How to… negotiate investment

10 December 2015
How to… negotiate investment

With the economic outlook looking positive, Jon Gill and Andrew Webber offer advice on the best way to go about securing investment

Côte Restaurants and the Alchemist are recent examples of an increasing appetite by private equity to invest in the restaurant sector.

Whether as a direct investment, buy-out by an investor or a trade sale to one of the larger groups, the drivers for this are clear. Consumers appear confident, the short-term economic outlook is positive and investors have money that they are keen to put to work. Some of the larger groups are also looking to grow faster than may be possible organically.

The primary targets are entrepreneurs with an established group of restaurants; typically 20 or more. For those in this category, it is possible investors or potential acquirers will get in touch, keen to start a dialogue. These conversations need not, of course, lead to an immediate transaction, but they are nearly always worth exploring because they can open the door to joint ventures and other collaborations that may be useful in the future. Before you start a dialogue, it is valuable to have an honest conversation with the current shareholders and executive team to clarify objectives and identify areas of alignment or perhaps misalignment that a transaction may be able to solve.

Transactions come in all types, from a ‘clean break' for shareholders with value being fully realised at completion, right through to a ‘buy-out', where the majority, if not all, of the investment is made to grow the business. In the latter scenario, existing shareholders maintain ownership, albeit alongside a third-party investor.

The opportunities are certainly out there. But it will be the clarity of purpose at the start that will help determine whether a change in the existing ownership structure of the business is really needed. This clarity will also help to ensure that any transaction is designed to deliver what the business needs.

Four points to consider when attracting investment

  1. Consider the desire for future growth - what further potential the business has for geographic expansion or brand extension, for example. Can this be exploited with current resources in terms of finance, people and expertise? What is the management's view on building the business further?

  2. Seek the right professional advice - this is a specialist area, in which entrepreneurs will be dealing with parties for whom the structuring and negotiation of transactions is their core competency. Entrepreneurs therefore need to surround themselves with legal and financial advisers who know the sector, know the counterparties and can provide the experience, resource and context to achieve the right result. This can often result in a change point for the business's existing advisers, who may have been well-suited to business-as-usual advice, but may not be the right fit for such a critical and ultimately time-consuming project.

  3. Get the business fit for third-party scrutiny - deal with any disputes quickly and permanently, ensure the brand is properly protected, ensure that any real estate issues are managed professionally, and invest in the infrastructure to demonstrate the business has the capacity for further growth. These pre-emptive steps will ensure that buyers or investors focus on the future potential they are buying, rather than being distracted by legacy issues that could cause problems in the future.

Jon Gill and Andrew Webber are corporate partners at TLT

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