How to turn a single outlet into a chain: Finance

By Chris Druce

- Last updated on GMT

Related tags: Venture capital

Present potential backers with thorough and concise trading information
Present potential backers with thorough and concise trading information
With many a bank notoriously reluctant to lend to the hospitality sector in the past, how do you pay for expansion and who is likely to lend and help you build your restaurant, pub or hotel empire?

Although the economy is slowly but surely recovering and consumer confidence returning, property prices have remained relatively low, with many an operator taking advantage of the market and snapping up going concern businesses.

The time would therefore still seem ripe for hospitality operators to expand their businesses across two or more sites, potentially gaining themselves a place on the R200 list of the largest food-led pub and restaurant groups in the UK.


High street banks and making your pitch

The typical route most business owners will go is to approach their existing bank to raise the cash needed to expand. However this is regrettable if understandable, according to Paul Thompson, director at Acorn Commercial Finance.

Acorn provides independent advice to operators on structuring a deal, often using banks to provide funding but having no ties to any specific lender. The problem, in Thompson’s view, with going direct to your high street bank is that they do very little of this sort of lending overall, and that was before they began looking at reasons not to lend following the credit crunch.

“If you go into your bank half-cocked you’ll be turned down,” warns Thompson. “Also, it’s usually a one-shot deal with your bank and if your concept doesn’t fit into the bank manager’s often narrow view of what will work, and what won’t, you’re likely to get rejected. This can be demoralising and most operators don’t realise there are other options available.”

Regardless of who you’re pitching to Thompson makes sure his clients present with as much trading information as possible to avoid any nasty surprises that might turn lenders off the idea of funding the expansion.

Another mistake is to go in with a ‘War and Peace’ length business plan that, for example, details the demographics of the South West without actually answering the most basic questions your lender will want to know. In the case of a pub lease, those questions may be what’s on your menu, what will you sell, what ambience are you aiming for and, if it’s a failed business you’re taking on, what was wrong with it and how do you intend to fix it?

Other funding options

Thompson points out that if you can find a decent site there’s not much competition, as now lending has reduced, generally it' only existing businesses with some cash-flow that can afford to expand, and the odd cash-rich private buyer, although they are few and far between.

It’s tight out there as well, with perhaps 10 of the 150 lenders in the UK market currently stumping up cash for hospitality expansion projects. However if you have a good idea and strong existing business, money is still available to take it to the next level, with at least a couple of banks, building societies and venture capital houses lending into the sector at present. There are also alternatives such as the Enterprise Investment Scheme.

Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme is administered by HM Revenue & Customs and allows private investors to attract tax relief, typically presenting a decent return on a relatively low risk investment. Hospitality companies that have flourished using this scheme include Loch Fyne, which was sold to Greene King in 2006 for £68m​, the Capital Pub Company and farm-shop and restaurant concept Country Food & Dining, the last of these two both involving Firkin Pub Co. creator David Bruce.

The EIS scheme involves funding rounds of up to £2m, with an ultimate cap of around £10m in place. It’s helped Country Food & Dining to grow to four freehold sites using a model that, although profitable, wouldn’t necessarily offer the returns corporate investors demand.

“Due to the limits on capital raising under the EIS, all bar one of our sites have been funded through separate companies with, largely, separate shareholders,” says Gordon Montgomery, finance director at Country Food & Dining. “However, we have a central management team in place that runs all the sites, enabling the investors to benefit from economies of scale in operations, buying and central administration.

“For our type of business, the problem at the moment is banks don’t seem to be keen on the retail sector and, purely from our trading, we can’t offer the high returns that private equity funds typically look for.

“Therefore, the EIS is a good route for us, as we can offer investors a comparatively low-risk (property-backed) investment which, when the trading returns are combined with the tax relief they get, can give them an attractive overall investment. In addition, there is always the hope of achieving enhanced gains through the appreciation of underlying property values or getting change of use gains on excess land attached to any of our sites.”

Private Equity

Although the private equity or venture capitalist crowd has attracted a fair bit of criticism in recent years with the term ‘asset strippers’ a favourite of the mainstream media, there are plenty of good funds out there looking for somewhere to put clients’ money.

In April of this year, healthy eating restaurant group Tossed announced plans to operate 25 sites by 2013​, after receiving a £1.5m development fund from venture capital company Beringea.

Although you’ll give up some control by going the private equity route, you gain plenty of expertise, with a representative of the fund typically joining the company board, which is a useful resource when you’re just starting out.

Read more articles in this series here​.

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