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Funding options for hospitality operators
Since the start of the pandemic, the key word in the hospitality sector has been “survival”. But as we start to get back to some degree of normality, this has now shifted to “opportunity”.
We are seeing more and more activity in the industry, with operators now ready to take advantage of the possibilities the pandemic has created.
In order to realise those opportunities, however, many operators are seeking funding. But with so many options available, choosing the right one is not easy, and it is certainly a case of no one size fits all.
Here, we break down the five best options for an aspiring operator.
An initial public offering, or stock market listing, is always one for debate for business owners. If you have an attractive business it can be an efficient way of raising money through the public markets, just as Various Eateries and Nightcap plc did in 2020. It does, however, mean you are now sharing more information about your business in the public domain – undressing in public on a regular basis. So, if you have a period of poor trading, or there is a mistake in numbers presented to the public, it could have a detrimental impact on your business (just ask Conviviality plc).
Recently, Hawksmoor has announced a potential interest in an IPO to continue their expansion and Soho House has become Membership Collective Group as part of a listing in the US (although their share price has decreased c10% since their listing).
An IPO tends to lend itself better to a business with sufficient scale, with excellent governance, and nothing to hide. However, for F&B operators with sub 8-10 sites, it may not be the best option.
2. Private Equity (PE) / Venture Capital (VC)
The demand for private equity or venture capital funds to invest in F&B operators in the last year has reduced significantly – largely because of the uncertainty that exists in the market. Leisure rollouts were all the talk of PE investors ten years ago, but in the last few years (and even before Covid) this was declining, largely due to the failure of many mid-market chains that had received PE investment. The key here was that many of these chains were generic, without a unique concept, and were poorly managed.
In recent times, generalist investors, without a specific sector focus, have moved away from traditional F&B, and industry-specific investors have moved into more niche areas (e-gaming / experiential concepts). An example of this is Cain International putting further capital into the parent company of experiential leisure brand, Swingers, earlier this year.
Having said this, we are starting to see more interest as investors realise the pandemic has created opportunities for more cost-effective rollouts. Now operators have started trading again (and trading well), along with more site availability, and more favourable landlord deals, the F&B rollout is coming back for those businesses with a unique concept and a quick payback and return on investment. Imbiba’s recent investment into Pizza Pilgrims is a prime example of this.
We are frequently having interesting conversations with PE and VC investors regarding leisure assets, and we truly believe that the purse strings are likely to open further in the coming 6-12 months.
Crowdfunding can be a great way to increase brand image, as Brewdog found out. It is more popular with smaller businesses or independents as a way to raise their profile and raise capital while doing so. It is, however, an expensive option. You need at least 40-50% of the funds required before you even start to have any chance of a successful raise, which puts off a lot of operators.
This month, Market Halls has announced it is launching a £1m crowdfunding campaign, offering shares to all investors with scaled incentives. As is typical with crowdfunding, these include discounts in the venues, VIP hire of event spaces, and access to events. A great initiative to raise brand awareness (and some capital), but it certainly will not come cheap.
4. Private investors
If none of the above options work for you, private investors are another option worth some thought; either friends and family, angel investors or family offices. In fact, this is where I would start if I were an operator looking for capital because if you already have a relationship with people, it can be the quickest and cheapest way to raise funding – and the level of due diligence required will likely be a lot lower, as the level of trust will be a lot higher. The issue is that many private investors have also been put off the sector in recent times, and unless you have a good network, it can be difficult to find the right investors for you.
There are plenty of debt solutions out there, and arguably if you are not giving away equity in the business, this is a cheaper option – although remember you have to pay the debt back. You will often be required to give a personal guarantee, something that many business owners are reluctant to do. Debt products can be expensive in terms of interest/cash flow too, and traditional lending has become incredibly difficult to come by in recent years with high street banks doing very little in the sector. Merchant cash advance (lending against future credit card income) is becoming more popular, but again, it is expensive.
Many business operators do not realise that there are lots of options out there for raising capital. Yet recent stories, such as Hawksmoor, Soho House, Pizza Pilgrims, and Market Halls, highlight many of these are still available, despite the worst crisis to hit our sector probably ever.
The market is opening up again so make sure you are well equipped from a finance and cash flow perspective to take advantage of the hospitality and leisure revival.