Why (some of us) in brick and mortar are uniquely f-ed right now

But there's a bright side. It's called talking about it.

At least once a month, I open Instagram to read that another little brick and mortar shop is closing for good. In January I saw that Folia Collective, an L.A.-based plant shop I’ve been following since I opened Fernseed, was closing permanently.

Every week, another small storefront business closes for good.

From their Instagram post:

While our quick pivot during the early pandemic and all of your support enabled us to come out of the lockdown days stronger than ever, the 2 years that followed have been the hardest ones yet and we just can’t make it work any longer.

Am I shocked? I guess it’s shocking in the sense that, if Folia Collective is going down—they have a sizeable Instagram following and it feels like the kind of place minor celebrities shop at—I’m patting my torso and glancing around in disbelief wondering how I’m still here.

Is it grit, or insanity?

In my own struggle to know when it’s time to hold ‘em or fold ‘em, I decided that enrolling in the Goldman Sachs 10,000 Small Businesses program—essentially a mini MBA in running my own business—would offer some insight.

It was there that I learned, among other things, about the concept of multipliers.

A multiplier is a standard rate of value that helps brokers assess what your business is worth. It’s a number that your revenue (or profit, or EBITDA) is multiplied by in order to arrive at a dollar value.

Multipliers work like this:

Your annual revenue x [your industry multiplier number] = what your business is worth(ish)

You do not have any control over what your industry multiplier is. It’s like the NAICS classifications, or risk class codes. It’s determined by bureaucrats.

You know what a brick and mortar retail business like mine is worth based on its industry multiplier?

Jack squat!

Compared with other industries like manufacturing, finance or construction, retail is kind of worthless based on the standard multipliers. Most retail multipliers are less than 1, meaning that if your annual revenue is $600,000 and you multiply it by a multiplier of, say, 0.85, your business is worth $510,000. If you manufacture pharmaceuticals, your multiplier might be something like 4.16. So a business that makes the same amount of annual revenue in the pharmaceutical manufacturing industry would be worth ~$2.7 million.

This means that no matter how hard you work at running a profitable small retail operation, your multiplier is working against you. These types of businesses just aren’t that valuable when it comes time to exit.

That’s why Emma’s comment on the Folia Collective Instagram announcement post haunted me. “What would it take to keep you in business?”

Every sentence fragment in Folia Collective’s response explains exactly how so many brick-and-mortar shop owners are trapped right now. Do you see it? Can you read between the lines?

I can read between the lines because for the past two years I’ve researched options for “what to do with a business that’s just limping along,” including: scaling and growing, selling the business to an interested buyer, selling the business to employees, keeping the business operating while I get another job, and/or just shutting the whole thing down.

Let me tell you, friends, the picture is not pretty. None of the options are attractive or lucrative and some aren’t even feasible, and Folia Collective’s comment spells it all out.

“essentially we’d need quite a bit of money” = we are in debt

Folia Collective was in business in 2020 so I imagine some of their debt is in the form of EIDL loans. In case you’re not one of those folks who was lucky enough to have gone through the pandemic while running a small business and you didn’t apply for or receive an EIDL, let me explain how that worked.

1. You went through a period of terror and paralyzing uncertainty thinking you were going to lose everything (which probably included your life’s savings because that’s the only way to fund a brick and mortar business) within a few weeks.

2. The government started handing out money at terms you’d never previously had access to as a small business owner (3.5-ish percent and 30-year terms) and will likely never have access to again.

3. You applied for some of this money, a process which at no point did they ask you how much you thought you needed.

4. The SBA awarded you some amount that was probably more than you could have ever dreamed and within a few weeks that amount was deposited in cash into your bank account.

5. After that period of uncertainty and terror, seeing that amount of cash in your bank account provided you with a sense of relief and, dare I say, confidence? You thought, “We’ll never need to worry again, because there is no way we could ever spend all this money!” Especially because in 2021, sales were booming.

6. 2022 happened. Then 2023 happened.

7. Then you read the fine print of the EIDL loan: it required a personal guarantee, which means that even if your business declares bankruptcy, you’re paying that sucker back one low monthly payment at a time… for the next 26 years.

It would be lovely if your EIDL loan were all the debt you had, though, wouldn’t it? It’s probably not.

I could (and probably will) write an entire essay about how debt accumulates in business faster than anyone who has not owned a business can conceive of, and not because people are naive and don’t know how to handle money. Debt happens because people have hope. They hope, many times over, that this is the last time they’ll have to spend $3,500 they don’t have to get the business around that next corner.

