The Anti-Marcus Lemonis Principle for Succeeding In Business
"The Profit" is a popular business show hosted by Marcus Lemonis on CNBC that follows the even more popular business show "Shark Tank." I happened on it a couple years ago when it first started and found it enjoyable enough to keep watching it. I like business shows, I like to see deals, and I'm always interested in seeing how other people evaluate deals. Lemonis judges businesses using his Principle of Three Ps: people, process, and product. This is a great principle, but it leaves out the details, which is where the devil hides, as they say. The principle sounds clever by condensing a business into a single, pithy phrase, but reality is much more complex. We can learn from Marcus Lemonis about how to invest in a business by avoiding the serious mistakes that he makes.
One mistake that Lemonis makes is that he rarely goes beyond asking a few questions. Sky divers and compulsive gamblers take this kind of risk, but not business people trying to make a profit. You need to do due diligence before you invest. You need to understand the business internals and externals. You do need to understand the people, process, and products, as Lemonis states, but you also need to understand the business financials, its intellectual property, the market and market opportunities, the competitors, and how these determine the growth potential. You don't get that information by simply asking a few questions and not cross-checking the answers. You don't ask someone how much money they make and then just write it down. You open the books. You verify the bank accounts. You bring in accountants. You check with suppliers and employees.
Let's take one example from the show. Fuel Food is a company that selects, prepares, and delivers fresh food and was featured on the June 16, 2015 episode. The company is owned and operated by Erik Leander, a former professional boxer with an 11-2 win-loss record. His nickname is "The Viking." From viewing its website, though not stated explicitly, you can gather that the company caters to extreme athletes, fitness models, and people who want to get into shape to look like extreme athletes and fitness models. Below are the things that Lemonis should have checked into very carefully before he handed a check for $300,000 to Leander.
Know the Business
Lemonis starts the episode by saying that he's going to visit Fuel Food, a company that "prepares and delivers well-balanced, healthy meals to the local area." But that's not the business. That's the business that Lemonis wants, but not the business that exists. Food Fuel delivers not locally but nationally (and by FedEx, even to local customers, which has got to be a red flag that the owner doesn't understand distribution costs or their effect on sales). Furthermore, there is nothing about Fuel Food that says "well-balanced, healthy meals." The website, the owner, the employees, the outfits, and even the decor of the Fuel Food offices scream out that this business targets people who want to lose weight and look sexy. It doesn't produce healthy meals as much as it produces what I would call "extreme weight loss meals."
Before you invest in a business, know the business-not the business you want it to be, but the business it is. If you're going to change the business, you need to ask yourself if it would be less costly to simply start a new business from scratch.
Know the Market
After Lemonis invests his money, he decides to hold a focus group to evaluate the product and its marketing message. This is in exactly the wrong order. You need to know the target customer before you invest; you need to understand the marketing message before you invest; and you need to determine whether the message is right for the market. There's no universal marketing message. You need to know your customer before you can determine whether it's the right message.
When Lemonis gets to the focus group, he sees the online marketing videos for the first time. He calls the marketing campaign "offensive," and I agree. They look like cheaply created, poorly written and acted, sexually suggestive commercials with scantily clad, buxom young woman wriggling and jiggling as they lust after the Fuel Food meals. There are two big problems here, and they're not necessarily with the videos. First, Lemonis has invested in a company but doesn't know anything about its marketing campaign, and he's shocked when he finally does learn. He says, "If I would have seen that before I came, I wouldn't come." Why hadn't he seen them?
Second, he is disturbed that these videos are offensive, particularly to middle-aged women, as echoed by the middle-aged women in the focus group. However, there is nothing in the company's description, website, or marketing campaign to indicate that middle-aged women comprise the target market, which actually appears to be mostly men as well as young, athletic women and models. If Lemonis wants to target a new market, he should discount the value of the company to compensate for needing to scrap all current marketing materials and create new ones. He would also need to understand who is addressing the market for healthy meals for middle-aged women because those will be his competitors. If that market is already well-covered by large, well-financed companies, then maybe the current niche market is a good one and potentially very profitable. Playboy magazine doesn't appeal to middle-aged woman, but it does pretty well within its niche.
Know the Product
When Lemonis tastes the meals, he doesn't like them. At the focus group, some people think the food is okay while others don't like it at all. Lemonis takes this in and says, "We got great feedback on things that are very easy to change, like improving the flavor through herbs and spices or fixing the presentation." So basically the product is bad, but he can fix it. If the product is bad, then why is he investing? Maybe it's because the distribution channel is efficient. But Lemonis goes on to say, "We also have to deal with the delivery service and the marketing plan." So the product, the distribution, and the marketing are all bad. Why is he investing? And more importantly, why did he find this out after he invested?
Know the People
Lemonis states that of the three Ps, the most important one is the people. On his website: "Out of the three, he mentions that People are the most important." So what about the people? Let's look first at the management, then at the workers, and then at the business partners.
Know the Managers
From what's shown on the broadcasts, at least some of the managers at the companies in which Lemonis invests are hard working. No company that is struggling can afford to keep bad performing people, especially at the management level. When it comes to judging managers, Lemonis does a good job. He gives them tasks, judges the outcomes, and, to his credit, fires poor performers. The big mistake, though, is that he does all this after he has invested in the company. Of course, you can't judge performance accurately until you have day-to-day experiences with the managers. Some people will appear good during interviews, but not in an actual work environment. That's why it's important to interview them all, ask tough questions about themselves (you may be surprised at how candid some people are about their weaknesses during a job interview) and ask others about them, before you invest! Continue to monitor management after you invest.
