Many retail store owners see profit opportunity in growth. Success at a few locations brings hunger for multiplying that success. Savvy owners also know that economies of scale in large operations can mean even fatter bottom-lines. To expand from a few stores to 50, 100 or even more in a short time, however, requires serious cash.
The first solution is one Meridian does not recommend — 100% debt financing. Whether found through an aggressive lender, leasing program or insurance company, 100% debt may look manageable at today’s low interest rates, but could backfire and even bankrupt a company if interest rates rise
A safer choice for funding fast growth is equity financing. Your company issues stock (voting or non-voting) in exchange for cash. Sources of equity financing include private individuals, other corporations, venture capital pools or investment groups, suppliers and larger banks. Yes, banks!
Today, major banks are selectively investing in equity projects. Their reward? Better return on their money than loans. Your reward? An influx of cash and a healthy looking balance sheet that allows you to expand rapidly meeting your growth and profit goals.
The keys to obtaining equity financing, no matter what the source, are an accurate, realistic business plan and proven past performance. You must be able to convince an investor that your company is capable of pulling off its grand plans based upon your prior history of success. Your projects must provide cash flow and a suitable return on investment after a reasonable start-up period.
A business plan should contain detailed information about the managers of the company as well as the financial details. Investors will be looking not only for visionary leadership ability in top management but also depth in the mid-management ranks. Savvy investors know that the return on their investment will be predominantly dictated by the quality of personnel.
Investors also lean toward managers who have demonstrated the ability to financially turnaround a declining operation. If your company recently purchased a losing or marginal operation and turned it into a profitable operation, potential investors will be impressed. To substantiate this performance, include historical financial statements during the prior owner’s tenure and your own recent results.
Non-bank equity investors will want proof of a favorable banking relationship including availability of working capital lines of credit and traditional bank financing. If your equity partner is the investment arm of a bank, they may have internal policies that either require you to do all your banking with the same bank or prohibit you from borrowing traditional loans from the same bank. As you investigate bank equity partners, be sure to inquire about their policy if it would have a bearing on your decision to accept their equity funds.
Equity partners vary greatly in their desired amount of control in your company. The control can range from none to majority voting rights. If your company is family-owned, you should carefully weigh the cost of control with the benefit of equity cash. After full consideration, many companies opt for slower growth to maintain 100% control.
Equity cash is not without cost. Be prepared for transaction and legal fees. Fees as much as 2% are commonplace in equity deals and legal costs can easily run into six figures.
Most equity investments will be made in stages with more cash forthcoming as your company reaches its preliminary goals. For instance, a partner might fund five stores initially and then make sure those stores are operating at least as well as your business plan projections before funding the next group of stores.
Because of this staged funding, it is critical that your projections be accurate, leaning towards conservatism. Investors will never criticize you for performing better than plan, but can and will withhold further funding if you perform worse than your stated business plan.
Finally, before you embark upon your grand growth plans, consider whether bigger is truly better considering your organization’s culture and people. Success should not be measured by the number of company locations in your annual report, but instead by your self-satisfaction. You may conclude that to pursue excellence at your existing sites will provide greater self-satisfaction than adding more stores.
