We have seen some challenging times for all businesses in the last few years. Some have closed their doors, some have pulled back, some have changed direction, and some have actually seen good growth. For those tea businesses who have survived and are looking at growth/expansion avenues, there are multiple options. In my post this month, I’d like to cover some of these.
First is simply continuing to grow where you are planted. If you have a retail location, you may want to find ways to increase the profitability of that location by adding new products, exploring ways to decrease overhead, or discovering creative avenues to expand your marketing reach. You may want to expand into other areas while keeping just one retail outlet – areas that can include web sales, wholesaling, or consulting.
Another way to expand is by adding another location or locations. Most people need outside capital to expand in this direction, even in an economy in which retail spaces are almost being “given away” with entire build-outs in place that have been vacated by foodservice businesses. The three rules of commercial and residential real estate are location, location, location, so this can be a sticky wicket. Ideally, you are a destination that can draw customers even in a less prominent retail location, but this is rare. Most businesses need front-and-center exposure along with great product / concept. This type of location is normally still desirable and expensive. If you have to or want to do your own build-out from scratch, you are looking at anywhere from $75,000 to a mid-six-figure price tag. A well-known coffee franchise requires an investment of over $300,000 and I’ve seen build-outs that appear to exceed that number because of their elaborate design and expensive materials.
If you want to expand and need outside capital, there are a multitude of opportunities to consider, some not very realistic for the average business owner. There are stock offerings, both public and private. “Over-the-counter” stocks / penny stocks, stocks quoted in the Pink Sheets, or those regulated by the SEC all require a good lawyer to guide you through the legalities of using these vehicles to raise capital.
We have seen several large tea companies in the last decade raise growth capital through venture capital (VC) groups investing in their companies. These VCs usually consist of a number of very wealthy people who have formed a venture capital corporation and invest in high-growth (or high-growth-potential) businesses with the goal of receiving extremely high return on their investment within 3-4 years of initial investment, either through the sale of the company or an IPO (initial public offering) of the company’s stock. These investors usually ask for seats on the company’s Board of Directors and a large amount of input and / or control in the businesses in which they invest. Their investment can be in the millions of dollars with rounds of investors from several venture capital companies who specialize in investing in various stages of the company’s growth.
Angel investors are normally just wealthy individuals who, on their own, or in angel investor groups, look for a place to invest $50,000 to $100,000 (money they can afford to lose) with the possibility of a good return. They typically don’t require the kind of tight / close input into the business that venture capitalists do, and often they are successful and / or retired entrepreneurs / business owners themselves who can mentor the young company and help it succeed with their seed money. They can even be wealthy family members of the company’s owners, or friends who have successful businesses of their own. There are also focused angel groups who specialize in investing in women’s companies, or minority-owned companies.
Lenders are another option. If you have outstanding credit, you can, even today, get lines of credit for your growing business. Lenders just want their interest and don’t care to get involved in the daily operations of your company.
Then there are the growth options people often think are identical – but are not – although they have similarities, namely franchising and licensing. Franchise lawyers love to point out scary possibilities if you license your business rather than pay the much larger bucks and put in the immense amount of legal work and time to get into franchising, but licensing is a route that is being chosen today by companies who have decided it is a quicker and less complicated / costly route. An attorney I respect greatly because of his long and focused work in these areas differentiates and simplifies them this way (my paraphrase):
Franchising is based on securities law. Licensing is a form of contract law. If franchising, compliance with franchise laws, like securities laws, requires registration in the applicable jurisdictions and preparing a disclosure statement for the non-registration states. Licensing is simply a contract between two independent contractors and franchise registration is not required.
Now, many franchise lawyers will tell you “if it walks like a duck and quacks like one,” it is a franchise duck – even if you call it licensing. So, again, if you are considering growth through these means, you should take inordinate amounts of time and effort to make sure you secure the best possible attorney familiar with applicable law. In licensing your business, you can also lose control of the quality standards you have worked so hard to build for your brand. The licensee may decide to bring in products, design, or concept changes that will (especially if the business bears your logo or appears to be a company-owned store) put a stain on your perception and reputation in the marketplace. The franchisee has no such freedom and must comply with your brand and concept standards. Setting up your business to begin franchising can be costly – into the six figures. Licensing costs much less and takes much less time. There is much more disclosure in franchising.
It is tempting – once you have made it through the first few two to three years – to step out too quickly into growth choices. Don’t let ego or competitive spirit drive you to make decisions that will, in the long run, hurt your business’ brand, perception, and/or profitability. Expanding something that isn’t ready for expansion is a bad business decision that no growth choice will benefit.