Money talks: the best ways to impress an investor

08 July 2019 by
Money talks: the best ways to impress an investor

The media headlines might be all doom and gloom, but there is still money to be made in casual dining. Elly Earls finds out which investors and lenders are still open to financing hospitality businesses and what they're looking for when it comes to a successful proposition

In the past 18 months, restaurant businesses have been forced into restructuring and closing in their droves. Carluccio's closed 30 restaurants last year after the group entered a company voluntary agreement (CVA), Prezzo announced the closure of 94 sites last March, burger chain Byron has quietly closed 16 restaurants and, in May, Jamie Oliver's restaurant group went into administration, costing 1,000 jobs.

Research by real estate specialist the Altus Group suggests that the insolvency rate among UK F&B establishments rose by 17.9% in 2018, with the Insolvency Service paying out a total of £298m to former members of staff as a result of their employer entering into either administration, liquidation, a CVA or another form of corporate insolvency. The Altus Group said the situation was the result of ‘a perfect storm' of rising rates and subdued consumer confidence in the face of Brexit.

Carluccios exterior
Carluccios exterior

Yet alongside the doom and gloom are many success stories. Wagamama, which opened seven new restaurants last year, generated a 3.4-times return for Duke Street when it was sold to the Restaurant Group in one of the largest ever transactions in the UK casual dining sector. Coca-Cola bought Costa for a staggering £3.9b, a deal that is 24.5 times greater than the brand's annual underlying operating profit in the last financial year. Meanwhile, Azzurri brands continued to

"There's lots of doom and gloom, but there are plenty of examples of businesses doing well," says Robin Rowland, operating partner at private equity firm TriSpan. "The good businesses are shining and the ones that are over-rented or with declining sales are in real trouble. There is a complete polarity between the winners and the losers at the moment.

"We at TriSpan are far more bullish and optimistic than the market would indicate. The truth is that there are amazing successes. There's still an appetite to invest in hospitality businesses, but it has to be a good business."

shutterstock 1334781416 Wagamama
shutterstock 1334781416 Wagamama

It's a similar story when it comes to loans, according to Henry Ejdelbaum, managing director at ASC Finance for Business, an independent business finance broker. "Lenders are still keen to provide finance for the hospitality sector. Even though there is some economic uncertainty with Brexit and the climate at the moment, we have managed to secure loans for clients at interest rates sometimes even as low as 2% above base rate.

"If you've got the right business to put forward, lenders are happy to put funds behind it. The current climate can be seen as a detriment or can also be seen as a situation to take advantage of to grow your business - we've seen many clients succeed despite the current environment."

The people behind the plan

finance shutterstock
finance shutterstock

Catherine Gannon is the founder of Gannons Solicitors, a corporate and business law solicitors in central London. She says that while lenders and investors are still interested in the hospitality industry, they're now much more focused on the people behind the business.

"A great concept and fantastic food offering are just the start - those ideas then need to be supported by the right team. Since the crash in the casual dining market, private investors have been following the example set by the banks and looking more carefully at the people behind the plan. Can operators demonstrate strong ethics? Have they really done their research? Do they know how to budget - and, indeed, stick to it? Operators need to demonstrate they know how to run a business."

For Ejdelbaum, that knowledge only comes with experience. "Lenders are keen to support those who have worked and understand the nuances of the hospitality sector," he says. "When you're looking for finance for hospitality businesses, you therefore need to make sure that you put your experience forward first, or that you have someone with a large amount of industry experience in your core team who can provide the 'know-how'."

Agility is also important, says Bob Silk, relationship director at Barclays Corporate Banking's Hospitality and Leisure team, which facilitates debt for a wide range of leisure businesses, ranging from start-ups to multinationals.

"In order to be successful, at the very outset you need something that's differentiated and often that revolves around the Ps - people, place, product. But you've also got to be sufficiently fleet of foot. Because consumers are so demanding and because tastes and consumer behaviour change so quickly, the ability to innovate and be nimble is really key.

"But companies don't do that on their own - it's all about the management. It's the people that make the difference. Contractually we lend money to companies, but actually we lend money to people. It's about their ability to convert a financial plan on a spreadsheet into reality."

Be realistic

finance 2 shutterstock
finance 2 shutterstock

That said, those spreadsheets are more important than ever, according to Gannon. "Rising business rates and the increase in wage bills, together with oversaturation in the casual dining and pop-up markets, mean investors are looking for only the best business plans," she says.

"There is certainly no objection to expansion, as long as quality isn't diluted in the process. Expansion should be a smart prospect, not a risk, and operators must demonstrate that their business is in the best place possible to ensure it appears lucrative to investors.

