Winner | ACG Growth Capital Award
- Company: BarFly Ventures LLC
- Top executive: Mark Sellers
- Total employees: About 600 employees in West Michigan, including part-time.
- Business description: Owner and operator of bars and restaurants, including the HopCat chain of beer bars, Stella’s Lounge and Grand Rapids Brewing Co.
- Annual sales: Just under $50 million in 2016. BarFly aims for $65 million next year with about 85 percent of the revenue coming from the HopCat chain — and “that’s rising every year.”
- Advisers: Plante Moran and Deloitte (financial), Warner Norcross & Judd (legal) and Wolverine Building Group (construction)
For Mark Sellers, the magic number of sorts is $300.
That’s the cost-per-square foot the founder and owner of Grand Rapids-based BarFly Ventures LLC shoots for when looking at potential new locations for his growing HopCat chain of craft beer bars and restaurants. At that price, Sellers says the company can use its existing cash flow to open three to four locations per year, each in the range of 8,000 to 12,000 square feet.
Sellers admits that the cost per square foot for HopCat is significantly more than most bars spend — national, high-end chains excluded — but he says it’s important to provide the right kind of environment for patrons.
“We do it because I want the atmosphere to feel like you’re stepping into another world when you’re stepping in and I want it to seem like a really unique experience,” Sellers said.
To get to the point where Sellers and his organization could begin financing the expansion, the bar owner and former hedge fund manager had to secure the right capital partners. The process required working with Southfield-based investment bank Cascade Partners LLC, who in turn sent out pitch decks to about 200 funds. The company got 55 responses expressing interest.
Sellers’ goal was to get enough high-interest debt to propel the expansion forward without diluting his own equity in the company, or that of the company’s senior employee shareholders.
Last September, BarFly Ventures secured $25 million in mezzanine debt financing from two Texas funds, Congruent Investment Partners and Main Street Capital Corporation, a raise which earned the company the 2016 ACG Growth Capital Award.
“It was a pretty good deal. Interest rates (are) higher than a bank, but we didn’t get any dilution of our equity,” Sellers said. “Since then, the value of the company has gone up a lot.”
Institutional capital providers aren’t often that interested in restaurants, which are traditionally considered risky investments. To offset that, Cascade Partners played up the regional chain’s managerial experience, previous demonstrated success and — of course — the company’s focus on the booming craft beer segment, according to Managing Partner Rajesh Kothari.
“Restaurants aren’t an investment area that everyone’s excited about because of the perceived risks,” said Kothari, who noted other people at the firm were involved in the deal. “But people don’t see craft brewing going through a cyclical trend.”
Indeed, research from the Boulder, Colo.-based Brewers Association puts the $22.3 billion craft beer segment on an annual growth trajectory in the range of 16 percent. Economists and brewers frequently note that as long as trends toward hyperlocalism continue, there’s room for more growth in craft beer and the supporting industries.
Now with 11 locations in seven states — and several more at various stages of planning — Sellers said BarFly had to get considerably more sophisticated in its financial processes.
“When I first started opening bars, HopCat and (others such as Stella’s Lounge), I didn’t really have any (process),” Sellers said. “I just made them look the way I wanted them to look. In fact, that even continued through the East Lansing and Detroit (HopCat) buildouts. But over time, we’ve really refined the financial budgeting before we open. Now we don’t do a project unless we think we can open it for less than $300 per square foot.”
The refined financial procedures appear to be paying off for the company. Just in the last month, HopCat opened locations in Chicago and Kalamazoo, and the company announced a Royal Oak site after MiBiz reported that the company had filed to transfer a liquor license from an existing bar.
Additionally, Sellers confirmed that a Cleveland location is on deck after the company’s lease was leaked to a reporter with Crain’s Cleveland Business in August.
Sellers admitted the company has filed LLCs in cities where it doesn’t necessarily have intentions of opening a HopCat, partially as a way of throwing off reporters.
For the time being though, Sellers plans to stick with the strategy of opening three to four locations per year. That means he doesn’t have to go out and raise any more money and incur all the related headaches.
“You just have a very bright light shined on your business,” he said. “You have to answer all these questions you’ve never had to answer before and even after all that, (potential investors) can still say no. Raising capital is no fun.”
Editor’s note: This story has been updated to note that Rajesh Kothari of Cascade Partners was not involved in the BarFly deal, which was handled by other executives at the firm.