BUSINESS BUSINESS or TALKING WITH FRIENDS

Jean: You should just start a business.

Wendal: I don’t think businesses are a thing.

Tyson: Oh, here we go.

Wendal: What I mean is that I believe in debt and I believe in disposable income but I don’t believe in the organic, money-making, self-sustaining businesses. Never seen it happen. And I’ve been looking.

Tyson: What?

Wendal: So, we have the numbers. And you know these. They're irrefutable. Things like:

• Small business owners have far more liquid wealth than wage earners

• The overwhelming majority of start-ups are financed with personal funds or a loan or gift from family and/or friends

• The same number of businesses start each year as fail

• Many business owners don't pay themselves to start with and sometimes don't for a decade or more

• More than 20% of all small businesses fail in their opening year and 60% are gone within three years

• More than 40% of start-up businesses fail because there’s no need for what they're offering and 30% fail because they simply ran out of cash

Those are just facts. That's a general description of the typical experience within the small business world.

Tyson: Okay.

Wendal: Well, what does that mean to you? What picture does that paint?

Tyson: I dunno.

Wendal: Okay. Well, I also worked with a team of folks to start a business. I’ve taken business and business accounting classes. I’ve also seen the start-up expenses and monthly and annual accounting for a dozen small businesses all over the US and Canada. And I have inside information from other local business owners and former owners.

Tyson: Right. And?

Wendal: So all that just to say that I’m not coming at this from nowhere, but taking the numbers we all have and those I have unique access to.

Tyson: Sure. And?

Wendal: And then there’s the mountain of anecdotal information from all the businesses we engage with and walk by every day.

Tyson: Okay.

Wendal: Right. And from there we all nurse and spread these ludicrous comic book fictions about folks starting businesses from nothing and earning a living (or even real wealth.) We do this while knowing that these exist almost entirely in myth. I mean, the evidence for business owners not losing terribly is so scant that it is effectively a non-phenomenon.

Tyson: But I know people who have businesses. And they’ve been successful.

Jean: Yeah.

Melany: So do I.

Wendal: I would gladly wager that you don’t have all the information.

Tyson: Bullshit.

Wendal: I’m not suggesting they’re lying to you, only that folks don’t tend to volunteer their full financial picture, even to family or friends. That’s just not how folks operate. And we also live in a culture in which we all know not to press folks on these topics, ones almost everyone considers personal and sensitive, if not taboo.

Tyson: I don’t know man. I also have information. And these people aren’t getting huge gifts from their uncle or a Kickstarter windfall or waiting for a lottery win.

Wendal: Here’s a specific example. When we were starting the bakery, we modelled ourselves after a successful American bakery, who we were in communication with, who were supportive of our operation, and who provided us not just with all their accounting and inside information. But they even offered advice, their start-up best-practices, and even recipes. So I can show you how much they spent on butter and whole wheat flour in April of 2003, for example. How did they become a successful, sustainable business? They didn’t start from scratch. They started by taking over a well-known and loved local eatery that was going out of business, and replaced that local food operation with a very similar one. So the place didn’t just come with cheap used equipment already in place but a customer base and a community looking for food in that location, too. And then they opened up in Northern California alongside the dot-com boom, when investment dollars were easy and abundant, interest rates dropped from 7% to below 2%, and folks in the community were flush with cash. They also exploited a whole bunch of financial options unique to America, including a favourable national co-operative bank. And they did all this in a dense urban area in the context of a wealthy hippie community in which members were happy to gift funds to a community bakery and spend $8 on a loaf of bread every week. Etcetera etcetera.

Tyson: Well.

Wendal: Well, that’s less a reproducible business model and much closer to a whole set of remarkable miracles. What they didn't do is what anyone else would have to do. That is: take a $600,000 business loan from a predatory bank who would dictate what they could and could not spend it on and at an obscene lending rate. There’s no question they wouldn’t exist if they were trying to do what they did in San Francisco in Detroit or Flint or Atlanta or Augusta. Even in California, could the replicate their success if they were to start today, when building costs are four times what they were 25 years ago and with investors not investing and lenders not lending?

Tyson: That’s one example.

