THE $3 MILLION VENTURE

The Friendly Market is a large supermarket located in a city in the Southwest. Friendlys, as it is popularly known, has more sales per square foot than any of its competitors because it lives up to its name. The personnel go out of their way to be friendly and helpful. If someone asks for a particular brand-name item and the store does not carry it, the product will be ordered. If enough customers want a particular product, it is added to the regular line. Additionally, the store provides free delivery of groceries for senior citizens, check-cashing privileges for its regular customers, and credit for those who have filled out the necessary application and have been accepted into the Friendly Credit group.

The owner, Charles Beavent, believes that his marketing-oriented approach can be successfully used in any area of the country. He therefore is thinking about expanding and opening two new stores, one in the northern part of the city and the other in a city located 50 miles east. Locations have been scouted, and a detailed business plan has been drawn up. However, Charles has not approached anyone about providing the necessary capital. He estimates he will need about $3 million to get both stores up and going. Any additional funding can come from the current operation, which throws off a cash flow of about $100,000 monthly.

Charles feels that two avenues are available to him: debt and equity. His local banker has told him the bank would be willing to look over any business plan he submits and would give him an answer within five working days. Charles is convinced he can get the bank to lend him $3 million. However, he does not like the idea of owing that much money. He believes he would be better off selling stock to raise the needed capital. Doing so would require him to give up some ownership, but this is more agreeable to him than the alternative.

The big question now is, How can the company raise $3 million through a stock offering? Charles intends to check into this over the next four weeks and make a decision within eight weeks. A number of customers have approached him during the past year and have asked him if he would consider making a private stock offering. Charles is convinced he can get many of his customers to buy into the venture, although he is not sure he can raise the full $3 million this way. The other approach he sees as feasible is to raise the funds through a venture capital company. This might be the best way to get such a large sum, but Charles wonders how difficult it would be to work with these people on a long-term basis. In any event, as he said to his wife yesterday, If were going to expand, we have to start looking into how we can raise more capital. I think the first step is to identify the best source. Then we can focus on the specifics of the deal.

QUESTIONS

1. What would be the benefits of raising the $3 million through a private placement? What would be the benefits of raising the money through a venture capitalist?
2. Of these two approaches, which would be best for Charles? Why?
3. What would you recommend Charles do now? Briefly outline a plan of action he can use to get the financing process started.