In the current climate, it might seem as though the finance market has fallen out of love with the hospitality sector, leaving many hotel operators wondering how they can fund their growth plans.
The latest figures suggest the insolvency rate among UK food and beverage operators rose by 17.9% in 20181, so it’s extremely important to stay abreast of business finance options. However, for the right concept, in the right location, the financial backing is there. It’s about knowing what’s right for your business and how to find it.
Get under the skin of how an investor thinks
Lenders are still open to investing in the hospitality industry, however, it needs to be the right type of venture. 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.
Hotel operators need to be asking themselves: Can I demonstrate strong ethics? Have I really done my research? Do I know how to budget – and indeed stick to it? In addition to serving up the perfect plates, it’s important for operators to be able to demonstrate they know how to run a business and that they have set that business up to succeed.
Making the case for expansion: Quality vs Quantity
Funding is still available from investors. Indeed, venture capitalists and private equity investors are actively pursuing worthwhile projects. However, naturally, there is a greater degree of caution in the current climate. There is certainly no objection to expansion, as long as the quality of the offer isn’t diluted in the process. Expansion should be a smart prospect, not a risk and hotel 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 make 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.
Be realistic – setting attainable goals
Investors look for a strong scale-up plan and a clear exit strategy. Hotel operators should understand their target market, know their proposition and have the presence to achieve it. Investors also want to see genuinely attainable goals. Be realistic – don’t promise to open 40 new hotels 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. We’re seeing a focus from investors on businesses that have harnessed the power of technology to improve operational efficiencies. Hotel operators should automate in-house processes as much as possible. Tech is very fashionable and we find investors often want to help fund projects they have a connection to or feel passionate about.
Know where to look for investment
Access to funds can be an issue. Banks are still hard to crack and schemes such as Funding Circle are not offering sufficient investment so, without access to High Net Worth individuals, venture capitalists or private equity funds, operators find it difficult. To my mind, investment is personal. It should reflect the needs of that operator’s business at that time. The main aim is to find the relationship that suits you. So, what are the alternatives to private equity investment?
Banks are heavily regulated and have the strictest rules so the pressure to deposit money will be higher. The relationship with a bank is also less personal.
With a good business plan and sound preparation, crowdfunding can be successful but these platforms have higher thresholds for success. Again, 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 looking to invest: 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). A crowdfunding platform can be a good way to go to market, get the brand out there and act as a useful halfway house between bank loans and private equity investment.
l operators should look at a range of investment options to see which suits their circumstances best. After all, you wouldn’t choose a partner that didn’t suit you personally.
Negotiating with a lender
It’s important to accept that there are market standards. Today, personal guarantees are standard requirements by banks, and investors will demand good and bad leaver provisions. These provisions set out what will happen to the funds or shares should the investor leave through involuntary circumstances – a good leaver – or for undesirable reasons, such as misconduct – a bad leaver.
These conditions are incredibly difficult to negotiate and I would advise hotel operators to focus their energy on areas where they can improve their position and soften standards, such as agreeing a cap on liability. The responsibilities vary between types of investment – with a bank loan, the conditions are stipulated by the bank; with crowdfunding, the operator lays out the terms; and in the case of private equity investors, there is scope for negotiation.
It’s about finding the investment which fits the business, knowing what the goals are and having a solid, well-researched, realistic plan in place. It’s vital that hotel operators aren’t over-ambitious. We have witnessed the distressing fallout when a plan goes awry and an operator attempts to expand too far, too quickly.
The brand and the team behind it can become diluted by growth and the quality of the offer will suffer, potentially leading to the collapse of the entire enterprise. With concerns about Brexit still unanswered and the rises in rent, rates and wage costs continuing unabated, now is not the time to enter into any business partnership without a full and detailed plan of action.
By Catherine Gannon, founder, Gannons Solicitors