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THE

KOSNAR GROUP

AREA DEVELOPMENT STRATEGY FOR RETAIL STORE EXPANSION


Every retail store multiple-unit operator will say the same thing: One store is a different animal from any
number more than one store. Multiple units require an organization that can handle payroll, real estate,
accounting, human resources, and operations management centrally. "You can't do it all yourself," according to
Carl Kosnar, Managing Partner of The Kosnar Group. One of his first hires was a director of operations--"it was
the smartest thing I did." Kosnar thinks his market area will hold at least six ACI Auditory Center units, perhaps
up to 12, "so we're building a base for that kind of growth."
Having multiple units is "like a stock portfolio--it's a way to spread your risk," Kosnar says. "It's unlikely all six to
twelve centers would be down in the same year." Once you've figured out how to run multiple units, he says,
adding more isn't that difficult--which is one reason he's adding more: "I've found that the larger number you
have, the easier it actually gets. You can afford better leaders, better systems, and then, of course, your G&A
per store unit drops."

Mapping Successful Financing Strategies: Transitioning from a Single Unit to a Multi-Unit Operation

The transition from single-unit operator to multi-unit operator is a process that begins with successfully
operating your first unit.

There will always be investors who enter the business with the intentions to open and operate only a single
unit; it can be franchised or company-owned. However, the majority of total franchise units are controlled by
multi-unit operators that represent a broad base of industries in both single brand and multiple brand concepts.
Many franchisors will also add that their franchise systems include a combination of both single and multi-unit
operators. In fact, many franchisors system-growth strategies are built on expanding the core base of singleunit operators into multi-unit operators.

There are many best practices being applied that will position both small franchise and company-owned unit
operators for a successful transition into a second location or beyond. However, two primary variables that will
be measured by lending sources and potential investors will include the operators historical performance to
generate cash flow and how well the business has been re-capitalized. Many operators begin the introduction
into future growth plans by opening and successfully operating the first unit for a couple of years. Once a
trend of positive cash flow and accumulated earnings has been achieved, its common practice for single-unit
operators to execute a growth strategy by expanding into second and third locations.

Having access to external capital and obtaining the appropriate levels is paramount to both new and seasoned
multiple-unit operators. First-time franchise-unit operators as well as company-owned operators quite often
find it a challenge to attract traditional debt financing to start a new business. This challenge is most
commonly attributed to the lack of a historical operating performance and insufficient collateral to fully secure
the loan. New operators have traditionally utilized banks and non-bank finance companies that provide U.S.

Small Business Administration loans to get started. These specialized SBA lenders continue to be a viable
source of capital for new operators. A major attraction to SBA financing for franchise start-ups is that not only
will SBA lenders finance the soft costs such as franchisee fees and tenant leasehold build-out cost, but SBA
lenders will typically provide working capital to support the business until it generates a positive cash flow.

Strategies to Become a Multiple Unit Operator

Equally as important to developing a positive-performance trend, the smaller unit operators should also pay
considerable attention to building up a strong cash-liquidity base and re-investing retained earnings. Building
a strong liquidity base from cash flow generated by operations will not only provide for an internal source of
working capital but also provides for a strategic source of equity capital that will be readily available to open
the next unit. Re-capitalizing the business early through re-investing profitability is also a good strategy for
small operators and will provide leverage to support getting that next unit financed with long-term lenders.

A Little-Known Innovative Strategy Used to Obtain Expansion Capital for Seasoned Multi-Unit
Operators

Multi-unit operators have an established operating history and fortunately have a broader selection of funding
sources available to them beyond debt funding.

One relatively little-known strategy for multiple-unit growth is the Limited Partnership vehicle. The Limited
Partnership structure is an equity fund-raising device that eliminates the need to sell stock.
Limited Partnerships are formed by two or more people, with at least one person (usually a corporation) acting
as the general partner who has management authority, and at least one person in the role of limited partner
who is a passive investor with no management authority. All partners both general and limited must enter
into limited partnership by either oral or written agreement.
Limited Partnerships are managed and controlled by general partners; general partners have authority to bind
the partnership. Limited partners normally do not participate in managing the business.
The general partners are liable for partnership obligations to the same extent as partners of general
partnerships. Limited Partners, however, are generally not liable for partnership obligations; their only risk is
their agreed capital contribution, or as provided in the partnership agreement. However, if limited partners
participate in the management of the partnership business, they may lose their protected limited partner status
and become liable for all risk.
Larger multi-unit operators will typically be able to attract non-recourse capital without providing any personal
guarantees. Multi-unit operators may look beyond the traditional lending sources in executing a growth
strategy that may include raising fresh capital for a sizable acquisition. There is currently a strong supply of
private-equity capital available in the market for multi-unit operators. Private equity investors are most

attracted to well-positioned concepts with high-growth potential and operators with a strong management
team. Specialized asset-based lenders and equipment-financing companies are also strategic sources of
capital frequently utilized by multi-unit operators.

The transition from a single-unit operator into a multi-unit operation is a process. The process begins by
successfully operating that first unit and then building on operations by duplicating that proven process.
Developing a strong cash-liquidity and re-investing profits back into the business will also provide operating
flexibility and position the operator to execute a strategic growth strategy. Upon becoming a multi-unit operator
with a proven successful performance and management history, the available sources of external capital will
broaden for the operator and allow it to execute that next-level growth strategy.

*****

CONTACT:
CARL J. KOSNAR
MANAGING PARTNER
THE KOSNAR GROUP
2306 WALES DRIVE
CARDIFF BY THE SEA, CA 92007
TELEPHONE: (619) 994-2258
FAX: (760) 632-0772
SKYPE: carlandandi
carl@kosnar.com
www.kosnar.com