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 and some sweat equity on the front end and ongoing deal making and advice, would yield him $400,000+ a year every year.
Let’s see: $100,000 in once and $400,000+ out every year…
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.
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