Wendal: Okay. Look, I have a friend who had a coffee business for years, running a mobile cart and then a kiosk in an office building. With effectively no expenses, she only ever haemorrhaged money. She simply could not charge enough to cover her very minimal costs and pay herself anything at all, and still have folks buy her offerings and not go elsewhere. And when COVID arrived and free money was put on the table by the feds, she jumped on it and rented a space within a commercial real estate marketplace that was under water. In the months and years to follow, to view the thing from Instagram was to see a bustling business quickly making itself the heart of the community, with not just beautiful surrounds and great food and coffee but also music, art, and literary events day and night. But after just two years the landlord bumped up the rent and the business was gone faster than it appeared. Shocked, I asked the owner what happened. She explained that they never made any money. Not even enough to think about servicing their loan. They only had cashflow sufficient to convincingly float the illusion of a business, so long as there were no perturbations of any sort in the system. And I think that’s almost all business. She did nothing wrong. More than that, she was kicking ass by any and all accounts. And she was selling hot, brown water for $5 and had loads of daily customers.

That was our business model with the bakery, too. We would turn a profit when every household in the city bought a $24 pizza or $8 loaf of sourdough from us twice a week. Otherwise we would take a loan of $600,000 and hallucinate a business into existence, with slick marketing and community events and local business advocacy and anything we could muster, and we could manifest this hallucination in full colour and sustain it for two to four years without much trouble. But there wasn’t even any fictional universe in which we would ever have anything robust or lasting in which money was made — and the credit union loaning the start-up capital would, by standard banking practices, ensure this scenario.

Or for a good example of a successful operation, the best known coffee joint in town appeared, from the outside, to be a little local start-up that made it. Turns out the family had big money behind them and are commercial real estate developers who just plug this cafe into ideal locations in their various developments. So their success is an illusion made possible by a highly unusual situation available to no one else anywhere. And that's the kind of circumstance I find behind every successful business I can get real details on.

Tyson: Well, it’s just not true. I have a friend with a bookstore. She didn’t take family money. She pays the rent on her store. She makes money.

Wendal: Again, I’m certain you don’t have all the information. I worked at a bookstore. A large national chain. They don't actually make money on books. That's not a thing. The only reason they still exist is that they offer e-readers, tablets, fitness trackers, yoga gear and tablewear, and other home goods, kids toys and games. Your friend sells none of that. So she'd not covering retail rent downtown and paying herself a respectable wage on the difference between what she purchases a book for and what she can sell it for.

Tyson: That’s not true.

Wendal: Well, just do the math yourself. What is rent going to be downtown?

Tyson: Come on.

Wendal: Well, you're telling me I'm wrong. Come up with a huge spectrum, even. And then take the cheapest. What are the maintenance fees and utilities gonna be? And insurance? And website and marketing? And build-out costs? Shelves are not free, last time I checked. And what is inventory on the smallest bookstore? Could you run with 1,000 books? And you’re making how much on those books — books that anyone can find in their local thrift shop or from online retailers around the globe and have shipped right to their home? The industry standard is something like a 2-6% profit margin and its an industry that has been collapsing for twenty years.

Tyson: I’m telling you, I know businesses that are surviving.

Wendal: It’s just math. Back of the napkin, what do you have? I’ve looked up the numbers for starting a bookstore. I mean, who hasn’t? The thing I looked at suggested start-up investment was $30,000 to $60,000. So we can assume roughly $45,000 to start? Where does that come from? How do you manifest $45,000?

Tyson: Lots of folks have access to some money. Or they save up or get a loan.

Wendal: Great. And if you take in only $1,000 a day ($365,000 annually), you might come away with less than $15,000 in profit (at the typical 4% margin)? But, really, who out there is doing those kinds of numbers and turning a profit? And if you’re thinking the margin on a niche used books is far higher, you also have to accept far lower annual sales volumes than what’s trending or on The New York Times Bestseller list. Right? You might sell one $75 or $225 nineteenth century dictionary but you aren’t doing young adult fiction volumes and you couldn't fill the demand if there was that kind of customer base. Obviously.

Tyson: That’s not—

Melany: Look, I ran and did the accounting for a retail shop. I did their Quickbooks. We were selling second-hand clothes and crafts and artwork. And the owner was making good money on all that stuff. We were selling $1,000 per day. And half of that went to the artists whose goods we sold. So about $500 a day, five days a week.

Wendal: Great. I still don't think the math works. That’s what, $135,000 or something? But that wasn’t their profit. $25,000 or $50,000 or $75,000 of that went just to their rent alone. Right? And then they had at least one employee. Presumably the owner also wasn't selling unique clothes but instead stuff everyone else has access to. They probably liked to shop and had a good eye for colour or quality. Right? So what was the mark-up on that stuff? It couldn't be much if it was going out the door. And you implied most the sales were not clothes but work from local artists. And that was a decade before ubiquitous online purchasing.

Jean: Okay.

Melany: Okay. So?

Wendal: We don’t need the numbers. Just explain to me, using your version of reality, how the rest of what you know to be true pans out. You know restaurants and cafes and bookstores and clothing stores don't pay their employees enough. You know the staff turnover at these places is huge and detrimental to the business, right? If profits are being made, they don't need to pay people nothing or keep them at unmanageable hours. Right? And you know owners take huge, untenable risks that damage the rest of their essential relationships, like not paying their produce or garbage or accounting or tax bills, right? "I can pay you in full and in cash next week" is how these businesses run. I mean, there are books and films about this and you know it from your own experience. And you know that when you walk into their washroom as a customer they've refused to replace the broken $20 toilet seat or put up a $3 hook so customers don't have to lay their coat or bag on the filthy washroom floor. Why is that? Why is all the above standard operating procedure? Because they're trying to lose their customer base or because there's not a nickle to spare?

Jean: You’re not—

Tyson: But we know all kinds of people with businesses.

Wendal: I’m not saying they don’t own a business. I’m saying that the overwhelming majority of folks accrue tremendous debt or otherwise burn through their own or someone else’s disposable income to float a small business. They don’t make a sustainable living.

Tyson: People are making a living.

Wendal: Okay, come at it from the other side, then. Why would anyone be a barista? Why would there be any bank tellers or dishwashers or minimum wage booksellers? Why, if you can just manifest your own profitable business, being your own boss and doing what you want, selling locally-made pencils or bespoke phone cases or artisan vegan dog bones, from willpower alone? But, actually, that’s not even the claim. Is it? The most common and persistent claim is, like your retail shop, that you can start a business from nothing, easily, and turn a tasty profit while not busting your ass but just hiring some random college kid to do all the work, including the accounting, for as little pay as legally possible and within the commercial real estate setting of a bustling American city. I'm just offering you a version of reality that doesn't require angels and saints working daily miracles on every street corner in every city and town. Give me a version that accommodates just some of what we know about the world and doesn't involve miracles.

Tyson: But you know our friend with a cafe.

Wendal: You can open a cafe. It’s done every day. But its not more profitable or a better use of your time or less stressful than running the social media accounts for the city or a local college as a bottom level unionized office worker.

Tyson: I knew you were crazy but I didn’t know you are a conspiracy theorist.

Wendal: I had an accountant, in a business accounting course, explain how he exploited all the available legal loopholes to maintain a moderate lifestyle. He showed us how he didn’t pay for food or transportation or vacations, or even university education for his kids. He explained how he writes off his house and SUV and on. This is a guy who has made a career of engaging in accounting and legal gymnastics unavailable to most people, just to avoid taking on a huge amount of debt while still doing all the things we think of as part of a normal life as a successful small business owner. And his example is where the positive small business figures come from.

Tyson: No.

Wendal: Just look at the highest earning professionals, in this country. Folks bringing in over $250,000. If you're in that category, you're an orthodontist or osteopath, lawyer or accountant, the first thing you do is open a Canadian Controlled Private Company. Then you make your family members employees of that company. And then you use this company to never pay any taxes, conceal expenses, provide "employee training" and "paid vacations" and on and on. There are millions of those and, on paper, they make up the overwhelming majority of the country's "successful enterprises." But they are neither enterprises nor successful; instead, they're legalized criminal operations. Everyone is doing it. There are academic papers on it. There are national accounting conferences with lectures about it. And it's mostly those people, of their spouses or kids, who are starting failing businesses or ones that merely sustain themselves. Just about everyone else is losing out to landlords and banks.

Jean: No.

Melany: No.