INVESTING IN THE RESTAURANT SECTOR
This article first appeared in Caterer and Hotelkeeper magazine May 2013
By Andy Gregory
George Osborne’s Budget may have been full of gloomy economic updates but it also included some patches of light for the leisure and hospitality sector.
In an industry where good news has been in short supply since the crisis, these concessions will add to the perception that light at the end of the tunnel is just about coming into view – and encourage more businesses to invest accordingly.
On the demand side, while serious headwinds remain, the Chancellor’s decision to freeze the fuel escalator and further extend income tax personal allowances will boost consumers’ spending power (and the tax cut on beer was a subtle nod from Mr Osborne on how to use that boost that many in the sector will appreciate).
Moreover, the Treasury also offered supply-side reforms that will benefit employers in the industry as they seek to grow their businesses. The Employment Allowance, which comes into effect next April, will subsidise employers’ national insurance contributions by up to £2,000 a year. The Chancellor says up to 2.5 million employers will qualify for the new allowance, while 450,000 of the UK’s smallest businesses will pay no employer national insurance contributions at all.
The measure is specifically aimed at boosting job creation – it effectively means a business will be able to hire one new member of staff on an annual salary of £22,500, or four employees on the minimum wage, without incurring any additional national insurance contributions.
For labour-intensive businesses in the leisure and hospitality sector, that’s a welcome reform – particularly for those with ambitions to expand. It should encourage more companies to open new sites and hire new staff.
Nevertheless, a programme of openings – particularly if it is aggressive and ambitious – requires significant investment. And while the climate for openings may feel more benign, the problem of how to fund site roll-outs hasn’t gone away.
It’s a common dilemma for fast-growing leisure and hospitality businesses.
Though it may be possible to finance some additional openings from cashflows at existing outlets, rolling out new sites in this way is likely to be a slow process. And that delay might mean missing out on prime sites, or seeing competitors steal a march.
While bank debt might be a solution – assuming this form of finance is even available – it is likely to come with strict performance-related covenants. Businesses often encounter unexpected difficulties when developing new sites and such covenants can leave them vulnerable as they try to cope with these short-term setbacks.
Business Growth Fund may be able to help. The long-term equity finance we provide is well-suited to businesses with ambitious and realistic plans to grow rapidly. It can deliver the funding that will enable companies to realise those plans with a cushion of protection to see them through hiccups along the way.
We will invest between £2m to £10m in businesses with an annual turnover of between £5m and £100m. We only take minority stakes in companies; we are building not buying businesses – and doing so for the long-term.
The leisure and hospitality businesses in which BGF has already taken stakes are proving that despite the difficult economic climate, it is possible to prosper and grow with the right business plan – and the support necessary to underpin that growth.
BGF’s investments in the sector began in March 2012 with a £3.25m stake in Barburitto, a Mexican restaurant chain with six outlets in the North of England.
The investment has kick-started a rollout programme, with Barburrito planning to triple the number of its restaurants it operates within four years. The business began that programme in March 2013 with the launch of its first London restaurant, in London’s Paddington Station. It expects to open a further three outlets over the next few months.
Similar investments include Boost Juice which was launched in the UK by Richard O’Sullivan, whose track record in the sector includes the development of Millie’s Cookies, which he built to 100 stores before selling up for £24m. O’Sullivan launched 10 Boost bars before approaching BGF for help with dramatically accelerating the rollout of the chain. The fund’s £2.5m investment in the company, made at the end of last year, should enable the company to open 10 new sites in each of the next three years.
Then there’s Peyton & Byrne, the family business of celebrity chef Oliver Peyton, where a £6.25m investment made by BGF last December has given the company the firepower that it needs to expand on several fronts. BGF also introduced Peyton & Byrne to Mike Johnson, the former chief executive of Whitbread’s restaurant chain, and he is now helping the company roll out more of its bakeries and restaurants.
At Wear Inns, meanwhile, an £8m investment by BGF in May 2012, together with additional funds from an existing investor, has already enabled the pub chain to add 11 new pubs to the 15-strong portfolio it had previously built up. Wear’s strategy is to buy up underperforming pubs with the aim of reversing their fortunes – it’s an intelligent business plan, but one that may require significant investment.
