#39: Coffee is a Business (Whether You Like it or Not) | Andrew Gough | SCA Lectures 2018

Owning and operating a coffee business is a sexy idea, but many operators are too bogged down working “in” their business instead of working “on” their business. In this lecture, recorded at the 2018 Specialty Coffee Expo in Seattle, Andrew Gough tells us his business story using real data and shares a simple tool for monitoring your business markers.

Andrew Gough founded Wichita-based Reverie Roasters in 2013 after spending nearly a decade in the financial services industry. Two years after opening his coffee roaster/retailer, Andrew joined his team full-time and Reverie Coffee Roasters has grown into an award-winning company, determined to solve the struggles of our city through community engagement and by promoting civic pride.

Full Transcript

James Harper: Hello everybody, I’m James Harper and you’re listening to the SCA Podcast. Today’s episode is a part of our SCA Lectures series, dedicated to showcasing a curated selection of the extensive live lectures offered at SCA’s Specialty Coffee Expo and World of Coffee events. Check out the show notes for relevant links and a full transcript of today’s lecture.

This episode was recorded live at the 2018 Specialty Coffee Expo in Seattle. To learn more about this year’s schedule of lectures – and to get your tickets – visit coffeeexpo.org!

Owning and operating a coffee business is a sexy idea. But many operators are too bogged down working “in” our business instead of working “on” our business for it to ever feel particularly great. In this lecture, Andrew Gough tells us his business story using real data, and shares a simple tool for monitoring your business markers.

Andrew Gough founded Wichita-based Reverie Roasters in 2013 after spending nearly a decade in the financial services industry. Two years after opening his coffee roaster/retailer, Andrew joined his team full-time and Reverie Coffee Roasters has grown into an award-winning company, determined to solve the struggles of its city through community engagement and by promoting civic pride.

Also, I will jump in at one point to help you follow along.

Okay Andrew, take it away!

1:30 Andy Gough’s introduction – we need to have talk about making money

Andy Gough: We’ve exceeded capacity, so those of you that got here early, that was smart. There’s a lot of people that got turned away. So that tells me something that this is a relevant topic to maybe something that you’re experiencing. And over the course last few days, I’ve met a lot of people who have expressed that to me. So, I’m very fortunate to be here and I want to thank you to all of you for taking time to be here to talk about what I consider to be a relatively hard conversation to have either with yourself, but especially with your business partners, meaning your employees and your community.

My name is Andy Gough and I am the founder of a small company in Kansas called Reverie Coffee Roasters. Why am I here, literally sitting in a room with some of the most decorated people in coffee and I’m just some small guy from Wichita who happens it just get Lucky with the really sweet title for a topic? Because it is probably one of the cooler topic titles. I’m not going to lie. I’m a little bit egotistical on that. I’m a play on words.

But it actually really is a relevant topic title. Because I think every business owner ultimately at the end of days trying to make a journey through coffee or through their business into this profitability place, but nobody really likes to talk about it that way.

Business is not the most sexy topic, or the financial aspect of our business, because it speaks to a lot of things that our employees and our customers…we don’t want them to hear about this. We don’t want them to know that we are here to make a living and to make money.

The problem with all this is if we don’t have that conversation, then people won’t take it seriously. And they won’t ever get you to the point where you can actually do this in what I consider to be a sustainable way.

So, we can have sustainability conversations about all kinds of aspects of the business. I spent two days at Re:co Symposium and I’ve done that for three years now as my intro to the coffee world and I’ve learned about all of the complexities of coffee and how hard it is to do it.

But yet without someone selling that product and doing it in a way they continue to continue to do it. It ain’t going to work, at least it’s not for you. And if it’s me, and I’m being as real as I can possibly be right now, I have at stake my wife and my two children, my house, my cars, the multiple lines on my car that we’ve had to do, the credit cards that we’ve used to start our business and somewhere in the neighborhood of half a million dollars’ worth of debt that I have to pay, to make debt payments on every single month. And beyond that, let’s get to the bigger conversation is the US$50,000 of payroll I make every two weeks to our 56 employees. I feel like I have a personal… I owe them, you known their right to a career and a life. And so, I take it real serious.

So, I could have come and talked about my impact on the coffee community in the little ways we do it by making awesome coffee. In fact, I’ll just introduce you to my brand and my business a little bit. And I’ll have you pay attention to one thing: we just changed our business, grew up a little bit in the last few months, few years and the aesthetics in our business have been brought up to what I would consider the third wave. To be, like a really pretty place to go hang out drink coffee, like we see a lot of your businesses do.

4:45 Andy Gough’s personal story and how he started Reverie Coffee Roasters

But we forget that there’s this whole other side of the business. This is my coffee shop. I’m just going to tell you about it real quick, so I’ll get off topic very quickly. Started in 2013, I was a business guy. I actually worked as a financial education coordinator for a 401k company. So those of you that came out of a real job world into coffee, recognize your 401k plan. I was the guy that came and taught you about saving an extra dollar, I didn’t get too deep on conversation of P&E peony or what’s the beta of a 401k mutual fund. Like that wasn’t relevant to people that didn’t have enough money retirement. It was “you need to spend $10 less a week and then you can retire with enough money, so you don’t have to go work the rest of your life”. So, I did that for almost 12 years, but two and a half of those years I did while I was running my business that I started with a partner. And so, we grew up just recently. We went through a rebranding, improved a product packaging started a second location, separated our Roastery from our experience. This is a little offshoot cafe that we created in a mixed-use residential and commercial real estate property in the heart of our downtown as an amenity to those tenants. We called it Cafe de Kiva and then we opened a bakery as part of that expansion project. We relocated following suit… customers were asking for more. What do they need? What do they need food to go with their coffee?

Those of you that are not in business, you’re probably thinking “okay I’m going to open a coffee shop that just does nothing but sell coffee. We are going to change the way it works”. And then you let me tell you what happens after that six months later. You’re going to say “hey, I’ve got to sell some cookies or something because you cannot sell you can’t do it enough,” right? Okay, so that’s where the bakery came and that’s after five years of asking that question.

We didn’t just do like… The scones and all that stuff came first. I hired a Culinary Institute of America trained Chef to come work for me. And now I have a baker that’s on the team as well and she’s from Le Cordon Bleu. I sadly and excitingly have the most decorated kitchen and all of our community of half a million people and we’re just a coffee shop, which is fun. So that’s because we do cool stuff. And I didn’t have the best photos of the pastries there, but the bread is amazing.

I had to start a service company because when you have a lot of assets, they break. And also, when you are a roaster-retailer, you sell equipment and you need to service these things.

We also get into office coffee. We serve probably about 90 different wholesale accounts. But we’re still a small company. So that’s a little bit about my company and where we come from. So, I wanted to throw that out there. We’ve had to develop this over time.

7:45 Being honest with yourself about whether financials are your strong suit and bring in help

But one thing that was really a problem for us was when we started to look at all these things that I just showed you, they’re all very much aesthetically pleasing. They’re designed for the customer experience. And even so for your employees, the people that come to work for you, to give them this place they know. Like, they come from one shop to another, they’re usually coming because you’re doing something that they desire, and they weren’t getting at their old place. They hit the ceiling and now they’re going to find it better.

So, you have to create nice spaces. You have to use the best equipment and improve, improve, improve, improve. But then we forget about this other side of it, as an owner, and that’s the business talk that I want to share with you today.

