What Could Bring Your Business to Its Knees?
Ami Kassar, founder of loan broker MultiFunding, writes about the risk that worries him most—and how he’s addressing it.
Good Morning!
Here are today’s highlights:
Another entrepreneur sells to private equity only to end up disappointed.
The Biden administration closes a tariff loophole.
Inflation cools more sharply than expected.
David Liederman went from law school to line cook at Troisgros to founding David’s Cookies.
FINANCE
Ami Kassar’s business is heavily dependent on helping businesses get one type of loan: “We’ve developed a formula that works for us, but it’s time to start building on our core business. This need stares me in the face every morning when I wake up and look at our performance indicators. One indicator is the volume of our SBA lending. Our goal is to increase it by 30 percent this calendar year. Right next to this box on my dashboard is another indicator: the percentage of our revenue derived from SBA lending. Today, that percentage is more than 95 percent. Our goal is to reduce it to 25 percent. Clearly, we have a long way to go.”
“In looking for a close cousin to our current core products, we’ve concluded it would make sense to start offering our community full banking services and lines of credit. Soon, assuming there are no last-minute snafus, we will be able to offer these services nationwide with a new banking partner.”
“On the one hand, I am excited about all of the possibilities created by our launch. Eventually, this new business line could become more significant than our current business. At the same time, we are scared. I worry about our brand, reputation, and integrity.” READ MORE
The SBA sent PPP loans to collections without notifying the businesses: “The Small Business Administration did not always send written notice to businesses that took Paycheck Protection Program loans that subsequently were sent to collections, a lapse the agency attributes to a breakdown in its automated systems. The lapse was detailed in a new report from the SBA’s Office of Inspector General, which found the agency did not send written notices on 5,456 PPP loans totaling $1.5 billion. The expected communication would have provided delinquent PPP borrowers with notice that their debt was being sent to the Treasury Department and would have urged those borrowers to negotiate a payment plan or pay the loan in full.”
“While the SBA originally stated it would not refer loans under $100,000 to the Treasury Department for collections, it later reversed its position after hiring a third-party to analyze the potential effort.”
“The agency also did not adequately oversee how lenders served their PPP loans and whether those lenders followed the proper procedures before charging off a loan. That includes effectively communicating the loan status with the borrower and seeking payment after the loan is more than 60 days past due.”
“The SBA said in a response within the report that it does not have the funding or a contract to support a higher level of oversight desired by the IG, although it will review any lenders it finds are deficient in their obligations.” READ MORE
FAILURE
What happens when you combine multilevel marketing with private equity? “Three years ago, in May 2021, Carlyle invested roughly $600 million in a skin care company called Beautycounter. Jay Sammons, who ran Carlyle’s consumer products business, had already helped OGX hair care products generate high returns for Carlyle. He had been watching Beautycounter’s progress under its charismatic founder, a woman named Gregg Renfrew, and reckoned it could be even bigger. Ms. Renfrew had built the decade-old company around a mission: making cosmetic products without a host of commonly used chemicals. The products were distributed through independent sellers in a multilevel marketing model that has been used for vitamin supplements, cosmetics and Tupperware.”
“When Carlyle bought its controlling share, Ms. Renfrew got about $50 million for selling part of her stake, according to three people with direct knowledge of the deal, and stayed on as chief executive. She and the private equity firm were aligned in their big plans: Raise annual sales from where they stood, about $400 million, to $1 billion, and take Beautycounter public.”
“The excitement faded quickly. The partnering, too. Within three years, Beautycounter would be shut down, and Ms. Renfrew would be trying to salvage the pieces. All the money that Carlyle had put into the company was lost, making it one of the worst investments in the firm’s 37-year history.”
“Beautycounter’s demise didn’t surprise Ken Wasik, the head of the consumer investment banking group at Capstone Partners. Multilevel marketing companies typically have ‘a very strong founder that defines the culture,’ he said, and that culture is hard to change. ‘The problems happen when people buy it and think they can take it mainstream.’”
“The question, he said, is ‘Why did Carlyle expect something different would happen here?’” READ MORE
TRADE
Biden places tariffs on Chinese metals that go through Mexico: “The Biden administration took steps on Wednesday to prevent China from circumventing American tariffs on Chinese steel and aluminum by routing those imports through Mexico. The administration said it would impose tariffs on imports of Mexican metals that are partially made in China. American officials said the move would close a trade loophole that has allowed cheap, state-subsidized Chinese metals to circumvent existing U.S. tariffs. The United States will now impose a 25-percent tariff on Mexican steel that is melted or poured outside of North America before being turned into a finished product. Previously, that steel would have entered the country duty free.”