Finally, there’s Camino, a chain of tapas bars in London run by an experienced management team that have previously built a diverse range of successful bar and restaurant businesses. BGF put £3m into the business in December 2012 and Camino now plans to step up its site rollout programme – and to double the number of people it employs.
What do these businesses have in common, other than operating in different parts of the same sector? Each company has ambitious plans for the future and a realistic roadmap for getting there. BGF’s money will help them fulfil their potential.
FUNDING STRATEGIC ACQUISITIONS
For businesses determined to grow quickly, a strategic acquisition can be the transformative moment in their evolution. But buying another company requires both deep pockets and the skill and experience to integrate two organisations in a way that realises their combined potential. Many growing companies have the ambition to expand this way, but lack the means to do it.
By the beginning of 2012, Anthony Foy, the chief executive of SkyDox, a business offering secure file sharing facilities that use cloud technology, was facing exactly this dilemma. “We were a small and innovative company that was a leader in its field, but we were growing in incremental steps, mostly thanks to business angel investors,” Foy explains. “We came to the conclusion that making an acquisition would enable us to realise our ambitions more quickly.” He identified Workshare, a US company with a very complementary document management business, as the perfect target. The question was how to finance the deal.
“It was a slightly unusual transaction because we were hoping to buy a company that was both older and bigger than us,” Foy says. Securing sufficient debt from risk-averse banks was out of the question and equity investors were wary too. “We did pitch to several private equity companies, but I wouldn’t say imagination is a particular hallmark of that industry,” Foy recalls. The solution proved to be an injection of growth capital from BGF.
In September 2012, it invested £7.25m in SkyDox, with Scottish Equity Partners also participating in the financing. The acquisition of Workshare was completed a few weeks later. “Raising money is never easy – it’s a painful and humbling process and you have to really believe in what you’re doing,” says Foy. “We chose BGF because they had the intellectual capacity to see beyond the immediate risk of the deal to the longer term potential of bringing these companies together – they had the capital we needed to grow, but they also offered a partnership where our interests were aligned.”
Nevertheless, Foy says he thought hard about whether he had the drive to make the deal work. “The pain is something you put up with in order to realise your ambition,” he says. “Not everyone desires that and part of this process is deciding whether you really want to go for that growth, or whether you prefer to run a lifestyle business.”
That’s a familiar refrain for Chris Hodges, an investor in BGF’s London office. “Our single-biggest competitor is the ‘do nothing’ approach,” he says. “The reality is that it’s tough out there and ambition is a crucial ingredient of business success.” This is one reason, why, says Hodges, the quality and attitude of the management team are priority considerations when he is mulling an investment in a business. “I need to get a sense they’re open to the bigger picture, to really strategic thinking,” Hodges adds. “We only take minority stakes, but equity dilution can be an emotional thing, so we need managers who recognise that growth capital can really turbo-charge their business.”
For those managements that meet these tests, an equity investment – especially from BGF – is the ideal way to finance an acquisition, he argues. “Equity capital is far less restrictive than bank debt, where the borrower is subsequently required to perform to very tightly defined criteria where failure may mean losing control of the business.”
Mervyn Williamson, the joint managing director of business travel management specialist Statesman Travel, points to another advantage of growth capital he says was crucial when his business was considering fund-raising options. “Bank debt wasn’t going to be practical – the problem we pose for the banks is that we’re not an asset-backed business so there’s no security for a lender – because our model depends entirely on earnings,” he says.
“But even if we had been able to borrow the money to do the deal we wanted to do, we wouldn’t have gone down that route because we were also looking for additional expertise at the boardroom table, ideally from someone outside the business travel sector who would bring a different mindset to our company.”
Like SkyDox, Statesman was also on the acquisition trail. “My partner and I had bought Statesman in 2007 and we grew it from £28m of annual revenues to £50m three years later,” he says. “But we needed to be bigger than we were in the eyes of some of the larger potential clients, who felt uncomfortable dealing with a company where they’d be a disproportionately large customer.”