Know the Workers
At every company he visits, Lemonis decides the staff is great and hard working. Is that true? Lemonis rarely does more than give them a pep talk. He rarely criticizes an assembly line worker or a furniture painter or a food packager. You need to look at all the people. If your assembly line workers are slow or careless, your costs go up and your quality goes down. You will lose business. Unlike Lemonis, you need to look at all the workers, not just management. And you need to do it before you invest, not after. Workers may be trainable, but not managers. Small businesses don't have the resources to train managers, nor the time to deal with widespread inefficiencies until the manager comes up to speed. Let managers get training at business schools or large corporations while you hire the smartest people who are already competent. But workers can sometimes be trained, depending on the skills required. However, investing in a business that needs to train its workers, or hire new ones, should lower the value of the business.
Know Your Business Partners
You must especially know your partners. I've advised startup companies where one of the partners just wouldn't meet his commitment or worse, wouldn't even make a commitment. Often the other partners don't want to kick out another partner. I advise them to make a test. Assign each of them, including themselves, a difficult task to be done by a specific date. Get together at that date and compare results. If someone makes excuses from the beginning, they're not serious. If they make excuses at the end, give him a fixed amount of time to complete his task. Of course there are extenuating circumstances-sickness, death in the family, emergencies-but if a person can't get a task done in a certain amount of time then you can't work with him and he'll bring down the operation. A lot of people want to get rich, but very few want to put in the effort, deal with the stress, and risk the failure. This will determine whether the partner is really a partner or a dreamer. Kick out the dreamers early or your business will suffer a slow decline, and you with it.
In the case of Fuel Food, the owner of the company, Erik Leander, appears stubborn, dictatorial, intimidating, paranoid, and generally feared by his employees. So was Steve Jobs, but under his leadership Apple had a great product, great distribution, cult-like employees and customers, and terrific profit margins. Fuel Food seems to have none of these attributes. If Lemonis wants to run the company, as he demands when he invests, he needs to know that he can work with Leander. He spends little time with the man until after he gives him a check for $300,000. Don't do that! Ever! If you do nothing else, get to know your business partner before jumping into bed. Or off a ledge.
Know the Finances
Lemonis discovers late in the episode that Leander is only part owner of the business. The other owner, Paul Schumak, is under investigation by the U.S. Securities and Exchange Commission for running a Ponzi scheme. The 46 percent of Fuel Food that Schumak owns is controlled by a court-appointed receiver. Lemonis is "very relieved that [his] check didn't get cashed." You think? He just gave a $300,000 check to a guy whose business is in trouble and whose partner is being investigated for investment fraud by the U.S. government. Do due diligence! Lemonis is angry at Leander, but he should be angrier at himself. He failed to know what he was getting into.
This is a common theme in all the episodes: Lemonis never looks at the books until after he invests. And then he's always surprised that there's more debt than he was told, as the owner shrugs. This is, for lack of a more delicate phrasing, really, really, really stupid. Never invest in a business without checking the financials, and don't do business with someone who can't tell you all the outstanding financial or legal agreements. They're either too stupid or too dishonest to be your business partner. They will bring your business down, and possibly your entire career. Get the financials and legal agreements and have them checked by outside professionals.
Get Everything in Writing
Lemonis famously, and proudly, does business on a handshake. Never do business without a written agreement! This is unbelievably stupid. I just can't be more diplomatic about this. There are only two kinds of people who do business without a written agreement-those who are naive and those who are crooks. In either case, you don't want to be in business with them. Even Lemonis should know better by now. He recently settled a lawsuit with A. Stein Meat Products, one of the companies in which he invested on the March 4, 2014 episode. He offered them money based on the information they provided and promises they made. The whole thing was recorded on television, so there should be no disagreement, right? Wrong! Even watching the show, it's not clear. Lemonis puts in more money after finding out that their financials were different than what they told him. It's not clear how the transaction was edited for broadcast. There were supposedly other negotiations that were off camera. Who knows? Contracts are not to be derided but embraced. Any serious business person knows that a contract is required not to make money for lawyers, as is often implied, but to clarify all the major aspects of a deal. There should be little ambiguity about everyone's responsibilities in the deal.
Don't Give Money until You've Done Due Diligence
You shouldn't buy a car until you give it a test drive, and you shouldn't buy a house until you've hired a home inspector. Why would you buy into a business before you know anything about it? Maybe if you have billions of dollars and a hundred thousand is pocket change, but it's still a bad decision. Lemonis writes checks first and then discovers, in almost every case, that the "facts" he was given are exaggerated or just plain wrong. Then what? He often backs out, having lost thousands of dollars to a sinking company. He gave a $300,000 check to Erik Leander whose partner, he discovered later, is accused of running a Ponzi scheme, and then reminds Leander with a wagging finger not to cash it. That kind of money pays for a nice retirement in Mexico or Russia.
Don't Be Lemonis
How do you make a small fortune? You start with a large fortune and follow Marcus Lemonis' example. Instead, do the smart thing and understand a business before you invest. If the product stinks, the management is poor, the staff is demoralized, the delivery is lousy, the marketing is bad, and the financials don't look kosher, don't try to improve it by essentially creating a new business. If it's a business you desperately want to be in, take your money, hire the right people, create the right process, manufacture the right product, and start a new business that you own 100 percent. You'll be happier and have a much better chance at turning your money into a small fortune or possibly a large one.