So, let’s get real serious for a moment. I am not a very serious guy, but sometimes I can be. You’ll see me up here maybe not smiling but I’m really intentional and passionate about what I do, but I’m also like really down-to-earth. Had some really interesting conversations with our roommates here in Seattle the last few days.

But I took a test a while back. I took the Gallops Entrepreneur Indicator. It’s part of an accelerator program, and that was the first thing they did. And the goal of this was to identify the top four things that you as an entrepreneur, or business person, would be your strong sets. And then the idea is that you invest all your time and effort into those four things, the other six really don’t matter.

And so, as part of this business accelerator program I was part of in 2016, I got to sit with a professor at the local University who is actually the director of the business department and have them analyzed that. And so, he’s like “man, this leadership and knowledge and these four things are like you are a classic leader. That is your job.” And I’m like, “that’s great” because I worked for two and a half years at another business for someone else. So, I’m not the barista. I’m not the roaster, I’m ultimately in my business now working finally and I don’t really know what my job is.

So, I must be the leader. So, I need to work with these folks and help, listen to their needs, fix their problems, help them fix their own problems. And he goes on “normally we don’t ask you to care about the other six because those are irrelevant. They’re not your strong sales skill, but if you are considering taking investment, as part of your plan to grow your business, number 10 cannot be profitability. You cannot let the worst attribute you have at a 10 be the thing that people want you to be number one. They want to see you have a sound business and it sounds like you don’t take it that serious.” And the reality was I didn’t even know who to talk to about this stuff. I had no clue, first of all, what about Finance? I remember I came out of the banking industry as a 401k educator, so immediately people go “you’re a brilliant financial guy, you came from the banking industry,” and I’m like, “wait a minute you. You don’t understand. I’m the advocate. I’m the guy that had to like to justify to an employee why they shouldn’t have eaten that Big Mac on the way to work because that’s the difference between them having enough money in retirement or not. Like, that has nothing to do with financial wizardry. That is straight-up people ‘spend too much money’, right?”

So, I did a few things. I hired someone to help me build a basic financial package that we have continually refined as our business changed to be a better business person. We are running profit and loss statements relatively successfully but can always be better measuring where we’re at but continually trying to improve and improve and improve and I’m learning as I go. And I’m learning as I go in the business, the entire way, too.

But it wasn’t quite enough because even though I did those things my bookkeeper wasn’t understanding of our industry. They didn’t know anything about coffee and like “why do you have these people, so many people? Who drinks this much coffee?” I mean, they have all these questions they can’t answer. They’re not really there to look forward, they look backwards. And just tell the story through numbers. So, I needed that guidance and help, and I’ve learned as time goes on, we have to reach out and get help for those things.

Here’s how a coffee professional enters. We do research. We create a vision. We’re supposed to plan. We build strong finance. We pick a great location. We got to hire the right people and train them. We’re supposed to open our business. And of course, it’s never perfect, so we regroup it. We become profitable and then we repeat it. Is that how it works?

No, you buy a coffee roaster with your credit card. Okay? You lease a building. You go then to a bank and say, “look what I did” and because I worked for another business, I had great financial, like I was the best-looking financial success story of any startup entrepreneur because I had a nice cushy job with an income. I wasn’t already quit and we’re looking to “hey give me money. I don’t have a job. I have no way to pay this back.”

Then I hired the persons, we made some beans brown. And then I was like really reconsidering whether this is a good idea or not. Because at that point it was too late, I was in it. So that’s the reality a lot of us go through. We think one thing, but it ends up being very different.

And sometimes we get a little bit self-conscious about it. Nobody wants to tell you how much money they make. And you don’t want to ask that question, but we all want to know the answer and we need to know the answer, but we just don’t get. This is something you don’t do in our culture, right? We don’t ask those questions. So, I’m going to talk to you a bit about that here shortly in some surveys and some inch some really good data that’s been provided that I hope you consider using.

When I think about businesses and what you need to make a great business, coffee shops are really good at these things. At least, right now specialty coffee, where the industry is going, where we started in 2013 and the things that I think we did really well are pretty much characterized on here. We come up with a great concept. You design what kind of a shop do you want to be? Do you want to be pour-overs only? Do you want to be an espresso bar?

I mean, you design what you want to be. You create a strategy, you go through and build a plan a financial plan. Or a not so much the financial plan, but like here’s how we’re going to market, here’s how we’re going to hire, here’s all those things. You do the hiring, you put great employees in there and commit to that. I heard someone earlier saying in a great presentation in the room next door to us, say that they’re getting ready to start a business. And so, it’s going to take them six months to get those people up to Specialty coffee status to be certified in their facility, but that’s the goal, right?

We create great aesthetics. I mean pretty much every new coffee shop that opens, is just a little bit cooler and different than the other one, right? But it’s not really a differentiator, just part of the aesthetic. It’s what makes customers happy and excited to go in your shop. Last thing of course, you have to consider – and these are not necessarily one more important the other they’re just part of the plan – is a great product. You want to make awesome coffee. These are all things that are relatively subjective, right? There’s nothing that’s like saying that there is a right concept that works and then you’re going to be fine. You can’t just do these things. There’s no book for this right? You make your own and you’re a unique individual.

15:00 The importance of having conversations with your employees about financial sustainability

A better business idea would be to add this one piece to it, which is adding another pie piece, and it’s about being financially prepared to manage your business. And I’m not just talking about having enough money in the bank. We can have an entire discussion on financing your business. This is about getting intimate with the numbers and using that. In a way that makes your business just as cool as the product or the concept or the strategy or the aesthetic. Any of those things.

So very few people will put good finance as one of their key values. It’s just not something that you want to go tell your barista, “make that latte art perfect, smile and say, ‘thank you’ to the customer and remember to put the money in the drawer because we need that.”

But it’s the reality. We have to do that. And it’s my plea to you – and this is a personal story about myself – but it’s a plea to you and all of us together really as a coffee community to make sure that that financial conversation is a huge part of developing the role of a barista and all the support team that you have.

If you don’t it will make your life an utter nightmare. And if you are in business, have been doing this for a while and you’re tired of people thinking that your business is so successful because you have great aesthetics. You just moved to a US$1.1 million dollar building renovation that you had very little do with, but it just looks like you built this massive facility and that your lines are out the door. So, you must be making money like crazy.

Reality is, it’s not like that and we’re very alone. And so, we need to make sure that the finance aspect of it gets great.

I’ll throw this in real quick before I get into the story. I spent time listening to farmers explain their struggle with, how at the coffee shop level we’re charging between US$3 and US$4 a cup and in some cases a lot more. But the average cup of coffee, as it trickles down the chain, ends up putting about a nickel for every cup of coffee sold to the farmer. And we’re worried about raising our prices 5 or 10 cents or 25 or 30 cents. And of course, they want to know where is that money going? Is it not coming to you?

And one of the questions that we couldn’t answer because it would have seemed very insensitive, hard understand was that I’m trying to get my revenue lines up to break even, so if I give you that ten cents that they deserve for that coffee, I’m still not able to be in business forever and need to fix that problem first before I go to the other one.