That posed a chicken-and-egg problem, with larger clients unwilling to come on board until the business grew bigger while the business struggled to achieve that growth without the bigger clients. “We began looking for acquisition targets and having identified Commodore Travel, we had to think about how we would finance the deal,” Williamson adds.
Having decided growth capital was the best fit for his business, Williamson began talking to a number of interested private equity firms. But he didn’t want to give up control of the business and he was concerned about the “churn factor” in the industry. “Three years after they buy you, you can find yourselves sold to someone else who you may or may not like,” he complains.
Finally, Statesman was introduced to BGF by its banker, Lloyds Banking Group. In October 2011, the company became what was then only BGF’s second investment, accepting a £4.25m injection of funding, which was crucial in clinching the acquisition of Commodore. “We did think long and hard about bringing in a third party, but we’re happy to have ended up with a minority investor whose interests are aligned to our own,” Williamson says. “We also like being part of a portfolio family – we’ve been able to offer our services to some of the other companies in which BGF has subsequently invested and to source from those businesses at a competitive rate.”
A year-and-a-half later, Williamson says both the rationale for the acquisition and Statesman’s choice of funding solution are proving themselves. “The combination of our two companies has given us a great deal of additional credibility in the market place, boosted our procurement power and given us real strength in depth – we’ve totally raised our game,” he says. “We’re also continuing to invest, which costs money, but there’s going to be a return on that investment and we’ve had the support of BGF as we’ve made those commitments.”
All of which is music to the ears of BGF’s Chris Hodges. “More people need to recognise the attractions of growth capital,” he argues. “It became deeply unfashionable for a period, amid the first dot.com boom and the years of easy credit that followed, when leverage and debt were all the rage, but this really is an excellent way to develop a business.”
FUNDING A SITE ROLL-OUT
“Roll-out programmes often don’t work out as expected, so you need balance sheet security in order to get past any nasty surprises…equity puts a slug of long-term capital into the business so you can take your time preparing to make the leap and then really go for it.”
Four years ago, Richard O’Sullivan, the managing director of Boost Juice Bars, realised he had a problem. His ten-strong chain of juice and smoothie bars was trading strongly despite the recession, as it capitalised on booming consumer demand for healthier products. And having previously built up one retail business, Millie’s Cookies, to 100 stores before selling up for £24m, he recognised he had another potential smash hit. The question was how to fulfil that potential.
“We felt the opportunity was rising all the time but our ability to fund that was definitely challenging,” O’Sullivan explains. “With four years of trading behind us, we knew our original business plan was going to be delivered and we had the ambition to do much more – it just wasn’t going to be possible to realise it with our finances as they were.”
O’Sullivan considered the best way forward culminating in BGF investing £2.5m in the business in December 2012. The money has enabled O’Sullivan to begin turning ambition into reality.
“We’ve been able to turn on the hosepipe, not least because the money has given us real credibility when we talk to landlords about securing leases” he says.
Andy Gregory, a regional director of BGF, led the engagement with Boost and has taken a seat on the company’s board. The dilemma facing O’Sullivan is, he says, common amongst fast-growing retailers and leisure businesses, which often don’t generate sufficient cashflow to realise their potential. Bank debt may be a solution, where it is available, but, Gregory argues, it’s not well-suited to businesses looking to fund an aggressive roll-out of new sites.
“Equity is a better source of growth capital for businesses in this position because it provides a more stable platform,” he says. “Roll-out programmes often don’t work out as expected, so you need balance sheet security in order to get past any nasty surprises. Debt may require you to accept covenants that mean you could lose the business if the roll-out programme goes wrong, but equity puts a slug of long-term capital into the business so you can take your time preparing to make the leap and then really go for it.”
Oliver Peyton, the founder of Peyton and Byrne, recognises this analysis. With three strands to his company – a chain of restaurants, a business offering catering services to iconic venues and a growing string of bakery and café outlets – he too found himself struggling to capitalise on the potential for growth.
“We felt we were at a turning point where we had to decide whether to really go for it,” Peyton says. “When you reach a certain scale, your growth needs to become more exponential, and we felt the economic environment was going to throw up the opportunities to achieve that – it felt like our moment, but we knew what we wanted to do required much more capital than we had available.”
