IF YOU ASKED ME about my financial life, I could regale you with stories about working the swing shift at the local chemical plant, or the rental properties I’ve invested in, or my efforts to make a living as a professional wrestler. But instead, I’m going to tell you about the coffee shop—so perhaps you can learn from my biggest financial blunder.
In 2009, as the financial world was falling apart around us, I saw a classified ad describing a small business for sale. A drive-through coffee shop had recently closed. The owner of the equipment and the landlord were both trying to find a buyer who would operate the business. I was intrigued.
At the time, I already owned a fourplex apartment and two single-family homes, and was renting them out. Thanks to my forays into rental real estate, I felt I could accurately evaluate business deals. Indeed, I’d also looked at laundromats, small apartments, foreclosures and other small deals—and didn’t bite on any of those.
Still, I was looking for my next business challenge. I had married in 2007, and our daughter was born in 2008. I’d held off buying anything during that first year as a parent, as I adjusted to the change. But after a while, I felt that—between my rental properties, my job at the chemical plant and my young family—I was managing my time well.
As I got details about the coffee shop from the landlord, huge red flags emerged. Books I had read over the years about Warren Buffett’s teachings, coupled with my experience as a landlord looking at properties, were warning me: “Danger ahead.”
The biggest red flag: The landlord was a fantastic local lawyer and business mogul, and yet he told me he couldn’t provide the shop’s sales figures. I was looking at buying a business despite lacking key data and knowing nothing about the industry. But hubris led me to ignore such warning signs.
I sat down and did some back-of-the-envelope math. The shop’s rent was modest: $300 a month plus utilities. It was solely a drive-through, with no inside seating. It was in the industrial part of our Iowa town. I drove by it every workday, and I knew that the level of passing traffic was tremendous. It was one city block from the Hardee’s franchise where I had worked as a teenager. I had been employed at Hardee’s on and off over the years, becoming an assistant manager, so operating a restaurant-type business didn’t intimidate me. I felt that this was within my circle of competence.
Boy, was I wrong.
My wife was supportive of buying the equipment and trying to make a go of it. She had worked in retail, and done some bartending and waitressing. We felt confident that we could operate the shop. It would only be open from 6 a.m. to noon, so it wouldn’t take up our whole day. My basic numbers said that sales of $100 a day would produce a profit.
I knew that the previous owner had done well with the shop for a few years when it was on the north end of town, the site of most of the city’s restaurants and stores. Development by the local mall had forced the owner to move, however, and the shop reopened on the south end of town. Why the previous owner had given up the shop wasn’t clear. We were told that it might have been personal reasons, not necessarily that the shop was losing money.
We settled on a purchase price of $9,000 for the equipment. We bought a few more items that we felt we needed, such as an industrial blender, as well as some inventory. Because we didn’t know how to operate the espresso machine, we hired a trainer who had owned a shop in Canada. She was fantastic, and trained my wife and me on the ins and outs of making great lattes. It’s embarrassing to recall now that I had had a latte only a handful of times. I had never visited Starbucks in the nearby bigger cities. Despite having driven by the shop on my daily commute, I had stopped to try it just once.
Learning the business. On the first day, I handed a lovely customer a caramel latte. She was so happy that we were open, and I was proud of our drinks. After completing her order, I had a moment of dread, though. I could see why the previous owner had done so well on the north end of town but struggled at the new location. This woman was clearly an affluent professional, our target demographic. But I also knew from my five years of working at Hardee’s that affluent, professional women were scarce in the neighborhood. Almost all the passing drivers—and we saw lots of them—were men on their way to the nearby factories. There, they drank regular coffee, not lattes. For many of them, that coffee was provided free by their employer. Those men also worked shifts, in some cases starting before we opened each day.
We had a few promising Fridays and Saturdays when we broke $100 in sales. One Saturday, during fantastic weather, we took in $153. I realized our prices were too low, but changing them would have required paying for new menu signs.
As days of operation turned into months, we began to learn the business. We found a good roaster of excellent espresso and drip coffee. We made a deal with a local grocery store to buy half-and-half and milk at low prices. We cut out supplies that I had thought we would need but that turned out to be unnecessary. For instance, our espresso machine filtered our water, so I didn’t need to pay for filtered water.
Also, I thought I was buying a coffee shop, but what I bought was a latte shop. Lattes were 90% of our business, and I had been blind to that when I purchased the equipment. If I had worked two weeks at a Starbucks, I would have known so much more about the coffee business and how it operates. In short, I wouldn’t have bought the shop—or, at a minimum, I would have had the knowledge and experience needed to have some chance of success.
