Moving Home to Expand the Family Business

Entrepreneur: Justin Gagnon, 31

Background: After graduating from the University of Notre Dame in 2000 with a bachelor's degree in business administration, Gagnon worked for Level 3 Communications (LVLT) in Broomfield, Colo., building order-entry systems. During a short visit home to Danville, Calif., in 2003, to help his father build a Web site for the family catering business, Gagnon came up with the idea of transforming it into a full-time provider of healthy lunches delivered to local schools. He quit his job, moved home, and recruited two college buddies to help him build the business.

The Company: Gagnon and his friends, Ryan Mariotti and Keith Cosbey, each invested $6,250 into launching Children's Choice; Gagnon's parents put in an additional $6,250 and took a 25% ownership stake. In 2003, its first year, the fledgling business served about 550 lunches a day to eight schools in the San Francisco Bay Area and took in $400,000 in revenue. Today, its 90 employees prepare an average of 10,000 lunches a day for 122 schools throughout California.

Revenue: $3.9 million in 2008

His journal: If it wasn't for my dad continually pestering me to come to California with a couple of friends and "build a Web site" for his school lunch business, I might have never taken the leap. But it was his pushing that made me curious about what was going on in his industry. I found that there was no one really focusing on school lunch. Everyone in foodservice did something else first—a restaurant, a deli, a caterer—and none of them had the resources or the dedication to truly focus on school lunch the way I thought it needed to be done.

When it comes to school lunches there are three distinct stakeholders: schools, parents, and kids. Schools want hands-off administration, no capital investment, and happy parents. Parents want convenient ordering, nutritional meals at a relative value, and happy kids. Kids are happy when they are given a say in what they're eating and when what they're eating flat-out tastes good. I knew that building a company positioned to exceed all of these expectations would be a huge undertaking. I also knew I couldn't do it by myself.

I asked Ryan Mariotti and Keith Cosbey, two of my best friends from college, to help me refine the idea. In 2003 we flew to California and pitched my parents on spinning off the school lunch portion of their small catering company into an enterprise focused on serving healthful, kid-friendly lunches to schools that lacked the infrastructure and expertise to do it themselves. After sitting speechless for two straight hours during our pitch, my parents eventually realized we were serious about leaving our secure jobs as IT professionals to learn kid catering from the ground up. They agreed to teach us everything they knew.

We started off with eight schools that my parents already serviced but the cash flow didn't even come close to sustaining three new partners, let alone retaining earnings for future growth. We all moved in with my parents and spent the first couple of years barely paying ourselves enough to warrant the paper the checks were printed on. We would drag ourselves into the kitchen at 5 a.m. to prep and cook food, visit school sites during the lunch hour, and eventually end our days in our "office" [a room that adjoined Keith's bedroom]. There we built our IT systems and discussed every aspect of the business until midnight or later. The next day we got up and did it all over again.

As a startup, we experienced one of our most deflating lessons after discovering that no matter how hard we tried to build accurate assumptions into our business model, the truth always seemed to be far from our speculations. For starters, we thought that with greater volume came more purchasing power, and with more purchasing power came lower prices. What we failed to factor in, however, was that my parents were procuring many of their ingredients from Costco (COST) and similar restaurant supply houses that already offered rock-bottom prices. As our volume grew, the daily task of going to Costco together to buy product for the following day became unsustainable, and we knew we had to look to food-service distributors. We were shocked to find out how much more our products cost through these channels—and how well Costco and others had negotiated their pricing. Not only did we not save any money, we spent quite a bit more through these distribution channels. It took years of substantial growth to even come close to big-box pricing.

One advantage we did have was that our collective expertise was in IT and we were able to realize efficiencies by streamlining many manual processes in the business. We built an IT system that would scale and grow with our business; it was far more sophisticated than would be expected of a company our size. That was the easy part. The hard part was figuring out how to scale the operation to match the sophistication of our technology.

When we first came on board, the distribution model for the meals was based on parents from our schools working for us part-time. They would pick up the lunches from our central kitchen and deliver them to the schools in thermal bags. As we added more schools, we realized there were a whole host of issues around scaling with this delivery model—not least, finding replacement drivers to accommodate the field trip schedules of our employees and finding a place to park all of those SUVs. Developing a model to distribute our meals in customized, heated transport ovens and utilizing truck distribution was costly. As sophisticated as our systems are, we haven't yet found a way to automate our trucks to drive themselves.

Our business plan also had major flaws in our growth projections. While we were lucky to have some level of historical financials from the years my parents ran their program, we were too inexperienced as entrepreneurs to understand that profitability does not scale linearly. We knew that we would have to take on additional overhead as we grew, but we vastly underestimated just how much the timing of the overhead would impact profitability at different stages of the business. It turns out that the profitability of an independent operator is actually quite good if the individual keeps busy, as the business rests almost solely on his or her shoulders. But eventually, it's not just you in your business. It's you managing people. And then you are managing people who manage people. And then you are directing people who manage people who manage people.

At each stage of the game, you are most profitable the moment before your volume pushes you into needing the next rung of management—at which time your profitability dips yet again. The key is deciding how large you really want your business to become, and how to maximize all of your resources at that stage without overburdening them. We haven't targeted a revenue figure for our optimal size yet, but we envision this being the point at which we all can focus on the job functions we love most, day in and day out. I would strategize on new ways to engage kids in their relationship with food, Keith would assess new markets for our services and roll our program out, and Ryan would spend his days focusing on building IT systems that better support our customers and the company's daily work. We would leave the rest to everyone else. Until that day comes, what keeps us going is the fact that we all love our jobs, we're used to wearing many hats, and we have a fairly high threshold for pain.

As I think back on our story, I almost wonder how in the heck we survived with so little experience in the industry and with a business plan that, quite frankly, was fundamentally flawed in so many ways. A smarter person than I might have foreseen all of these shortcomings on paper and pulled the plug on the idea before it even got off the ground. And that would have been a tragic mistake. Don't misunderstand me on this point—business plans have value in helping you work through your ideas in the concept stage and keeping you on track toward your goals once you're up and going. But while a business plan may win you a competition, it's not going to run your business for you, and it certainly won't be the final determining factor in your success. That, ladies and gentlemen, is up to you.

—Edited by Stacy Perman

More essays are available in our ongoing series.

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