Peyton had several concerns in mind as he began looking for new sources of finance last year. He recognised the company would not be able to secure sufficient funding from the banks to realise his vision for it, but having founded Peyton and Byrne with his sister, he wanted to continue trading as a family business rather than giving up control. He was also aware the company would need more than just financial support as it scaled up.
“We had to consider whether we had the ambition and expertise to turn our family business into something that would be much bigger,” Peyton says. “Whilst we talked to a range of private equity firms – that didn’t work for us. We chose BGF because they were only interested in a minority stake and they really seemed to understand our growth plan.”
In December 2012, BGF invested £6.25m in Peyton and Byrne with the cash earmarked for an acceleration of the company’s plans to roll out more of its bakery stores and to launch new restaurants. Crucially, in addition to the cash, BGF introduced the company to Mike Johnson, a former chief executive of Whitbread’s restaurant division, who joined Peyton and Byrne as a non-executive chairman to help provide that new expertise.
This support, financial and non-financial, has given the company breathing space to focus on the next stage of its development.
“Instead of worrying about cashflow, we now worry about growth, which is a much happier problem to have,” Peyton says. “In the past we’ve definitely missed out on opportunities because we didn’t have the funding to cope with more than one project at a time.”
The story at Wear Inns, one of the first examples of a business where BGF investment has fuelled a site roll-out programme, is similar. Like Oliver Peyton, John Weir, the chief executive of Wear Inns, was confronted by more opportunities than his business, which buys up underperforming pubs with the aim of turning their fortunes around, could cope with.
Weir was also concerned the company would miss out if he didn’t find a way to move more quickly. “It would have been possible for us to grow organically, but we might never have achieved our full potential because there’s a real window of opportunity in our business just now,” he says. “We’ve been able to buy at a time when pub prices are low, but that will no longer be true in 15 months’ time.”
The £8m investment BGF made in Wear Inns in May 2012, alongside additional funds from existing investor NVM, immediately enabled the business to add 11 new pubs to its 15-strong portfolio. “We think we have opportunities to pick up another ten while still being very selective,” says Weir. “But BGF has given us more than just the cash – they’re a supportive minority investor keen to learn more about our business but without breathing down our necks.”
Andy Gregory says it is the long-term and flexible approach BGF is able to take that is proving so compelling. Too often institutional investors focus on their own exit plans, which may not sit comfortably with the site roll-out programmes envisaged by the business seeking funding.
“Equity should be long-term flexible capital that enables the business to take strategic decisions without having to “just think about short-term cashflow” Gregory argues. “It gives the business the confidence to go out and execute their growth plans aggressively; plus you get an investor whose interests are aligned with the company – in our case over ten years or more if needs be.”
To secure that commitment, however, businesses must prove their mettle. Above all, says Gregory, this is an investment in people.
“Quality of management is incredibly high on my list of priorities when I’m considering whether to invest in a company,” he says. “If we’re going to have a minority stake for that sort of period, it’s crucial we’re confident we can develop a partnership that really works.”
Wear Inns continues acquisition trail
Wear Inns, a company focused on acquiring and managing a chain of community pubs across the North of England, has successfully acquired a further two premises from the Orchid Pub Group. The company acquired nine pubs from TCG Bars in July 2012, so has completed a total of 11 acquisitions only five months after receiving a £10 million funding package from NVM Private Equity (NVM) and Business Growth Fund (BGF). This will bring Wear Inns’ managed pub estate to a total of 26 premises.
The newly acquired premises include The Colonel Prior in Sunderland and The Park in Bradford. Both pubs fit nicely into Wear Inns’ target criteria of community-focused establishments with a potential for development.
John Weir, Managing Director of Wear Inns:
“In 2006, our objective was to acquire 20 pubs across the North East and Yorkshire, so we have achieved this and more over the years. We were clear that managed pubs were the way to go as they are clearly driving the market in terms of positive like- for-like growth. This year has been phenomenal and we are delighted to complete the second part of our acquisition strategy – with help from NVM and the Business Growth Fund.”