So, this is a really honest and true story that I’m going to tell you about my business and last five years. And much like going to the doctor’s office and a teaching University, I’m going to lay it all out on the table for you. I would ask that you don’t necessarily share this publicly with the world. But the same time, I’m putting it here and I’m happy to argue or share my story and hope that it helps you understand how to better run your business and then so we can share information and become smarter about running our coffee businesses for the future.

18:00 The story of Reverie Coffee Roasters’s business as told through financial numbers

So, this is a story about my business in the last five years. I opened in June of 2013. So, for half a year and the rest of that year as a roaster retailer, we sold, US$113,000 worth of goods and services. Okay, just using these numbers. These are top line numbers.

If you think about a profit loss statement. I’m going to walk you through this. This is the part. That’s the most apparent to you. It’s the part that we run with every day. We’re always comparing ourselves. “Hey, we’ve got to do a little bit more. Can you sell like two more cups of coffee or when we sell one or two more bags and it’ll push our top line up and we’re going to be fine?”

If you’re in the wholesale roasting and retailing business and you have wholesale customers, have you ever been in a scenario where they are saying to you “all I’ve got to make is US$250 a day, and I’m good. Like that’s all I got to do.” And then, when they get there, “that’s all I gotta do is do US$375 a day and I’m good” and then “US$500” and you’re chasing a number.

This is the easiest one for people to see because it’s the thing that’s at the register. Your staff can count the number of coffees they sold, and they made. They feel it. They know it because this is what they’re doing. So that’s the first line. And sales guys will tell you the sales is where it’s all at. This is the beginning of the process and it’s the most important part of the process. And it kind of is but it’s part of an entire process that I find we don’t place equal emphasis on all parts.

So, I want to give you an idea especially those with are not in business that don’t know these numbers or have never seen it graphically represent this way. I want to show you what the cost of goods on that was. And these are real numbers, I took real percentages and I filled up the buckets here think of these like buckets. And at the end of day we want to see some room at the top, please, some room at the top.

Cost of goods. Average cost of goods in our first year it’s always really high. It was around 50% almost. It was really high. And granted our financials are not that great back then. You can almost just cut that and forget about it because what a true loss is in a year and what you report, and your income is very different than what you show on a P&L statement.

Remember, you go to the bank, or you go to your wizardry tax advisors and they tell you what your real loss was. That number is really US$76,000 a year. It wasn’t a loss in a sense like we literally paid out that much, there was a lot of operating costs in there.

But so, years three. ’14 ’15 ’16 and 17, the costs remain relatively flat. I think our average cost of goods in that timeframe is around 40% – 45%.

We run a retail and wholesale business. It started off as a wholesale retail experience. We wanted to sell wholesale roaster and we had this tiny little espresso machine and a bar and three chairs around a single table. That was our model.

We wanted to just be selling coffee in a retail environment and then we end up becoming one of the larger and most high-volume cafes in our community because we needed specialty coffee really bad. And going to people to sell you coffee to make their product better as a lot harder process than just doing it yourself. And it shifted how we plan.

So, year three, we did over half a million dollars. And that was the year that I quit my job at the bank, and I went to work for myself. And we did a renovation in that year to improve our facilities as part of the expansion of me leaving, and expanding the business, bought some equipment. All the way up through we clipped a million last year and I was super excited about that. That was it’s like every kid’s dream, it’s like my wife wanted a white wedding dress on the beach, mine was like “I got to make a million bucks.”

So, that was landmark year for us in a way. We had a lot of exciting things that happened last year, and it catapulted us into 2018 which has been a good year.

So, the biggest expense that each of you all have – and I should point out by the way, I’m going to cut labor expenses or costs separate than your operational costs. Those are two different things, and they are separate on your basic profit statement, but they are harder to see because I don’t know if any of you look at My QuickBooks account doesn’t give me a total of my operational expenses. It just gives you a listing and then it totals it into your labor as a total cost so keep them separate, please, because it’s very important. So, there’s your labor cost and now we’re starting to run out of expense there.

Our labor costs, we ended last year because the expansion was a little over 50%. I told you one’s 40, one’s 50, we’re squeezing it down and are leaning. Who has again not started a business here, but thinking about it? Is it scaring you at all? Okay. I hope so because I’m not going to apologize if you decide not to do it like it’s may not be the best scenario.

The last part is operational expenses and what I put there in a different shade of blue you can tell it goes off the chart here on the far right and there’s only two spots in there. These are by the way operating expenses, are all the things that you have to spend money on like rent. But they’re not necessarily labor, they’re not your cost of goods. So, it depends on how you do your books. Obviously, the IRS is generous in that if we spend under 2,500 bucks. I believe we can generate we can push it into those categories. I can tell you with last year we actually pulled that out because of a sell portion of our business. There was a tax advantage for us to take those out. So, it would have been way worse. Let’s put it that way. So, to get to the very end the red spots or the part that’s I’m in the red most of the time and two times I’ve been out of the red. I think it’s important to see and I don’t put the percentages on here, but in 2013, we suffered a 37.9% loss which is equivalent of, I don’t know US$30,000 or something like that.

I mean it wasn’t a huge number, but it was a big number. And this last year we only suffered an 8.9% loss, but it was US$100,000. So, I mean. It’s relative. It’s very important and it’s very concerning because sometimes these things are so problematic that you can’t dig yourself out of them and you’re honestly living a dream that is never going to be reality. And how far are you going to go down and dig into it before you start to try to figure out how to get out? Now, I don’t necessarily come with all the answers. In fact, I’m here at SCA every year now to help figure those things out to meet people like you. I’ve met some good friends now in the audience that I know we’re going to have conversations afterwards.

There’s a guy on the on the third floor giving a presentation right above us on a similar topic who came here to say. “I’m so sorry. I can’t be in your presentations. I’m giving mine right now.” And I’m like, “I’m sorry. I wanted to go to yours too. We need to learn from each other.” So, I’ll get back to that here in a minute, but one important statement I learned when I was in the accelerator program was this right here, ‘you as a business owner are spending way too much time working in your business and you’re not spending a nearly enough time working on your business.’ And if you can think of that and its reality then how are you going to give yourself more time? What can you do besides go to a conference once a week or once a year for a week? What can you do in everyday life? And some of that’s just talking with other business owners and starting to have an open conversation with your staff.

But sometimes you need data to really support your conversation. So, one year ago. I was fortunate to be at Re:co and the second I think speaker of the entire event was Heather Ward who is the Director of Research here at the SCA and she spoke about a program called the Benchmarking Survey. Did anybody participate in that particular program?

Who has heard of it? So, there’s quite a few that heard of it, only a couple that participated in it. Those of you that participated in it. These books were published, and these are the results of that survey. Just real briefly about this. There was a 2000 I believe ’14 or ’15 survey of 200 roasters and retailers around the United States. Basically, it said very basic information where we stand financially, as your profit, your return on assets. There are three and basic things just to establish some sort of benchmark because we actually had no benchmarking at all in our industry ever that they can find and nothing that’s relative and new especially with the current wave of coffee that we’re seeing in specialty.

So, they created with third-party this program where you could log in, you can put in your financial information. There was like 72 data points and questions. And, as long as you have the information in front of you could fill this out and it was great. How many of you logged in and started it and then never looked at it again because it was complicated? So, it’s really unfortunate as important as this was. And I ran out and I met her I said, “I want to talk to you about this. This is what I can do because I’m not the barista. I’m not the roaster. I’m a businessman who’s trying to lead a business that was growing, and I wanted to see it grow and this is my contribution. In one year from now, I’m going to be standing on that stage and talking.” I got come here instead, but that’s great. So, I think I need to be in the business a little longer to speak at Re:co.