“Mexican aluminum coming into the United States will face a tariff of 10 percent if it contains metal that has been smelted or cast in China, Belarus, Iran, or Russia, said Lael Brainard, the director of the White House’s National Economic Council.”
“Officials in the Biden administration said the United States wanted to protect American factories that produce steel and aluminum, including those that have recently received new investments from government funds.” READ MORE
HOSPITALITY
Some hotels are having a tough time: “The U.S. hotel market hasn't seen as much distress as was widely expected coming out of the pandemic — especially given how significantly the hospitality industry was hammered in 2020 — but a number of properties and owners are having to contend with foreclosure, receivership or distress sales brought on by challenges to the sector. One of the more prominent recent examples is a nearly 3,000-room hotel complex in San Francisco that has seen its value degrade more than 65 percent since 2016, the San Francisco Business Times reported. Park Hotels & Resorts, the former owner of the two-hotel property, stopped making loan payments and handed the keys back to the lender last year. A receiver was appointed in October.”
“Also last fall, Blackstone Inc. was in negotiations to surrender four Club Quarters hotels it owned in Philadelphia, Boston, Chicago and San Francisco, the Philadelphia Business Journal reported. Blackstone last year defaulted on a $274 million commercial mortgage-backed securities loan backing those four properties.”
“Michael Bellisario, senior research analyst at Baird, said distress right now is most commonly seen in hotel markets that have yet to recover from the pandemic, in addition to older properties in need of updates. ‘Some of the headlines are pigs working through the python,’ he said, in reference to recent examples of hotel owners surrendering distressed properties.”
“‘If you’re around a manufacturing hub, that’s going to be a driver. If you’re down near the airport, that’s a booming opportunity,’ Horde said. ‘But in the Perimeter area, it’s a soft office market. What’s the driver?’” READ MORE
THE ECONOMY
Inflation came in lower than expected in June: “U.S. inflation eased in June even more than economists had expected, further extending a recent slowdown in price increases. The consumer-price index rose 3.0 percent from a year earlier, the Labor Department said Thursday. Core prices, which exclude volatile food and energy items, climbed 3.3 percent over the previous 12 months and 0.1 percent since May.”
“Stepped-up production and normalized supply chains have already led to a sharp decline in goods inflation. Prices of services have been going up more quickly, on average, but are expected to rise at a more moderate pace as a cooling labor market leads to slower wage growth.” READ MORE
OBITUARY
David Liederman, founder of David’s Cookies: “The cookie’s unique feature was that it was not made with standard Toll House chocolate chips but was studded with irregular pieces of dark Swiss Lindt chocolate. He chopped the chocolate by hand, the way Ruth Graves Wakefield did when she created the Toll House cookie in 1938 in Whitman, Mass., before Nestlé took over and began manufacturing its little chocolate drops. Mr. Liederman called his cookies chocolate chunk, a term that has become widely understood and used in the world of baking and confections.”
“After graduating from law school and passing the bar, he worked for a time at a law firm. But after a few months he took off for France for a full-time job at Troisgros, where he eventually became a line cook. He was the first American employed in that kitchen.”
“He opened his first cookie store, David’s Cookie Kitchen, on Second Avenue and 53rd Street in Manhattan in 1979. Shops around the country had begun selling chocolate chip cookies and finally started popping up in New York. His cookies were clearly the best, in large measure because they were made with high-quality ingredients, including good butter, fresh nuts and that chocolate.”
“A chain of more than 100 David’s Cookies stores followed, nationwide and in Japan, along with several restaurants and a number of entrepreneurial efforts, including an unsuccessful attempt, in 1985, to buy Zabar’s, the Upper West Side food emporium, and turn it into a national chain.”
“He sold David’s Cookies to Fairfield Foods in New Jersey in 1995 and retired from the company, which is still thriving, though he often said the quality of the cookies no longer met his standards. At his death he was tinkering with the notion of going back into the cookie business.” READ MORE
THE 21 HATS PODCAST
A Successful Owner Chooses an Innovative Exit: This week, special guests Laura Anderson, founder of Local Ocean, and Peter Koehler, her financial consultant, explain why Laura decided to sell her thriving seafood business in a transaction that created a business model that is neither widely known nor widely understood. It’s called an employee-ownership trust, and there are only about 50 of them in the United States. But their numbers are growing here and abroad, and for good reason. The trust model offers owners something of a choose-your-own-adventure option that can allow them to sell for a market rate in a relatively uncomplicated transaction that makes it far more likely the business will remain true to its established mission—especially when compared to selling to private equity or even to an employee stock ownership plan.
Of course, there are challenges, including getting a bank to consider financing one of these deals. But in this episode, Laura explains why, with Peter’s help, she decided to trust the trust.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren


