To start this business, Sam had to invest a great deal of time and money. Sam had to pay the franchise fee to start the business. Sam also had to buy inventory for the new store. Sam had to sign a long-term lease and invest more money into the fixtures for the new location. Sam also had to pay for utilities and insurance for the new business, too.
Long story short, Sam put a great deal of work and money into this new small business. Every small business owner does.
When the doors to the new business opened, Sam was very excited. There was a twinkle in Sam’s eyes and a bounce in Sam’s step! Life was fantastic.
Fast forward to today, 10 months later.
The business is doing very well with many happy customers! There are several awesome reviews for the business online! The business now has many part-time employees! Yay!
On the surface, everything looks fantastic. Except…
Sam seems to be miserable. There is no longer a twinkle in Sam’s eyes. The bounce in Sam’s step is also gone. Sam rarely smiles and doesn’t appear to be very happy anymore.
Sam’s store is open 6 days a week, Tuesday through Sunday. Sam’s store hours vary from 11 am to 6/8 pm throughout the week. Sam works a minimum of 50 hours a week while the store is open. This doesn’t even include the administrative hours Sam works to handle marketing, bookkeeping, payroll, taxes, and everything else outside of the normal store hours. Sam has to be at the store most of the time to make sure everything runs smoothly. This means Sam hasn’t been on vacation since starting this business.
On top of this, Sam has children. Sam has missed many kid activities and sporting events because of the store. Sam is only able to have dinner with the family on Mondays when the store is closed.
While reading this far, you might be thinking that Sam should just hire a manager to manage the store. This manager will give Sam more freedom and allow Sam to actually have a life.
Makes sense, right?
Well, the business doesn’t generate enough revenue for Sam to afford a manager. A manager’s salary would put the business in a negative cashflow situation. Sam hasn’t recovered the money invested into the business yet and a negative cashflow would increase the amount invested into the business reducing the return on investment further.
Sam is forced to manage this business, because the business can’t afford a manager.
Sam is trapped.
Sam is trapped because the business generates enough revenue to cover the monthly expenses, but not much more. Sam has a great deal of time and money invested into this business and the only possible option to recover this investment is to continue managing the business.
The problem is Sam’s business will never be very profitable. There are inherent limitations in Sam’s business, which limit the profitability of the business. A few of these limitations are:
1. Local business vs. national business. Sam’s customers must come into the store. This means Sam cannot sell nationally.
2. The highest priced product Sam sells is probably around $100. You have to sell a lot of $100 products to generate significant profit.
3. There is no automatic recurring revenue in the business. The business must sell to new customers each and every month.
4. The number of customers is physically limited to space in the store. Once the store is at full capacity, the business has to turn away new customers.
I know exactly how Sam feels, because I was in the exact same situation Sam is in with my gym. I could re-write everything above for myself as Sam. My gym was open 7 days a week. I couldn’t hire a manager to run the business because the business couldn’t afford the salary. My business had three of the same limitations as Sam’s business has.
This is a very challenging situation on several levels.
To make the business profitable, you have to completely reinvent the business. This reinvention requires more time and more money. All of the extra time and money is invested to make “bad” business better. If the business is “bad”, the best course of action is to get rid of it and focus your time on a “good” business.
To get rid of the business, you have two options:
Close the business
Sell the business
If you close the business, you obviously lose everything you’ve invested and possibly more. You may still be liable for any long-term contracts (leases, franchise fees, etc.) Plus, you disappoint your customers and part-time employees. The only real option is to sell the business. The problem is you have to sell the business at a loss and this is because the business isn’t profitable.
The only way to escape the trap is to lose money. This is psychology hard to do because you don’t see reality. The reality is that the money has already been lost. When you’re in this situation, you think you can avoid the financial loss, IF you keep plugging away in the business. The reality is you cannot avoid the loss, unless you reinvent the business.
I had been through a business reinvention with my real estate brokerage. I didn’t want to go through another reinvention and chose to accept my loss by selling the gym.
Some might say, “You’re a quitter!” and they would be right. I chose to quit a bad business. I took my lumps and moved on to a better business with a great deal of positive cashflow, no overhead, and no employees.
I now have more time, less stress, and a better life.
Small businesses are very similar to the new escape rooms popping up everywhere. Once you start the business, you’ve got to figure out a way to escape and it will definitely be an adventure.