Within three months of opening, we were bleeding money. My wife wisely suggested that we cut our losses and eat the monthly rent on the one-year lease we had signed. That way, we wouldn’t lose additional money every month, and we wouldn’t be tied to the shop seven days a week. We had been trying to have another baby, and we got the good news that my wife was pregnant. But my stubbornness couldn’t get past the money we had invested. I didn’t foresee the business improving dramatically, but I wanted at least to finish the lease.
That was a mistake. The business was doomed. Our target customers weren’t in our part of town. Even if the business had been more successful, the time we were spending at the shop wasn’t worth the small profit we might have made.
As my wife’s pregnancy progressed, her time at the shop dwindled and then ended. All the while, sales declined as summer ended and cold weather arrived. I had assumed that people drink more coffee in the winter, but the opposite is true. It was no different from my days in fast food: Summer was the busiest time. By contrast, my buddies who worked for grocery stores said winter and holidays were their biggest sales periods.
Meanwhile, thanks to the 2008-09 financial crisis, my 401(k)—which had performed so well—plummeted from a high of $147,000 in spring 2008 to $90,000 by the time I bought the shop in May 2009. I had a sizable portion of my 401(k) in my employer’s stock, and the company was hit that summer by bad news and Chinese competition. My 401(k) sank further, to $75,000.
Just as my retirement portfolio hit a low, my wife’s pregnancy became challenging. She developed kidney stones. My losses from the coffee shop meant I couldn’t pay all our bills. I was falling behind on the groceries, my electricity bill and my mortgage payment. I had no choice. I took money from my 401(k) at the worst possible time, when its value was down. I was confident that my investments would rebound, but I didn’t have the luxury of time—because the bills kept piling up.
When my son was born in January 2010, we knew that we would sell or close the shop when our lease ran out at the end of April. We were fortunate to find a young buyer who was willing to pay half what we had paid. I was honest about the shop’s failure to turn a profit in the year we operated it.
Long road back. My wife sees the positives in our year of owning the coffee shop. We met some wonderful people. But to me, the financial repercussions seemed to last for the next decade. I’ve come to terms with the fact that almost everyone who launches a business suffers setbacks and failures. Still, being humbled by your mistakes, ignorance and blind spots is tough. It’s painful to know your family and loved ones suffered because of your poor judgment.
In 1965, before I was born, my mom and dad had moved to Iowa. Every Hispanic family we knew in the area had the same story: Head north to a cold city where little to no Spanish was spoken. Most arrived from South Texas or Mexico. All were seeking a job and an opportunity to improve their family’s future. Many in our community had found that opportunity in Iowa—opportunity that had been kept from their families for generations. They bought homes, raised families and lived the American dream. Now that I was a husband and father, I marveled at all of them and the hardships they must have endured. Now, I also had to accept my share of hard times.
During this period, I often thought of my father and the example he set. “Keep moving forward,” he would tell us. I tried to focus on what I had going for me. Though I had gained 30 pounds from neglecting my workouts and diet, I had my health. My wife had fully recovered from delivering our son a month early. Alex was healthy and doing well. I had my steady, good-paying job at the chemical plant, which I now appreciated more than ever. If I worked an hour, I got paid for an hour. Regardless of my company’s latest quarterly results, I got paid for my work.
Time would be my friend as I licked my wounds and ate my humble pie. “I could dig myself out of this,” I would tell myself as I went to work.
Slowly, my 401(k) recovered. I try not to think of where it’d be today if I had left it alone during the depths of the Great Financial Crisis. I remember reading somewhere that it’s too bad that losers don’t write books because you learn a lot from mistakes. I’m not a loser. But I feel the same way about the coffee shop that I feel about my professional wrestling career. I didn’t “make it.”
Today, I define my circle of competency narrowly. I recently drove by a carwash that was for sale and kept driving. My job is my main source of income. We now have a good real estate business consisting of a fourplex and eight single-family homes. I don’t manage any of my properties, allowing me to focus on my family, my job and enjoying my workouts and monthly professional wrestling matches. My property managers are far more skilled and have a better temperament for the job. We own two of the rental homes free and clear. My long-term goal is to have six paid-off rental homes to help fund our retirement.
I hope to retire from my job at the chemical plant six years from now, at age 55. In addition to my 401(k), I have a Roth IRA and a brokerage account. These two accounts should help pay for my early retirement years until I claim Social Security. We’ll also have the rental income, which should provide around $3,000 a month, and my pension, which will amount to $800 a month.
If I hadn’t blundered with the coffee shop and had to tap my 401(k), I would have been able to retire even earlier than 55. On the other hand, I’m certain that if I hadn’t made that foolish investment, my arrogance would have led me to make an even bigger blunder, one that might have wiped me out. We all make financial missteps. I’m grateful that my financial fall came earlier rather than later—and that I learned from my costly mistake.
Juan Fourneau’s goal is to retire at age 55. When he isn’t at his manufacturing job, he enjoys reading about personal finance and investing.