid back about his predicament. He finally says "to hell with it," and the business goes the way of all flesh, sold to another service.
This was the big "come and get it day" he dreamed would take place some time, but much later and for much more money. He and his wife calculated the extra hours he had worked compared to the old job, and the money made before and after he left that job. They found that by dividing the extra hours worked into the money gained by the sale, his per-hour "wage" was lower than when he worked for the old boss. Indeed, if he had stayed with and worked as hard for the old boss as he did for himself, he would be a well-to-do young man instead of a somewhat older, wiser one.
KEVIN DAW is president of Heritage Coffee Co. (London, ON, Canada), a leading private-label roaster serving the breaktime management industries in North America. He is in charge of coffee buying for Heritage. A 30-year veteran of the workplace service business, Daw has served as a commission coffee service salesman, a principal of a vending operation and president of a bottled water company. Since 1990, he has concentrated on coffee roasting. Active in industry affairs, Daw is a Specialty Coffee Association of America Certified Brewing Technician, a member of the National Beverage and Products Association Hall of Fame, a recipient of the National Automatic Merchandising Association Supplier of the Year Award and a NAMA Coffee Service Committee member.