Mauro Biagioni, Director of NVM Private Equity:
“John Weir and John Sands have used their extensive experience of managing large pub chains to build up an impressive estate of premises across the North. This is a management team that truly understands its market and its customers. We are pleased to be a part of their ongoing success in an industry that has had its ups and downs over the years.”
David Colclough, Investment Director at BGF:
“In Wear Inns, we are backing a company with a clear strategy of buying and building an estate of revitalised community pubs in the North of England and this latest acquisition is a demonstration that this progress continues at pace. It is a compelling growth story and one which we are delighted to be involved in.”
Duncan Reid, Partner and Head of Corporate Law at Watson Burton:
“Wear Inns is a company which has gained strength and momentum over the last year with key acquisitions in the North of England. The key to its success is the management team’s ability to acquire and manage pubs under the Wear Inns’ brand whilst retaining the individuality of the community where each pub is located. As a firm, we have advised Wear Inns for a number of years and taken great pleasure in watching the company grow. We are sure that the latest of their acquisitions will be as successful as the last and wish them the best of luck in their future endeavours.”
Wear Inns expands pub portfolio
Wear Inns, a company focused on acquiring and managing a chain of community pubs across the North of England, has purchased 9 pubs from TCG Bars. This will bring Wear Inns’ managed pub estate to a total of 24 premises, with plans to acquire more in the near future. This acquisition comes two months after an injection of growth capital provided by NVM Private Equity and Business Growth Fund.
The newly acquired premises include The Bedroom in Whitley Bay, Black Bull in Morpeth, Greens in Sunderland, Lambton Arms in Chester-le-Street, Ye Olde Lang Jack in Whickham, Ship and Royal in South Shields, Lloyds Arms in Grimsby, Porter Cottage in Sheffield and The White Bear in Barnsley.
John Weir (Managing Director) and John Sands (Chairman), both long-standing pub entrepreneurs and Wear Inns’ founders, have established a reputation as credible acquirers in the market. The team has created a winning formula of purchasing well-located and often underperforming pubs with huge potential. Their premises are run and staffed by Wear Inns’ employees, to ensure a consistent management approach and high levels of customer service – without eroding the independent feel and atmosphere. The pubs are predominantly wet-led (i.e. focused on drink sales) and one of the benefits of being managed rather than tenanted is that they have more of a say in the range of products sold. The premises are deliberately unbranded to reinforce the community nature of the pubs.
John Weir, Managing Director of Wear Inns: “We are highly delighted to acquire this package of well-known pubs, with some iconic sites situated in areas that we know very well. The pubs will complement our existing business and enhance our growth strategy. All of the pubs are planned to receive capital investment and some new retail trading formats in the near future; with a clear emphasis on standards, service and exceptional retailing. This is the second transaction Wear Inns has made from TCG, after acquiring the highly successful Cross Keys Washington in December 2009.
As we develop we are hopeful of adding another four North East and Yorkshire pubs to the portfolio this year; with more acquisitions planned in early 2013. We should also create 40 new jobs as the business grows this year, with further new jobs expected in early 2013. It has been a complicated process of raising funds and making the acquisitions over the last six months. We were guided through this process by Duncan Reid and Paul Wigham from Watson Burton Newcastle, Simon John and Paul Mankin from PwC Newcastle.”
Wear Inns has acquired the pubs with the £10 million recently provided by existing investor NVM Private Equity (NVM) and new investor Business Growth Fund (BGF). BGF co-invested £8 million and NVM a further £2 million. This brings NVM’s total investment since 2006 to £6.2 million.
Mauro Biagioni, Director of NVM Private Equity:
“The Wear Inns’ management team has stuck to its business strategy since 2006, using their extensive experience of the industry to create an estate of unique community pubs that meet the desires of the regulars, as well as passing visitors. Wear Inns has increased its value considerably since inception and we are delighted to continue supporting the company’s acquisition strategy.”
David Colclough, Investment Director at BGF:
“The expansion of Wear’s estate of pubs follows our recent investment in the company and demonstrates the enormous potential for this business to grow through continued acquisition. We will continue to lend our support to the management team as they take the business into its next stage of development, solidifying its position as one of the leading pub chains in the North of England.”