The Story of Sally's Lemonade Stand or How Wall Street Screws Everyone

Let's follow the trials and tribulations of our favorite middle-schooler as she learns a lesson in fiscal reality. 

Transcript

Season 1; Episode 1 

The Tale of Sally’s Lemonade Stand or How Wall Street Screws Everyone

Once upon a time, a very bright, hardworking, middle schooler, named Sally, wanted a shiny new bike so she could spend the summer riding to the community swimming pool with her best friend, Emily, who lived directly across the street. 

And not just any new bike, but the exact same bike as Emily’s, only in fire engine red, not sun bright yellow, like Emily’s.  She patiently explained to her parents that with a new bike she could ride to the pool, attend summer dance classes and even run errands for her mom. 

Her parents liked the idea of a new bike but wanted Sally to learn a lesson in fiscal responsibility. So, they suggested that she should find a way to earn money to pay for the new bike, instead of just giving it to her free of charge. 

At first, Sally was disappointed but eventually agreed and began to think of different ways to make money, such as babysitting, dog walking or chores for neighbors. After dismissing several ideas as low margin, high effort, Sally decided to open a lemonade stand. 

She was excited and enlisted the help of her younger brother, Alan, and even got Emily to pitch in. Her parents gave her a start-up loan at only 5% interest, and her dad even helped her build the lemonade stand, charging only for materials at cost.

Sally spent several days experimenting with various lemonade recipes. One day, almost by accident, she included a few new ingredients and realized she had a winner. Her lemonade was better than any other lemonade she had ever tasted, even the kind her mother bought at the local IGA. Sally opened her lemonade stand and business boomed.

By the middle of summer, Sally had paid back her parents’ loan with accrued interest and was operating with a significant positive cash flow. In fact, she gave both Alan and Emily bonuses and then bought her shiny new bike, all with company checks that said, “Sally’s Lemonade”.

And word of Sally’s success spread.

One day, a black Lincoln Town Car stopped in front of Sally’s lemonade stand and a tall trim man, wearing a very expensive suit, got out and introduced himself. His name was Michael, and he was something called an investment banker, and he was working on what he referred to as a lemonade stand rollup. He talked with excitement about things like economies of scale, leverage, market penetration and operating efficiencies. 

Of course, Sally had no clue what Michael what was talking about, but she liked the idea that he offered to buy her lemonade stand for a multiple of six times revenue. So, Sally sold her lemonade stand to Michael.  

At first, everything was great. 

Sally got a check, although not as big as she expected due to something Michael called an, “earn out agreement”. But still she was happy. 

Next, Michael and his investors brought in a new CEO to run the lemonade stand rollup. His name was David, and he seemed very nice.

But then things began to change.

David increased Sally’s revenue and profit targets, making it very hard for her to make her, “earn out target”, whatever that was. Sally and all the other lemonade stands were also now required to buy their lemonade from a single supplier, who used Sally’s secret receipt. 

Next, David cut back-office staffing so all administrative functions, such as paying bills and responding to customers and suppliers, slowed way, way down. In fact, it became almost impossible to get a live human on the phone. Finally, David slashed all marketing and promotional activity, so hardly any new customers heard about or came to Sally’s lemonade stand.   

Sally wanted to know why David did all these things.

Do you know? We bet you do.

That’s right. Michael and his partners did not use their own money for the rollup. They had borrowed the money, and that money came with something called, “debt service”. Which means that every month, in addition to paying all the bills of the lemonade stand rollup, David had to figure out how to write a giant check to cover “debt service”.

Oh, and we almost forgot, every month, David had to write a giant check to cover the “fees and services” provided by Michael and his partners, even though no one was certain what “fees and services” contributed to Michael’s 51% equity stake. 

With so much money going cover “debt service” and “fees and services” it was very hard for the lemonade stand rollup to make a profit. And soon, things turned very dark. Sales decreased, Sally’s little brother Alan quit when his paycheck bounced, and David, the CEO, laid off Emily with no severance. He called it, “right sizing”. 

Within three months, the lemonade stand rollup declared bankruptcy. Big burly men arrived at Sally’s house early one morning and loaded her lemonade stand onto their flatbed truck. They even took her shiny new fire engine red bike, because she had bought it with a company check. 

This made Sally very, very sad.

But next summer, she had an idea. Why not start all over again? So, she built a new lemonade stand and started selling lemonade. And everything was great.

Until one day, the postman handed Sally an envelope and made her sign a little piece of paper. He explained that whatever was in the envelope must be very special because the people who had sent it wanted proof that she had gotten it.

It was something called a, “cease and desist order” from the legal department of a very large well known global corporation that made all kinds of great sodas and drinks, many that Sally loved. According to the, “cease and desist order” this huge global corporation had purchased Sally’s lemonade recipe from the bankruptcy proceedings of the lemonade stand rollup. 

But that’s a tale for another day. 

Thanks for listening.