I think we have a lot of small businesses owners in our communities who are in debt and, maybe like Folia Collective, calling time of death on hope that the business can turn that next corner—or that they have the energy to get it there.

Let’s say that against all odds you do right-size the business to a place where it makes $2,5000/month again in profit. It will still take 8.3 years to pay those loans back if they don’t accumulate any more interest and that’s considering that the business can only make a $2,500/month profit if you don’t pay yourself anything at all.

Do you have 8.3 more years in you of working this hard for nothing? I bet Folia Collective didn’t.

“ideally a new owner who could invest in real marketing and growing” = find someone to invest more money into this business than the business itself is currently worth

A new owner would have to not only pay off or take on most of that debt if they were to acquire the business, they would also have to be willing to invest more of their own money in growing some aspect of this business that isn’t brick and mortar so that the brick and mortar shop could continue. In other words, you cannot support the staff and operational expenses it takes to run the brick and mortar shop, especially in a place like Los Angeles where the rent is expensive, without growing the e-commerce (read: scalable) portion of this business. And that requires more money and more energy than the current owners have at this point.

“AND not have to pay themselves until…” = we haven’t been paying ourselves

Because of the debt, the owners have been taking limited or no compensation for a while in order to service the interest on the credit card debt. No one wants to buy a business they can’t draw a paycheck from.

Remember multipliers and how they factored into determining how much a business is worth?

Owner compensation is another big factor in determining how much a business is worth.

“we had been talking with someone but” = they bailed

It is unlikely a brick and mortar business will ever find a reasonable buyer, because potential buyers (i.e. people with that kind of cash and business acumen) are looking for a business that is turnkey, a passive revenue generator, not a business they have to invest money into, then work in while not paying themselves a living wage. Brick and mortar, by its very nature, is not scalable, so there is very little return on investment ever. That’s fine if you’re the founder and you’re paying yourself something, but once you factor in debt, it’s no longer worth it for anyone.

“beyond the fact we’ve been losing money for 2 years” = we need to show at least 2 consecutive years of profit and we don’t have that

Another factor in determining business value in addition to multipliers and owner compensation: a business should have at least 2 years of profit on the books to be attractive enough to sell. This means the Folia Collective owners, who have been losing money for two years, would need to continue to work for low/no pay for at least 2 more years until it returns to profitability to “get the business ready for sale.” Sounds like they don’t have that in them. Can you blame them after the past 4 years?

“a bit overwhelmed by the complexity of the business” = high owner involvement

Like most brick and mortar businesses, this business is operationally complex. Think of all the products we need to order! The scheduling that has to happen! The processes that have to be documented! The job roles! Now consider that we can only afford to pay people $22.50/hour in an expensive city like Los Angeles to handle that type of operational complexity and you can see why we have difficulty retaining a core team of managers who retain that institutional knowledge and run the business so the new buyer doesn’t have to roll their sleeves up and figure it all out from scratch.

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I don’t know the owners of Folia Collective and I can’t guarantee that everything I’m reading into this one Instagram reply is indeed true for them, but when I read it, I saw the thing I’ve feared has to be true for so many shop owners right now. We are trapped.

And let me stop you right here on the whole “I’m trapped,” thing. I’ve told you multiple times that I have not taken a paycheck from my business in nearly two years. How the hell, then, am I eating?

Because my partner makes enough money at his job to pay for all our household expenses. For a lot of people, that might be the “dirty little secret” of running a shop that could be considered an expensive hobby. And had I not done a lot of deep personal work over the past decade defining my sense of self worth in relation to how much I earn under capitalism, I would be deeply embarrassed to admit this.

I didn’t go into shop ownership to get rich. I got into this work because I felt called to it for reasons I can’t explain. I never felt more at home in the world than I did working for small storefront business in my community, I love owning a business, and this felt right. I went into this work thinking I might pay myself $50k in a good year, accumulate equity in the meantime, and have a pretty good work/life balance in the process. Now I’m here telling you I found out the hard way how quickly that whole picture can get turned on its head.

I can afford to operate a business that’s been turned on its head for a while because I could borrow against the equity of my house to keep it afloat while my partner pays for our groceries. That’s a position of privilege, but it’s not an embarrassment. If I keep it a secret, anyone less fortunate than I am might enter into business ownership not understanding those risks, fuck around running a tiny food business in their neighborhood and find out the hard way they’re going to lose their house because of two years’ worth of holding out hope that every $3,500 they put back into the business was going to be the last.

