What do Shark Tank, The Profit and Kitchen Nightmares have in common? They’ve all featured merchants who’ve used merchant cash advances. Statistically it’d have to happen but there’s nothing more wild than watching Marcus Lemonis try to save a failing business I actually declined for funding.
One deal I personally worked on has appeared on The Profit and there were a couple others that I’ve seen shopped around in the MCA space. Not sure if that restaurant on Kitchen Nightmares has used merchant cash advances? Just conduct a UCC search and find out!
No amount of underwriting could ever give you the perspective you get on TV. In between the lines of a business wanting help is usually a disaster or series of disasters that has the business on edge; All the employees are about to quit, the landlord wants them out, their vendors are mad at them, the owner’s an intolerable jerk, they don’t know how to market themselves, or the customer experience is horrible. It’s always something.
At least on Shark Tank the only thing scrutinized is the presentation of the product and the viability of it. On The Profit and Kitchen Nightmares, all the secrets are laid bare.
On the one hand it’s a glimpse into the struggles of running a small business, an experience I know firsthand from growing up working at two family owned restaurants. On the other hand, it’s a sobering reminder that there is so much risk in lending them money.
On The Profit, Lemonis hedges his risk by typically taking 50% (OR MORE!) equity in return. His famous pitch to these merchants who always come across as shocked is that, “I’m not a bank. I’m not a consultant. And I’m not the fairy godmother.”
— CNBC's The Profit (@TheProfitCNBC) November 18, 2014
Deals go bad
And even that approach carries risk. Early last year on the show, Lemonis wired $190,000 to Brooklyn-based business A. Stein Meat in return for 100% of their Brooklyn Burger Brand. The business used the cash to make payroll and reneged on the transfer of the burger brand, claiming they thought the money was a loan. They never made any payments back on it.
Lemonis filed suit against them in the United States District Court for the Eastern District of New York which opens by stating:
This is an action to enforce the straightforward, bargained-for agreement entered into by and between defendant Stein Meats and Lemonis, by which Stein Meats agreed to sell its “Brooklyn Burgers” brand of hamburgers to Lemonis. The agreement is unequivocal, and was witnessed by the millions of viewers who have watched Episode 2 of the second season of the CNBC reality television series “The Profit” that first aired on March 4, 2014.
However unequivocal it may have appeared, the case is still going. A peek at the court records show bitter and unrelenting litigation. At the time of filming, Stein Meats was only 2 weeks away from bankruptcy and was reportedly sold to its competitor, King Solomon. King Solomon is also named as a defendant.
The Brooklyn Burger brand is still in use as I enjoyed one of their tasty burgers at a Nets game last month.
Wait, don’t I know this deal?
In another episode of The Profit, the owner of a business I declined for a merchant cash advance is fingered as a bad guy. He was unrepentant, suggesting that the bridges burned, lives ruined, and debts defaulted on along the way were worth it to get the business to where it was now. I distinctly recall being shocked by their mountain of debt, which became the reason I declined it. Their debt problems were even highlighted on the show!
I had the luxury of examining their Balance Sheet since their request was sizable. Had the request been smaller, it wouldn’t have been required. Thankfully they were transparent about their debt. Of the thousands of applications I’ve underwritten in my day, I learned that it is incredibly hard for a small business to supply a financial statement, and of the ones I got, it was difficult to ascertain their accuracy. I’ve seen Balance Sheets that didn’t balance, numbers that were completely illogical, or statements that were missing major line items.
I see only two ways to approach something like this. It’s either a decline or it’s going to be expensive. I don’t care what my algorithms say their social media score indicates. If the business doesn’t keep good books then I have no idea what I’m exposing myself to.
The real world’s not so bad after all
I can’t help but notice that one of the best guys in the small business space takes a similar no-nonsense approach. You give Lemonis half of your business or he walks. Being on the show might boost sales but taking his money is not charity.
The only difference I’ve discovered between business financing deals made in real life and ones made on TV is that the ones on TV are more expensive. It’s the opposite of what you might expect.
If Lemonis thought his agreement witnessed by millions of people was unequivocal, then shouldn’t an online lender who has never met their client, nor visited their business, feel slightly less comfortable about their agreements?
I would think so.
Inc reports that Lemonis spends eight full days with each business but on twitter he claims it’s much more than that.
— Marcus Lemonis (@marcuslemonis) October 15, 2014
During filming, Lemonis can be seen going through the financial statements, interviewing employees, negotiating deals with vendors, trying out the products, and scrubbing toilets. With that experience and knowledge under his belt, he presents his cold hard deal, money for a massive equity stake. The terms are aggressive but he’s steadfast in his role as a businessman and not a fairy godmother.
Contrast that experience with a merchant cash advance company that has almost nothing to go off of by comparison; a few bank statements, a credit report, and maybe some online data points. With only this, they’re supposed to wire out $5,000, $50,000 or $150,000 to a business across the country and get no equity in return.
The two things that I’ve learned from these celebrity businessmen is that their underwriting is more personal and they manage to be even more expensive. They promise their expertise is what makes up the difference.
I’d love to say that every situation is different but it’s gotten to the point that we’re working on the exact same deals. If a merchant can get a better deal off TV than on it, I’d say things are pretty good right now.