"However, we would urge operators to be realistic about their capabilities and be certain they can manage the battle between quality and quantity under the pressure to repay a loan or expand quickly to turn a profit for an investor. Don't promise to open 40 new sites in a year when you know you can only achieve 15. Investors prefer honesty from the outset when setting out profitability targets. Be real and be business-minded."

Some investors, like TriSpan, will then act as a partner, rather than leaving the operator to do all the hard work. "Money is easy, but being a partner is much harder and we're prepared to roll our sleeves up and do that," says Rowland, whose previous experience in the industry includes growing YO! Sushi from three to 100 restaurants.

TriSpan invests most often as the second round of financing in emerging brands with eight to 30 sites that are poised for significant growth. Since it invested in Rosa's Thai Cafe early in 2018, it has helped grow the group from 10 to 16 sites, as well as improving sourcing, bringing in more repeat visitors and putting in financial controls around food and labour costs. "I liked the fact it was under the radar; it was a local hero in its own neighbourhood and the food was utterly authentic," Rowland says. "For me, it was by far the best Thai food for that price point you could buy. We also liked the fact it was strong on delivery."

Crowd control

Crowdfunding is another option for operators to consider. In April, chef Doug McMaster's Brighton-based zero-waste restaurant concept Silo raised £500,000 to relocate to London, a month after chef-entrepreneur Gary Usher's Kala restaurant became the world's fastest-crowdfunded restaurant project, raising £100,000 from 1,000 backers in just 11 hours.

Silo Hackney
Silo Hackney
"With a good business plan and sound preparation, crowdfunding can be successful, but these platforms have higher thresholds for success," Gannon says. "There is no personal relationship and crowdfunded investments will not be able to offer any further input into the company. However, crowdfunding is an attractive platform for many: backers may receive tax benefits on investments made in smaller companies and any resulting shares, via a government initiative known as the Enterprise Investment Scheme (EIS). Crowdfunding can be a good way to go to market, get the brand out there and act as a useful halfway house between loans and private equity investment." Or, if a business just needs some cash to tide them over during the quiet months, a business cash advance, which operators pay back as a percentage of debit and credit card takings, could be the best option. Indeed, financial provider 365 Business Finance has experienced a 100% increase in demand for its services in 2019 from restaurants and pubs looking to expand, refurbish, invest in equipment, staff and training, or who need help with working capital and VAT payments. Joel Braham, founder of the Good Egg restaurant in London's Soho, says: "Cash is key in this business; when you're buying food and have set payment terms, you have VAT costs, PAYE increasing with more staff - on any day there's a huge amount of money going in and out of the business, so keeping on top of that can be hard. You can prepare for these things, but there are some times when you need help and I think the merchant cash advance is great." Liberis Finance provides a similar financing solution, offering cash injections of between £2,500 and £300,000 to businesses that have been trading for four months or more, take an average of over £2,500 in card transactions per month and have clear business potential. Chief executive Rob Straathof says the cash advance can be particularly useful for businesses experiencing difficult periods as repayments are in line with cash flow. He also believes the economic climate shouldn't dictate whether it's the right time to seek financing. "If financing and expansion are good options, putting them off can be damaging," he says. "Funding viability may also depend on factors in a specific area of the sector and region, which might include gaps in market or areas where business models have proven successful. We think a business' ability to deliver what the market is demanding can outweigh an uncertain economic climate."
Balnoon Inn, Cornwall After 20 years of working in London as a corporate and institutional banking financial consultant, Melissa Kelly decided she wanted to do something she was passionate about and set about looking for a food-focused pub with letting rooms in Cornwall, a region that reminded her of the village in which she grew up. She had 50% of the cash she needed to buy Balnoon Inn in St Ives, but would require a loan for the remaining £100,000. "I knew I wanted to take out a business loan that I could pay back quickly without any early redemption fees and originally, given my background, I was going to go direct to the bank, but my estate agent suggested I speak to ASC Finance for Business. "They introduced me to a few of their small lending associates throughout the banking industry and we settled on one. But it wasn't just the introduction to the bank; it was the introductions to local professions, like lawyers and surveyors. ASC Finance for Business was really integral to the whole process." She thinks that what attracted the bank to her proposition was her thorough forecasting and plans for the pub. "I went in with a 10-year business plan and it wasn't just financial - it was looking at innovative things to do," she says. "I think that gave the bank a level of comfort that I knew what I was doing and that I had actually looked at the socio-demographics of the area and it could sustain the business." Kelly borrowed £100,000 over 10 years, but her business plan is to pay it back within six. "Having the safety net of that four years is invaluable," she says.

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