We cannot continue to let this happen!

When I read this post by Folia Collective I had a moment of realization that I am not the only one experiencing this upside-down-ness. They’re not saying these things explicitly because how can you? How can you tell people you’re drowning, but also that you need them to confidently continue to shop with you?

If it is the case that for someone to own a small business in your community they must be subsidized by another breadwinner in the household, how many people does that mean owning a small business in your community is off limits to?

If it is the case that for someone to own a small business in your community they must keep their day job in order to keep the business going because there isn’t enough revenue to pay themselves and all the bills, how many people does that mean owning a small business in your community is off limits to?

If it is the case that for someone to own a small business in your community they must rely on unpaid family labor, how many people does that mean owning a small business in your community is off limits to?

If it is the case that for someone to retire from the sale of a small business they’ve owned for decades in your community—to realize in dollars the value they’ve invested in their time and good will—that the business must transcend its own inherent constraints to become something bigger than it needs to be in order to provide that value, how many people does that mean retiring from the sale of a small business in your community is off limits to?

Do you see where I’m going with this?

Brick and mortar businesses have incredible value to the cities and towns they are a part of. We desperately need people to go into this type of work, running shops, restaurants, and other independent businesses because those businesses are what makes a place unique, combatting vacancies and monoculture, and ultimately attacts larger investment (see: the work of Richard Florida). But they have no actual value in a resale business marketplace because the multipliers are low, there’s usually high owner involvement with low compensation, and because of the limited scalability, it’s incredibly difficult to borrow money at low interest rates to avoid debt. So people work hard for years, providing value to everyone but themselves, not just to earn nothing, but to potentially lose their house in the aftermath.

Is this really what we signed up for?

How do we tell people like Emma how bad things are if we can’t talk to each other about it first?

How can we know if we alone are experiencing it if we can’t talk candidly with other people in similar situations?

How can we ask for collective help if we suffer under the belief that we are alone?

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I am still not folding because I can afford to hold financially and that’s an incredibly lucky place to be. I have, however, had to seriously consider the cost to my mental health of working very hard at something for no compensation. In order to keep my resentments in check (and not tear into everyone like Emma who so innocently boo-hoo our choices as if they’re the ones losing when a shop goes out of business), I’ve learned to create more space between myself and the business. I take more time off. I learned to stop defining myself so much by what I do currently in this business, in this phase of my life, which is contrary to how our culture and community wants us to see ourselves, but healthier in a holistic sense. All good stuff!

I might have 8.3 years left in me if, in fact, Fernseed starts to see a profit again (and things are looking good there these days, I must say). I definitely have two more years in me because of the aforementioned emotional work, aided in part by this whole sharing endeavor and the moments of understanding and community it has offered.

On that note, I want to share some recent favorite discoveries with you. (Let’s end on a hopeful note at least.)

• Kate Tyson’s Thoughtful as Moss Substack has a lot of good stuff for business owners struggling with issues like these. I highly recommend this post about collective failure as a starting point.

• Kate’s Whiskey Fridays podcast (co-hosted by John Gerber) is also a soothing dose of realness for business owners who don’t know whether to laugh or cry most days. I really enjoyed the interview Kate did with the owner of Primal Meats about closing that business.

• It seems like the whole Substack part of the internet has already seen the series Emily McDowell is writing on her decision to stop running her stationery company, but you must read it if you haven’t already. She also launched a podcast with famous quitter Holly Whitaker about quitting things, which I also recommend.

Finally I want to make a special highlight of the TYFU podcast, which has been a light in the darkness for me for this past week as I’ve been binge listening since discovering it. The hosts Beth and Marilla own brick and mortar retail shops in the Finger Lakes region of New York and talk about the joys and pitfalls in specific detail. They are hilarious and actually have good banter which is such a rarity in “amateur” podcasting. I laugh so hard I hurt listening to them go back and forth about shoplifting and people saying, “You know, you should just…”

Did you read that? I LAUGH.

I’m so grateful to these two women for reconnecting me with the actual joy of doing this work, because it is such a joy, honestly. Who doesn’t want a job where any rando can walk in off the street and you get to have an interaction with them? (Probably a lot of people don’t want that, but I love it.) Most of the time those interactions are incredibly positive, heartwarming, even. IT REALLY IS A JOY TO DO THIS WORK, I swear, or I wouldn’t still be here. These women helped remind me just how much I love what I do, even on the worst days.

I just want more people to have the opportunity to experience it without losing everything.

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