This was a very good episode of The Profit where the producers embraced what the show is really supposed to be about: business.
Tony Rozier is the owner of Tonnie’s Minis Cupcake Bar but the store is a wreck when Marcus Lemonis arrives. They’ve got scaffolding in front of the store and the layout of the cupcakery is just as bad on the inside.
Behind the counter, we see operations are makeshift with unorganized supplies and a non-existent process.
All of that is bad but what’s worse is Tony doesn’t know how to correctly operate a business.
One problem is he doesn’t know the cost of his product. When Marcus asks him the cost of one cupcake, he ballparks $0.33. Later we find out it’s actually $0.53 at a minimum.
This is a precursor to the overarching problem: Tonnie’s Minis operates at a loss (only $500/day in sales) and he’s in debt to a lot of people. One of those people is his wife, Erenisse, at a cool $250,000. He also owes his mom $13,000 (I think). And his sister, Tamika, is basically working as manager for free. Oh yeah, and don’t forget the loan shark whose name was bleeped out of the show.
Tony’s answer to the vortex is to expand to another location.
Expansion is a common reflex of entrepreneurs who are running in the red. They think all they need to do is grow bigger to become profitable when that’s never the case.
When you operate your business at a loss over a substantial period of time, it means there is a fundamental problem. That problem could be any number of things. One simply being there isn’t a viable business.
When Tony mentions expansion, Marcus replies with great advice:
“The only time a business should be expanding is when it’s totally proven out it’s model.”
Check Writing Time
When Marcus sits down with Tony, Tamika, and Erenisse we find out the key numbers:
$250,000 revenue for the year
First, where is this $250k number coming from? I heard he was making $500 a day which is $182,500. If his revenues were higher and are now declining, bad sign.
Secondly, losing $76,000 on $250,000 is really bad. To try to cover that with what essentially amounts to personal loans is even worse.
But here’s the funny part.
Marcus offers him $100,000 for 20% and Tony counters with $600,000 for 33%.
Tony was winging it earlier on his cupcake costs and it looks like he ballparked his business valuation too. Got to figure this stuff out before you go on The Profit.
Here was Marcus’ reaction:
“You thought I was going to write you a check for $600,000. Everybody was going to get paid. And I was
going to have a 1/3 of the business. And I wasn’t going to tell you what you could or couldn’t do. Wrong show.”
Good line but bad choice to take a jab at Shark Tank. The sharks are 1,000x more prudent than Marcus; they’d never do half his deals and, if they did, it wouldn’t be at the pie in the sky valuations Marcus gives.
Not only that but Marcus gets taken to the cleaners over and over on The Profit (ie Sal from Artistic Stitch). Maybe he does it for TV and he’s really not as naive as he comes across but it’s his show and all I can go by is what airs.
In this instance, Marcus gave a $500,000 valuation for a company that lost $76,000 on $250,000 last year, somehow only makes $500/day, and is loaded with $134,000 in debt. It’s been in business 12 years.
I don’t know how to value a company that’s losing money but that seems high, especially seeing as how Tonnie’s Minis was headed towards the cemetery without a cash infusion.
After Tony balked at the initial offer, Tamika said, “You know what you having full control ends up being. So now see what sharing control ends up being.”
It was obvious but a lot of people don’t have the courage to tell a money-loser that. It needed to be said.
Marcus bumped his offer a little more to help with the loans and a deal was struck at $125k for 25%.
Same valuation but the additional capital was desperately needed. Some of the loans can be paid down and Marcus could begin renovation on the store.
I didn’t think there was enough between the two (I would have thought tearing the place down would have cost at least $75k) but Marcus wasn’t about to offer any more cash.
Rebuilding the Process
After the deal, Marcus takes Tony and Tamika to Melita Bakery, a commercial bakery that can produce cupcakes at $0.44, an 18% decrease in cost, which, going by the $250,000 revenue model, would mean an additional $45,000 a year.
At first I thought the price quote was inflated: a commercial baker can only cut costs by 18% when the previous process was a couple of people hand-making each batch of cupcakes?
But then I remembered they need to take a hefty slice for themselves too. I’m guessing they can get costs down to $0.25 but either way, it’s a win for Tony and Marcus.
When the focus shifts back to renovations, we find out the roof collapsed and that’s going to tack on another $30,000 to Marcus’ credit card bill. But that’s what happens in renovations, costs go up, not down.
I wonder how Marcus got compensated for this.
In the end, Tonnie’s Minis is a huge success. Marcus tells us they’re doing $1,500 a day minimum at $400 profit which comes to $140k in profit a year.
Emotional attachment is often killer in business. As an entrepreneur, you have to divorce your feelings from the process. You don’t matter. What you did before doesn’t matter. Whether you’re in charge doesn’t matter. All that matter is that the business prospers.
Tony had ego issues and he was portrayed as stubborn in the beginning of the show. Towards the second half of the show, he was cast as continually more open to Marcus’ winning ways.
This was a very good episode as far as The Profit goes. They focused less on the inflammatory stuff and more on the numbers and business operations.
Disclaimer: The commentary herein is opinion only and is based solely on the edited episode of The Profit shown on CNBC without all the facts.