How to prepare your business for external investment

16 June 2022 by
How to prepare your business for external investment

Looking after your data, a fresh brand and the ability to grow into a multi-site business are all prerequisites for investment, says Rob Johnson

Taking a view across the consumer sector, we're seeing a noticeable shift in spending back into experiential retail and leisure. UK consumer card spending grew by 18.1% in April, and the online share of eating and drinking spend fell to its lowest level since before the pandemic (24.0%), according to Barclaycard's UK Consumer Spending Report.

These leisure sub-sectors – from eating out, to exercising and days out with the family – are in the most part seeing a resurgence in demand and, at the same time, increasing the appetite of investors. But, capturing the attention of investors is no easy task and business owners looking at the next stage of growth need to prepare carefully before courting potential investment. Here are the key areas hospitality businesses should consider when looking to attract external growth capital.

A sustainable proposition

The hospitality industry is full of business models based on short-term trends and crazes, often imported from overseas. Many of them enjoy short-term success but risk stagnating as interest wanes over time or excess supply comes into the market. Try to offer a strong concept with proven longevity, to ensure customers will come back time and time again.

Make sure you can scale

It's one thing to find a couple of good sites and operate them well, it's another to replicate that success at scale. A growing multi-site business needs to have appropriate team structures, allowing decision making and responsibilities to be delegated. It also needs fit-for-purpose back-office systems and software, and the ability to consistently select the right sites. This can become challenging the further you move away from your heartland.

Scalability is critical to demonstrating you have a high value opportunity and therefore maximising the price a buyer may be willing to pay for your business when the time comes to sell.

Short payback periods and return on capital

When a business is expanding, each new site should be able to recoup its set-up costs within two to three years. If it takes longer, it's questionable whether the business model is viable in the long term. Another way to demonstrate the attractiveness of the investment opportunity is to prepare a comparison of a site's set-up costs with its annual earnings, to demonstrate the potential return on capital. Depending on the specific sub-sector of the leisure and hospitality industry, operators should be able to achieve a return on capital of 30%-60%.

A well-invested core estate

Opening new sites is crucial and often the most exciting part of any roll-out. However, a common mistake is getting carried away with expansion at all costs and forgetting about what you already have. To stay relevant, even well-established sites need to be refreshed and upgraded from time to time. If a business is not continually investing in its existing estate and sales start to go backwards, then opening new sites simply becomes an expensive way of standing still.

Good data

Gathering accurate insights about individual site performance and customers is critical to easily identify and respond to any problems before the damage is done. The best operators will have embedded systems and reporting tools that allow management to view financial data and customer reviews in real time. Another benefit of having robust data at your fingertips is in helping to maximise site profitability. A data-rich business can ensure the right products are on offer at the right prices at the right times, with promotions targeted at filling capacity during quieter hours.

Rob Johnson is an investor at BGF

Image: Shutterstock

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