But that benchmark survey spoke directly to me and so I was eager in this in the June, July, August whenever that was, they release that information to go see where I stood. And that confidential information goes in and when you put good information in you hopefully get good information out and then I get a call. “Hey, we’re having a really hard time getting people to sign up for this thing.” Why is that? It’s real simple. You’re good on your profit and loss statement. You do this or that. I could answer a few questions about how many bags of coffee, where is it from. These are things that you can rattle off the top of your head.

I think the number is around 150 companies contributed to this. It was just like, wait a minute, we’ve been given this gift of information, but you have to contribute, you have to be able to participate for everybody to be a part of it. Why didn’t this work out? And we started hypothesizing this as I’m trying to think about this presentation, and I said, “I wonder if people are really like their profit and loss statements are actually usable.” And she’s like, “Yeah, we get that idea too.” We think we’re doing well, but then we’re really not but nobody wants to talk about that because we have the best, the wood on our bar. We have the best subway tile. We have all these things that are really perceived and we’re busy and our employees are making awesome coffee.

So anyways, this this came out. As a plug for this if you didn’t participate in the survey, I don’t know how to get a hold of the electronic document. These are pricey. These are research studies. They paid lots of money for it. I think you have to pay 175 bucks for this if you want to purchase it. Maybe you know a roaster or retailer that did participate. But if you want to know exactly you know, let me pick on one that’s a little more obvious but there’s so much information here. Groups by profit leaders, where all the coffee is going, what’s the percentage of the average rate of or the average percentage return that you’re going to earn, expect to earn in your business. It’s all right there.

So, I’ve used that information actually for me to start to figure out what’s my target and I’ve actually even, I wrote a note here to mention. I’ve used that information to negotiate a lease on that operation I have in the downtown building. I had someone coming to me saying I want you to come bring your amenity to my people and I’m going to charge only US$32 a square foot for you to do that. I said, “What’s the opportunity?” “Well, we got 220 tenants.” This in a different building by the way that I said “no” to. “220 tenants. They’re all lawyers.” The thing about lawyers they are stingy, and they charge a lot. And it’s in a really cool up-and-coming part of town, which is like the ones with the huge, giant parking lots and the really big buildings and the restaurants and everything so it’s not very dense at all.

And I said, “Let’s sit down at the bar and just hang out and drink coffee and talk and I’ll get my square application out and I’ll just let you see the transaction as they come through.” And so, we started watching that transaction and I explained this to someone yesterday and it was Nicholas Cho he said, “They see the people that are busy, but they don’t see the actual transaction that happens. They perceive you as being way more successful.” And when we watched for 45 minutes on a busy Tuesday at 10 o’clock, which is our busiest hour of the day, and we made US$140 and he was like, “You had, you served that many people and had a line out the door for over an hour and you made only a few hundred bucks?” Yeah, because they’re buying US$3 and US$4 at a time. You can’t you can’t make money in a US$32 environment. So, then we use that as an experience this tool actually to say the average coffee shop of our category is only going to expect to make about 6.9% at the end of the year, that black part. That’s it. So, why would I negotiate more rent than I’m ever going to possibly be able to pay back ever?

So, I mean that’s been really useful to us. So, I would encourage you to consider that as well. How you can use information like this to establish what is the average cost of goods in your industry, in your sector, by region if you get enough data so you know that “hey, I don’t necessarily know how much the coffee shop next to me is making but I know that if I’m hitting this marker, I’m probably okay”. If I’m at 50% labor cost and the rest of the markets at 37 or 38 or whatever the number is, I got a real problem here. That is going to be what my CFO now I’ve hired says, “This is what we call something that jumps off the page.” That so basic profit-loss statement. This is straight out of the book.

Obviously, it’s not exactly full and it’s not perfect. You need to know sales, your cost of goods, labor, operate and net profit. And so, to relate this back to where I was when I was an educator in the 401K world. I had to break down the basics. Like I said, no coefficients, ratios, all those things are not relevant to a person you can save more money. It was the most basic of stuff. How much you’re taking in, how much you’re paying out, what are you going to need in the future which is a derivative of that. So, this is your basic stuff right here and we all know that if you see a P&L statement, it’s all right there, but start there. I created a handout that I was supposed to plug you can go download it on the little application and all I did is just make it simpler for you to do something you should do.

I didn’t recreate anything. I think ultimately, I would like to take this into a digital format that allows a person to plug in the information with their staff. So, you can go sit down at your quarterly meeting and say, okay I’ve entered the data go put it in a little calculator someone with some basic Excel wizardry could do something pretty cool with this. And then you take that information and you walk into the café, you go behind the bar the place where nobody else sees but them and you have like – I don’t know there’s a simpler way of doing this. It’s just visual – and you say hey, it’s green, that means good. Our sales are good, our labors good and you’re just communicating with your staff about these things in the most simple of ways. Your management team they need to know more about the numbers. You teach them a bit about those cost of goods where they could be better at or just let them figure that out. Actually, that’s more empowering, to let them see what the cost of goods are.

33:15 How to embed your business’ financial performance in discussions at all levels

Showing your barista, a profit and loss statement wouldn’t literally make their head explode in most cases. But your person who is your ops manager seeing one like I did looking at the advertising number or looking at the, it was the meals and lunches for all the trainings that we did. “Why did we spend US$2,500 on food the last year on lunches? Why?” Great, you’re asking great questions. If I never showed, you that you never would have seen that so let them see the impact of the decisions that they can maybe make. So just start somewhere. I mean, this is so simple. It’s not that useful and it’s certainly not useful if you don’t actually put it to use so I would hope to think that in the future I would be able to provide you with something like that.

There’s a lot of really good financial calculators that exist in the world. None of them are designed for our business. Nothing is just so you know. Very little is designed, and you have to make it. But this is where I think the bigger conversation starts like right now where we are not satisfied with that, we let our organizations, we let SCA know, that this is something that’s important judging by how many people are standing in the hallway here listening. This is of importance to all of us and they will listen and help us consolidate some methodology up to the point where we violate antitrust laws because we don’t want to start controlling the costs because that would be illegal. But we definitely need to know, we need to know where we stand.

So, you’ve got to make a difference. So, a few suggestions would be to commit to some sort of a routine. My company what we’ve decided to do. I’m just telling you right now we don’t know the answers. We are learning as we go but we are committed to the routine every month. We sit down on the second Monday after every month and we sit down and we go through a profit and loss statement that allows my bookkeeper, my controller who’s my wife to receive all that monthly end stuff and then at least have one Thursday which Dan the Superman Financial guy comes in and helps me make sure my P&L statement works and that our cash flow statements and all those things are together so that Monday we roll in and we have a swift one-hour chat. Where are we at?

And then we do, every quarterly we’re committed to going through a two-hour session with our leadership team. We’re talking my five people that are really my 5 right-hand people that run each department or are in controlling and we go through this process to know, this is where we establish those goals. This is where we establish whether we actually did ourselves, did for us what we said we’re going to do our accountability part. And we don’t know the answers yet. We’re just committed to the process. The other part is engaging others. So, I can’t go see all 56 employees and tell them how good of a job they’ve done helping affect the bottom line, but each of their leaders and their co-leaders can do that as well.

