Expansion Requires Sweating Out the Details

By: Pearl Moroz

You’ve successfully operated a liquor store, or chain of stores, and now you’re looking to expand even further. But just because you’ve thrived to this point doesn’t mean you’re guaranteed similar performance at a new location.

In our experience, there are many factors to consider when it comes to securing financing for expansion, and many of these are often overlooked. Accounting for every factor before approaching a lender will help make the process go more smoothly and ultimately get your new liquor store up and running faster.

Where are You Going?  

You might think a spot on a corner in a desirable part of town is an ideal location for expansion, but it’s important to conduct a thorough assessment of the geography and the trends within that geography before making any real estate decisions.

You’ll need to know how many customers you can expect to visit your store. That means evaluating traffic patterns around the location. It also involves assessing parking: How many parking spots are available? Is the lot shared with other retailers? If spots are typically full that could cause potential customers to leave instead of dealing with the hassle of finding a place to park.

There’s also the issue of how you’ll balance potential real estate costs with your business plan. A high-traffic intersection in downtown Vancouver may be a good location in theory, but if you don’t have the high real estate costs baked into your plan, you could be setting yourself up for financial difficulty.

“At minimum you’ll want a five-year lease.”

Then there’s the lease. Owners often underestimate how vital the length of a lease agreement is to secure favourable financing terms. The loan term will never be longer than the lease. Your lender will want to have assurance that your rent will not go up and that you will be able to continually occupy the space. A two-year lease signals uncertainty. At minimum you’ll want a five-year lease, which typically equates to a five-year financing term.

Marketing Details

It has been shown that there’s a higher percentage of failure among business owners who don’t develop a detailed marketing plan. That’s why it’s helpful to think critically about all aspects of marketing. Your plan should include metrics that help demonstrate you understand your location, your audience, how you plan to attract that audience, and that you have a plan for achieving the projected results.

You may not have all the answers when putting the marketing plan together. Ideally, you’d start with a preliminary plan and work with an expert advisor who will ask the right questions that will help you think more critically and put together a successful marketing strategy.

Financial Projections, Management, and Net Worth

Of course, financial projections are crucial when it comes to expansion plans. What often gets lost in translation between the owner and lender is how you’re supporting those projections.

“What does the average customer spend per visit?”

It’s important to pay attention to the details that can back your assumptions. Does the average customer in the area buy liquor from a store once, or are they repeat customers? What’s the average price per bottle sold in the area? What does the average customer spend per visit? How many people pass your store every day, and what percentage of them can be expected to visit your store? If your revenue projections include realistic assumptions, that demonstrates you’ve done your homework.

You’ll also need to show an understanding of expenses at your new location. If you’re expanding to multiple locations, that needs to be assessed store by store. Payroll, for instance, is usually the largest item on an expense statement. The wages you pay in a store in downtown Vancouver, however, will likely be higher than a store in a smaller market.

Another aspect to examine is the day-to-day operations of your expansion. You may have been able to personally put in as many hours as necessary at your first store, but as you expand you won’t be able to maintain a constant presence in all locations. You’ll need to ask yourself: How many people will you need to hire for each store based on its size? What’s your pay scale? How are you going to find and retain store managers?

Finally, it’s essential to grasp how much your net worth fits into your expansion plans. If you’re expanding from eight stores to 12, you’ll need to have enough cash on hand to operate all 12, not just the four additional locations.

You need to understand how much of your net worth is already tied into your business. How will your expansion costs impact your first few months of working capital? What if you’re faced with a force majeure event not covered by insurance? Those funds have to come from somewhere, either an existing business or your personal net worth.

Ask the Experts

You may have done much of this work when you were preparing to open your first store, but it’s important to apply the same discipline when you’re expanding to your second or tenth store. The more information you have, the better prepared you’ll be.

“Look outside of your circle to consult with experts.”

Expansion can be a more complicated endeavour than opening your first location. That’s why it’s helpful to look outside of your circle to consult with experts specifically focused on the liquor store business. Experts in liquor store real estate, for example, can provide appraisals based on the value of the building and evaluate its potential income generation.

Working with experts that ask the right questions can help you identify the potential opportunities for, and obstacles to, securing the appropriate financing for your expansion.