So, engaging my team at the top level and then teaching them how to communicate, maybe something as simple as a green or a red or something that’s on a marker board in the kitchen or something that’s relevant to them to know how they can participate and how their impact is. Do the work and do the work in a way that is just as important as everything else that you value in your business. From the aesthetics, to the product, to the customer service experience. All of that is equal at least an equal to the understanding and managing of their personal finances. And of course, have fun with it, I’ve read I read a lot of books. I went from reading like one book a decade to last year, I think I read 14 or 15 books all on business and how to be a better person and Ari Weinzweig who is one of the co-founders of Zingerman’s has written quite honestly the longest novels I’ve ever read and it’s really slowed down my rate at which I can finish books. But they talk about open-book finance as part of one of the pillars. They make great food.

We make great service and we make great profit. That is a key, without the profit side you have no ability to add value and continue serving and supporting your community the way they do and they’re not ashamed of that at all and it works really well, and they do in a really fun way too.

So, the next steps, of course go back and look at your profit and loss statement and is it cleaned up? Do you have one? First of all, let me go back a little bit because according to the conversations I’ve had regarding the SCA’s awesome benchmarking study which by the way sort of got killed because the participation was so low, and we lost that continued thing, but we don’t know what will happen in the future to it. But, right now it’s not coming back until we demand it comes back and that takes action. But go get the information and make sure it’s there and if you don’t have a good system setup and it’s not being routinely recorded, hire someone to do it. Please hire someone to do it.

Smartest thing I ever did was hire a bookkeeper from day one. Well, it’s like two months in and then they spent six months fixing all the crap that we screwed up in the first year and it’s true and I’ve never said that wasn’t an important part of our business ever since.

Know your metrics. So, you may not know what they are, what they should be but by starting to log the data whether you know if it’s useful or not at some point it will. I don’t define my business based on one month or one week or even a quarter. That’s not how we’re defined but it’s a sum of understanding how you respond and react to the things that happen within those periods of time so just get comfortable with numbers, see them coming in and then you’ll begin to understand what those metrics are, what they should be.

Create business alliances. Have business alliances with other people that are like you in the most careful way you can. It’s hard to do that. Just so in your own communities, I started a collective called the ICT which is Wichita’s call letters on the airplane or airport code, coffee consortium. And it’s a bunch of folks that get together and hang out and talk but we never get into the conversation of finance and money because it’s hard to have that conversation. We’re perceived as being too competitive.

But here, I don’t compete against my friends in Austin, Texas and I guarantee you we have the same problems, we come from the same place and so maybe we could have a conversation just to check to see if we’re doing it right. So, create those business alliances and show up to events like this and keep talking about this stuff. And then the bigger part, probably the one that we all could do better is being a better leader in your organization because it takes you to take pride in finance and teach this and make it just as cool as an awesome cup of coffee.

If you don’t, good luck. It’s going to be hard. So, anyways, thank you very much.

There’s a very, very short microphone. If you’d like the crawl to the center. We’re glad to engage in a conversation with you. I’ve got lots of little isms and stuff. But I’d be happy to hear what you have to say. You actually need to kneel down. I’m just kidding. I was joking.

40:00 Audience questions

James Harper: Andrew is now taking questions from the audience. The first member of the audience asks about Andrew’s practice of sharing financial data with his employees. What does he share, what does he not share, and how does Andrew incentivize and reward his employees on those metrics?

Andy Gough: Great question. I don’t believe the microphone is on. So, for those of you that didn’t hear. How do I engage with the employees? Are there incentives tied to that? So, I’m here to actually learn as much as I am here to preach to you all, lecture you all about how you should run your business. I honestly should be sitting in the audience with you learning. So, we’re in the process of extreme growth in our company and therefore our time devoted towards this topic has been very lacking and so like I mentioned we’ve gone through a big change over recently with a with our new Cafe and almost tripling our staff in a matter of 47 days I think and so we’ve not had time for this.

So, how am I? I’m not able to do exactly what you’re saying. I’m actually here to motivate myself to do that and I just start with my leadership team first. So, how did we have the conversation in the past? I would almost, some of my employees are here. I would open up almost every one of my staff meetings, which we do not do nearly enough of those because they’re incredibly expensive like to the tune of US$1200 every time we sit down it which is too much money. I always start off with a where we are financially. So, we talk maybe about sales probably the wrong things. We talk about our expenses, where we’ve been if its year-end. One year, we actually made a tiny profit and I actually paid out 3% to my employees of what I earned. It’s a small amount people earn from as little as US$7 to I think someone made like 90 bucks, but it was something, I gave up something.

So that’s sort of a reward and I think where I’m going with it, is that because we do the planning. The budgeting by the way, just so you know the word budget is not limited to how much you spend, it’s how much you earn too. So, if we budget earnings in our wholesale or in our cafe or in our second cafe or a new cafe that’s opening the summer in the library, we budget the earnings and then manage the expenses and budget those expenses then there’s a lot of room there to be able to provide incentive to people.

James Harper: The audience members now asks Andrew whether he shares his sales figures with just the team leaders or all his employees? The audience members says he deciding whether to let his employees “feel the financial pain” of his business, and is wondering whether sharing this information will motivate them or not.

Andy Gough: What I’ve read is it all depends on how you present it. If you present it as an opportunity for them to participate and engage them in the process. So, it’s not telling them the hard truth so much as sharing with them in the struggles and how they can be a part of the solution. There’s a book, I think it’s “One Minute Manager” talks about the monkeys on your back. Those are the things that bother you and fix, it’s not the people it’s their lack of being able to come with a solution to an answer or an answer to a question they are about to present to you that takes away from your ability.

And to me it’s like, the monkey in that scenarios is like it’s present because I’ve not even given them anything at all to understand and so I’m going to start with that and then I’m going to hope that they come back and find solutions rather than come back with more questions. But ,yeah and on the reward side of it just so you know, my intention is that on a leadership level we have one methodology for calculating on budgeting and then we have overall company-wide and that might be presented like in a quarterly and then an annual of course If there is a profit I’ve committed always to giving a percentage of whatever profit I earn and that’s coming straight from me, that’s not a company thing. That is like me paying it right back into the company because I have partners and then maybe they don’t want to do that, but I’ll make them do it. So anyway, sorry, go ahead.

Attendee 2: Hi Andy, I’m Nick from Mighty Good Coffee in Ann Arbor. I really appreciate your candor so much and I wish it weren’t taboo to be able to talk about things like this. Have you had or are you planning to have considered where you are revenue goals specifically for wholesale, retail and food? Because we’re in a similar space where we

Andy Gough: No.

Attendee 2: have all of those things. So, no percentage plan

Andy Gough: No

Attendee 2: of we want this, we want with that?

Andy Gough: One thing. I always talk about when I speak is I, especially if I’m around coffee folks, which is not that often when I get to be around this many awesome professionals, but I’ll say where did you come from in your business? I came from Financial Services. I know photographers and tech guys and all these people come from all walks of life and they make their way to coffee for one reason or other. Very few people are born into it. So, I wasn’t born in the restaurant industry. In fact, my college degree at K-State, Kansas State University started, I have a PR degree. My first year I was in hospitality and said I would never run a restaurant or business, never and then that’s where I ended up, but I don’t know what sales goals we should have had. We had ideas we had to plan in order to get loans to find investors to finish our project because we ran out of money and time. We didn’t know and so we’re like let’s just make the best ricotta lemon pancakes first on the kitchen side or we got lucky and found the bread baker, stolen from Portland. For those of you from Portland you’re going to be sad, you lost your bread baker.

And now we’re like, okay. It’s back the way we started. Let’s start, make the product and then figure out how to make it work. Sometimes you just don’t know like – Wichita loves to look at bread, they don’t like to buy it, and so our awesome Portland baker comes work every day and she makes as many laminated things you can make, but we can’t sell these amazing loaves of bread. We put them on every food that we serve, and they like it, but loaves of bread just don’t go out the door and that hurts inside. So, we don’t know but wholesale, that’s adding a wholesale line that we’re adding and scaling that part. So, we just don’t know but our intention is to figure out where we’re at, measure against the metrics then. Because that’s all you got otherwise, and so hey if they’re running at 56% cost of labor something’s got to fix.

And at some point, we have to have a hard reality, like is this working or not? Like putting tableside service, is that really the solution? Especially when your customers complain number one about they don’t get served when they sit down, so that sucks and then second you’re not like a coffee shop anymore. Well, is the coffee shop world-changing? Is it different? Because I’m tired, I don’t want to do the same thing everybody else did I’m sorry. There’s no room to be innovative in coffee anymore. Like there’s literally, specialty was it and now it’s there. So, what do you do now? So, we look at other service opportunities and so we don’t know what that costs. Apparently, a lot, a lot. So, go ahead.

Attendee 3: Hi. I’m Justin Durham. We have a, my brother and sister. and I have a second-generation roaster/retailer/cafe/wholesale and a lot of our conversation is just analyzing the margins between retail and wholesale. So, I was wondering if you could just talk about what you’re seeing in your business five years in. Of just the margins between retail and wholesale and how that’s influencing your vision for growth long-term?

Andy Gough: And when, to be clear margins as in cost of goods or you’re talking about your actual profitability?

Attendee 3: Yeah, basically what we called our contribution to overhead

Andy Gough: Right

Attendee 3: Corporate overhead. So yeah, all in fully loaded.

Andy Gough: Okay. I’ll do my best. So, here’s the thing, in five years. When we started our company, we use QuickBooks online and we had one employee. So labor was just like they did everything from scrubbing the toilets to making coffee. And then you add 2 and then 3 and 4 and then the roasting team starts to develop and then you have the cafe side, but they’re all still in one pot. So, if I said how much of the profit is attributed to one group or the other it’s hard to measure that because the same person who’s doing the roasting might also be your barista part-time and it took us four years until it got big enough numbers where we said, hey, you know what? We really need to have categories and switch from this online platform, which when you have a multi-layered business doesn’t work. So, where we had multiple accounts and then they’re all contributing to one and that became a nightmare. So, then my financial wizard brought it back into one system and now we’ve got each thing partitioned. And so, we’re still in the process.

With the cafe, for example, we are serving food in our downtown location every day. We’re shipping it down there every single day and those are not getting recorded as cost of goods because we have to physically transfer them out of one bucket to another in the system and we’re just concerned about get sandwiches there by 10 o’clock. That’s our main concern. So, we don’t have, I don’t have the perfect answer that. I know what my cost of goods are in the roastery and our profit margin you were aiming at about 75 %, 70% percent profit before you add all your expenses and labor on top of that. But where you end up, we don’t know because I have baristas that work on the roasting team part-time and that’s because they want to be, that’s what they love doing. So, we don’t have the answer to that. This roaster/retailer will give you an idea because they will. did you participate in that?

Attendee 3: You know what, I was in the category mentioned. We started it, it got too complicated and quit, so

Andy Gough: It was pretty hard. I got sick one day and stayed home and do it for like four hours.

Attendee 3: Congratulations.

Andy Gough: Thank you. Yeah, I did that and so I watch movies too. This does help and if I could share some of the information you can get that information relatively easily, I think. Go get the book and just pretend like you’re going to buy it and then take pictures and then. No, I mean just go straight to the part that matters because it’s really information that, it’s for us. It’s for us to use. Yeah. That’s how I was able to negotiate the price of my rent. Because I said, “Hey you expect me to make 30% profit every year but the industry says I’m only going to make 6.9 if I’m lucky.”

Attendee 3: Right.

Andy Gough: “So I’m not going to pay you anything until I make 10.” And they agreed with it.

Attendee 3: Yeah. Well, thank you so much.

Andy Gough: Yeah, I just and when I can’t answer your question, know that we’re going to try to create a way after this to keep talking as a group collectively and I’m really going to push the SCA to help us with that. Hi.

Attendee 4: Hi. Appreciate your presentation.

Andy Gough: Thank you

Attendee 4: And one thing I was wondering is on your labor costs do you include anything for yourself and your wife in that?

Andy Gough: Yes. So, I want you to understand that that labor cost is inclusive of my salary. That is actually salary and I pay myself up until the end of September when we took ownership and had to switch everything. I paid myself a reasonable amount that I would pay someone to do my job.

So, it’s fairly representative of what you would have paid someone to run your business or run, as a manager. So, I took as a distribution of profit out on top of that to help. Because there’s no way in hell I could have lived. I came from a cushy bank job and then I, went to work in coffee and that killed my pay quite a bit, but it’s okay.

So now starting January, my salary is increased dramatically, but constantly so does our revenues have increased significantly too as result. So, it’s all sort of relative. I think there’s a growing prop we can grow out of some of these challenges. I’m banking on it because that’s the best solution for everybody. Laying people off and changing your business is not a good idea, it’s not a fun one at least. Sir.

Attendee 5: My name is Larry Russell from the Bahamas. We have the first specialty coffee shop in the Bahamas, in Nassau.

Andy Gough: Awesome. Nassau, good [51:35 inaudible].

Attendee 5: Got a question. Do you do an annual budget for your business?

Andy Gough: No.

Attendee 5: No budget?

Andy Gough: This is why I’m having this conversation because you can’t do a budget until you understand where you need to be. And so, by the end of this year. I would hope to have completed at least two quarterly budgets to be able to do planning at the end of the year, but my FIT, my planning year technically runs. You’re planning in the busiest year, the busiest months. So, who wants to sit down and do financial budgeting and planning for January when your sales go up 45% and it just doesn’t work. And this year for us especially with all the rapid changes I wouldn’t have been able to put an accurate budget together because we had no idea that our project would be delayed two months and we missed out on US$200,000 worth of revenue. It just wouldn’t have worked, it wouldn’t have been worth the time. We needed to swing hammers and get the place open which opened on February 16th. So, like we were with three construction projects and holidays to deal with.

Attendee 5: I also noticed that you have diversified your business. You’re doing bakery, you’re doing coffee sales and you’re doing equipment sales.

Andy Gough: And a full restaurant too, yeah.

Attendee 5: Is that the trend in the coffee business?

Andy Gough: That’s a subject for a whole nother conversation, but I will tell you I personally believe so. I mean, like I said, I started off thinking that I could sell prepackaged cookies and scones and things from local vendors and that wasn’t enough, you can’t make it alone on coffee and those little transactions. Coincidentally to be more candor than I can be, we opened a full-blown the best brunch restaurant in our in our community. It is hands down the best food. Today. for example, they’re making challah French toast, pecan-crusted French toast, just today for fun. That’s how good this is, and I don’t know where I was going with that other than I just wanted to think about that for a little bit.

No, like we knew that food had to be a part of the equation. We just didn’t know to what extent, but our business is completely changed as we’ve grown. We’ve continually listened to what customers want which I feel is a very big part of the specialty coffee industry. I’d say we’ve strayed a little bit from our coffee roots and that is a big part of some of the toughness that we’re going through right now with these new employees that don’t know specialty coffee, they’re serving and they’re not a part of that and we need to get back to that for sure.

Attendee 5: Follow-up question. We’re doing about 38% and coffee sales, about 42% in food,

Andy Gough: 38/42 okay.

Attendee 5: and then about 15% in pastries and then the rest is retail.

Andy Gough: Okay.

Attendee 5: Is that typical of what you’re doing or what are your numbers in terms of?

Andy Gough: Oh, here’s my point about the brioche French toast or the challah French toast is that we thought that if we put a US$10 item on the menu and our US$4 or US$5 coffee that we would get to that US$15 or US$16 price per transaction. So, prior to 2018 we were averaging about US$8.56 a transaction on all throughout the year and that’s including all retail everything, and it went to 9.60. It only went up a dollar. And it was like I was going to use my negotiating powers of getting it up to 15 to 20 to drop my costs on my credit card transaction and it went up a dollar. So, guess what I get to keep paying square for my transaction because it ends up being pretty cheap. But yeah, it’s tough. We, yeah, I don’t, I could just talk about this ad nauseam. I don’t have the all the answers. I just know that we need to start thinking more clearly about it and I think once everybody starts doing that. It’s going to help all of us grow as an industry.

Attendee 5: Just the ratio on your food versus coffee. What is that number?

Andy Gough: Oh, yeah, I totally avoided that one. I think right now. I think in terms of, like I have a wholesale in which I think is very separate like the gross sales. you saw were everything. I think our cafe did US$750,000 in sales and then the whole company did about, a little over a million-last year. So, I’m aiming for 55%. That’s what I’m going for in which you’re actually doing better than me. 55% coffee, no more than 55% coffee, like at least 45. So, I mean your, did you say you’ were doing 44 plus 15 in food?

Attendee 5: I’m doing 35, about 38

Andy Gough: In coffee only?

Attendee 5: In coffee.

Andy Gough: Yes. So, you are actually doing well.

Attendee 5: and about 42 in food.

Andy Gough: I think you’re doing really well. I would love to be where a majority of my is not coffee. Yeah, because people buy one cup of coffee. They buy one, right. They’ll buy booze and four or five beers but one cup of coffee. So yeah, I think it needs to be the smallest part of your business almost. Not these malls but.

Attendee 5: Thank you.

Attendee 6: Hi, I’m Mark from Toronto. Quick question for you. In terms of your marketing, there’s typical channels like social media, email, to draw and reach or upsell or increase frequency. Have you seen anything in terms of marketing or different channels that you’ve explored that have led to your growth over the five years?

Andy Gough: Well, like most of you all in your business you probably utilize as much free marketing as you can get which turns out it’s not really free when you have to devote labor and time to making it. We started off with an iPhone shooting pictures of whatever we were doing and then it turned into like the aesthetics I got, we weren’t as cool as our favorite shops in Oklahoma, Kansas City, Colorado. So, every one of your staff members probably has a really nice camera and is an aspiring photographer. We all have one so then they become in charge of aesthetics. And so, I’ve seen a value, a big change in how we are perceived in the industry based on we’ve grown up our, we have a really nice Instagram feed. I mean it looks good. The food tastes good but it really looks good too. And the same with the coffee, but it’s really hard to measure. I can’t ask them how much they, what’s the ROI on the time you spent? It’s impossible for us. You have to get into some really big agreements with companies to help you with those things and none of us typically do that unless you were really large. We’re not buying big data. Our cable provider, they don’t sell ads on TV very much anymore. So, they sell you online distribution of ads and they’re talking about the click rate on an app, in-app is like it’s the next thing and I’m like why? Well because people are spending, of the 92% of the time they’re on their phone it’s an app. It’s not on social media. It’s doing something different. And so, I don’t have a, I look back and say how much did we do this year? This year I feel like we’re going to spend less of a percentage, but we’ve been religiously, like every year I go back and add up all of the free gift baskets, I add up all of the donated services that we did from the charitable functions. We don’t do a lot of cash donations because quite frankly we don’t have much cash. It’s hard to do that. Cash has very little impact too and that’s a big part of it too. Little big impact on the big picture things right and solving problems. But it’s right around 5% percent of our total revenue we’ve given up in the form of marketing. But I’ve not seen something that really does make a big difference. If I knew that by the way, we would just put all of our money in that and we wouldn’t have a problem but there’s not.

We give a trade with our local NPR affiliate where we get more value out of the relationship by giving them coffee every other month. We split it with another roaster in the community and then we get to buy, like every year I’ve bought a little bit more to get to where I’m actually giving as much as I’m paying for. I’ve worked into it a budget cash flow wise. It was hard giving US$300 bucks a month and now we’re giving US$300 bucks a month and US$300 of the trade and I feel like those 3200 customers that give to that station are listening to me and know that those are my customers. But the terrestrial radio stations the ones that play rock music all day long, they want to sell me really expensive ads and they’re not going to, I know they’re not going to work. But it’s hard, marketing is really tough. In wholesale there is no better marketing having a well-built website that is optimized and then a really nice pair of shoes that’s comfortable and you go walk and you go tell people what you do. That’s the best way to do that.

Attendee 6: Awesome. Thank you.

Andy Gough: Yeah, sorry I can’t come up with any answers.

Attendee 7: Hi. I’m from Ecuador. I have a company similar like you and in Ecuador. I’m starting to open something in Peru and looking something in Guatemala now. Very similar models and even invoice. First thanks for having 15 years coming to the SCA

Andy Gough: Right on.

Attendee 7: and I’m impressed with the open topics and I see a big opportunity starting to share information about all of our business, to contribute our business. Even in Ecuador we have been trying to put together a couple of people, like three or four. I was the president of the association. Even to function some of our chains and to put, use the same ERP and put things where I think the opportunities in articulating between companies like I’m sure the main of the room are incredible. But at the end of the pond somebody has to start to do something so please can you start. I give you my card and then you give can your card. Maybe I WhatsApp chat or something like that because.

Andy Gough: Yeah.

Attendee 7: I think it was an incredible room

Andy Gough: Yeah.

Attendee 7: conversation and I think we all can learn from each other

Andy Gough: Right.

Attendee 7: and instead of asking you a specific question just to challenge if you can

Andy Gough: Yeah.

Attendee 7: lead the ongoing process.

Andy Gough: Happy to.

Attendee 7: So, my intention I mentioned earlier was to see if I can get some sort of facility., facilitated conversation through the SCA that we continue. I don’t want it to be just about me talking to people. I want it to be us talking to each other. Mention another class, the Baristas Hustle is a great resource. And when I read those posts and I contribute conversation about topics that are relevant to me, I see a lot of conversation among baristas but not so much of business owners and sometimes the business owners can get angry and they start mansplaining things and I hate that, and they’ve done a good job of limiting that.

But there’s sometimes used to be like the hard truths back door conversation that we don’t have as publicly because it can very easily be misinterpreted. I was a little bit concerned about putting real numbers on the screen, but then I was like, I’ll have fun explaining to someone who misinterprets that because it will always come out looking better. I do care about the community enough to do this. So happy to if you are you’ve got to leave and you want to stay a part of the conversation if you drop the cards here, I’ll safe keep them and then communicate with Heather Ward about how to maybe keep this conversation going. I can’t make any promises, but I’m in it just as much for my own use.

And by the way, it’s a really important thing. You can’t just give without expecting something in return. I think (1:03:06 inaudible) giving is way better than selfless giving in this scenario because you need something, and I need something, and we’ll actually get something done if we have that expectation. And I feel like this has been a good conversation about that. So yeah, feel free to drop your card and we can chat afterwards, too.

Attendee 8: Hey Andrew Hayes with ( 1:03:20 inaudible) Coffee.

Andy Gough: Good to see you again.

Attendee 8: Good to meet you again. I’m the owner of a coffee roaster and a couple cafes in Southwest Oklahoma. First and foremost, I would agree with you and say, as an audience this conversation is the most important conversation in our coffee business today and just like you said we can’t give that money down to these producers if we can’t keep our business running and unfortunately in our community is I’ve watched three to four cafes close and coffee shop cafes close in the last 12 months. And we’ve been able to succeed over that because we focus on these areas, but just like you and everyone else. I’m sure here, this is a real struggle. It’s a challenge and what I’m relating to you on this is right in the middle of explosive growth, you know. As owners and as operators of these businesses, we work in our business because that’s what’s required of us. And it’s so hard to pull out. That’s the same challenge I think all of us face and I’m personally facing right now is pulling up to focus on the business. When we talk about investors to help manage this explosive growth because just like you showed there you obviously didn’t have any money to invest back in your business and I’ve seen your stuff. I’m watching your photos. I mean incredible kitchen incredible products, but I know your business didn’t pay for all that. You had to bring somebody else’s money into it. And yes, the bank has their fees, and everybody knows how to get an SBA loan. But when you talk about an evaluation of money, you don’t actually have because you have no profitability really yet. How are you proposing that to investors and showing hey, I’m in explosive growth, I’m making no money right now but in five years we might be 5% or 10% profitable in this is how I’m going to pitch that to you?

Andy Gough: So, in general and then I’ll speak specifically about investors because I think I have a little experience with that being part of the accelerator and then actually taking investment and going through that process. But investors are mostly concerned about top line. I mean they do care about the bottom line, but their top line is in their eyes something they can work with. If I open the doors of my new cafe to nobody showing up and we have all this then we would have been out of business in two weeks. It would have been completely dead.

Attendee 9: You’re talking about a private investment?

Andy Gough: Yes, yeah sorry not loans. We got plenty of those too. And those are important by the way to get help with SBA with different organizations. We have networks that do non-profit work and help us with investments in co. They’ll take on uncollateralized portions of debt to make it easier for you. Those are all some resources take advantage. But when it comes to actual investors, they first care about you as a person and whether or not they can work with you. Your character is number one.

Second that combined with do you have something that actually works. And so, when we present the idea, we’re on track to make a million dollars this year. Okay, I can work with that, and then that attract and it’s just it’s really about matching people together then that makes sense. They want to see that they’ve got something to improve. I happen to take investment from a family LLC. that is the extra money that a family of bankers have. This is their play money. But what I have is one of my best friends now is a 36-year old CEO of the fourth largest bank in Kansas is like my guide and his father who is the chairman of the board. And so, I have a mentorship program that is far beyond what anybody else can have. Have they solved our problems? No. They’re looking at stuff jumping off the page right now because let’s be real, they have to spend all their time developing a big Bank.

Attendee 9: Where do you put those funds into operations or?

Andy Gough: in that particular scenario it went straight to buying stuff because we ran out of capital. So, we put $100,000 worth of money into the kitchen that we were short and the construction costs that we were short. Our total construction cost on our big project was not nearly as much as it could have been. Like I said, it’s a 1.2-million-dollar project, but we only paid about a US$110,000 of that, 120.

Attendee 9: Did you operate a line of credit…?

Andy Gough: So, we also established a line of credit for our coffee purchasing and we have another US$100,000 worth of extra debt and that’s layered on top of probably another US$300,000 with debt.

Attendee 9: That’s why I lay awake at night and read books.

Andy Gough: 2016 I had anxiety issues and I stayed up a lot. And I’m not making that up. And I read a lot of books in 2016 but honestly, it was almost like a calling. It actually worked out for me in the end because I came out of that knowing exactly what I wanted to do and then we put it on path and it only took longer because we had delays, construction delays and things but it worked. It worked in that we’re still here. I’m here to tell you about it. I literally was writing this presentation last week. I was hoping to give you quarterly numbers in there as well just to give you like the positive thing. We’ve tripled our expenses in some ways. But our top line revenues have doubled, month over month. We went from doing US$75,000 a month in total sales company-wide to over US$150,000. So like life is good in some ways but I’m still struggling.

Attendee 8: How did you evaluate percentage of ownership with those partners? I mean a $100,000 of a million-dollar business that’s 10%.

Andy Gough: Right. So, they are going to devalue the hell out of your business. They come in and tell you how great you are and then they’ll tell you you’re only worth like US$100,000. And going into a sale of capital raising. First of all, if you didn’t need their help then that that doesn’t matter. But if you want their help, they’re going to try to get a good deal. So, you have to be really careful that you don’t get into a scenario where you hurt their feelings and they hurt your feelings to where it’s never going to work out.

So, they helped me realize like, on all those metrics that they do look at those metrics. They look at your loan. I mean these are Bank people. This is what they do, they value risk and so it’s a tough group to go in because they’re going to beat you down because they look at your credit worthiness. But one thing they can’t figure out without putting a little bit of risk out is how much they value you as a person. And in our scenario like I’m not a financial wizard, but that’s where their expertise is so they can help me with that and they’re starting to get there. So, I mean, I think we raised a total of 200,000 in cash and they helped secure and back into a 150,000 in debt. So, we looked at it as like a US$350,000 contribution, but they only had to physically get up give up about US$200,000.

So, it was a little bit better valuation and I actually negotiated up I gave him an extra 5% to put an extra cushion in there. And to me, if I made 70% of something it is a hell of a lot better than 100% percent of nothing and I feel like I’m in a better position because of it.

Attendee 8: And you feel like in that scenario you were giving up about 30% ownership?

Andy Gough: Yeah. That’s what I did.

Attendee 8: Awesome. Thanks. Appreciate you, Andrew.

Andy Gough: Yeah. Feel free to drop your card and thank you guys so much.

Attendee: Thanks

Attendee: Yeah.

1:10:30 Outro

That was Andrew Gough at Expo in 2018. Remember to check our show notes for a full transcript of this lecture and visit coffeeexpo.org for tickets to this year’s event.

This has been an episode of the SCA Podcast. Thank you for joining us!

Listen, SCA PodcastSCA StaffFebruary 18, 2019

#39: Coffee is a Business (Whether You Like it or Not) | Andrew Gough | SCA Lectures 2018

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