The top ten tips for accessing finance in the hospitality sector

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“THE TOP TEN TIPS FOR ACCESSING FINANCE IN THE HOSPITALITY SECTOR”

Philippe Hails-Smith, Partner at Joelson Wilson LLP gave a presentation this morning which was both informative and useful.Before delving into the topic itself, Philippe outlined what it is to need investment and how important it is that the entrepreneur know exactly what they’re looking for.

• Is it simply that cold-hard cash is needed for expansion plans or does a young entrepreneur with a good idea need a mentor, with access to funds?
• Is the entrepreneur looking for a silent partner simply to help cover the initial cost of setting up a business or do they need a full-time board member who will take an active part in the day-to-day affairs of the business?
• Are funds required for a new business or expansion plans?
• Capital expenditure in the first instance can often run to as much as £500,000 for a new-opening restaurant or bar – have all possible sources of funding, including family and friends been propositioned?
• What is the exit plan for the investor?
• Is this a 3 year relationship based on a relatively quick return on investment, or does the business want a long-term partner to share the burden?

Once these basic questions have been asked, there are then “The Top Ten Tips”, which were outlined as: 1. PreparationGood research and ground-work cannot be discounted or in any way undervalued. The key when seeking any form of finance is to do the homework.What are the start-up costs involved? How will foot-fall affect the business? What is the competition doing?It is imperative that the idea or concept is well thought through and clearly defined. The entrepreneur must know as much as there is to know about both the concept and the external factors which will affect it.Ask for opinions from people who will tell the truth rather than massage an ego. Sense-check your numbers and expectations for the business. Do not over-inflate expectation for the first few years, but don’t be too cautious either.2. The idea/conceptNew restaurants, bars and hotels are being received with extreme caution as a high risk by banks in the present economy. Unless the entrepreneur has a backer with deep pockets and/or is willing to re-mortgage the family home, it’s unlikely that a bank will loan to a start-up restaurant/bar at the moment. So funding will have to be sourced elsewhere.Given that an investor will likely be looking for an equity share in the business, the entrepreneur must be clear on the terms of their proposal. What is it about the idea that will attract investors? What sets it apart from other similar initiatives?3. The Business PlanWhen presenting to a panel or individual investor, keep it short and sweet. A 100-page business plan, replete with eye catching images and logo ideas may seem like the best idea, but try to avoid it because the investor will likely switch off after page 4!Draw up a comprehensive plan, of course, but also have an “executive summary” – something for the investor to glance over and use as a tool for questioning the entrepreneur. It’s better to be able to answer the questions in person rather than looking through the paper work.

4. People buy PeopleA recurring theme throughout Philippe’s presentation was not to forget that investors are people too. Like the rest of us, they are as much attracted to a business proposition by the commitment and flare demonstrated by the entrepreneur as by the forecasted revenue.Of course a great personality isn’t enough of a reason to invest in a new business in and of itself, but faith in the work ethic and commitment of the owner is absolutely vital in convincing an investor to part with their all essential cash.When meeting with potential investors it’s vital that the entrepreneur display a certain level of charisma, charm and most importantly an in-depth knowledge of the business at all levels. A belief in both the business concept and your own ability to succeed is essential.5. The Sales PitchA sales pitch for a new business or concept should be based on the vision of the entrepreneur/creator, but it must also be supported by a well thought-out and considered business plan.In the course of the sales pitch it is essential for the entrepreneur to demonstrate a full and comprehensive understanding of what it will take for the business to succeed.

6. PlanningWhen the business plan is ready and the concept refined, how does the entrepreneur go about approaching the right potential investors?Before approaching anyone for investment, have a meeting with a legal advisor to ensure you know where you stand. Did you know there are legal limits on how many people you can approach? Did you know there are legal limits on how much investment you can ask for?Understand what is required in terms of finance and be sure on what you’re prepared to give up (equity) for that investment.7. CompromiseCompromise. Negotiation. Give and take. Settlement.Whatever you term it, it amounts to the same thing – you will likely end up having to give away more than you initially thought and/or for less than you had hoped. Prepare for this – if it’s anticipated then it can be planned for.

“Hope for the best but plan for the worst”

Negotiation is inevitable, but once these key aspects are outlined it’s easier for the business owner/entrepreneur to know their limits:

• How much equity are you willing to part with?
• What is the lowest amount of investment required?
• Is a 5 year partnership more realistic than a 3 year agreement?
• How many investors is too many investors?

Identify early on the key parts of the new concept or idea, which are fundamental and which you’re unwilling to compromise on.

8. Deal BreakersContinuing on from the compromise section, the deal breakers are equally important. The entrepreneur has to understand what the maximum percentage of shareholdings is that they’re willing to part with.

• Is the controlling share of 51% enough for them to effectively run the business?
• Who has control over key business decisions?
• What will the make up of the board be?
• What is the exit strategy for all involved?

9. ExecutionHow best can the entrepreneur approach investors? Is an introduction from a mutual acquaintance appropriate? What are the legal requirements for speaking to an investor?Should different tactics be employed when speaking to one group of potential investors as opposed to another?Philippe’s advice was to keep it simple. Yes, there are investment schemes where various tiers of investors are separated by virtue of the amount they’re willing to invest; at what stage they want to come onboard etc. Don’t get too caught up in the specifics just yet – first and foremost the investor’s interest needs to be attracted. Once they’re officially a part of the team and the business is underway, then you can look at investor schemes for others. It’s important to get that first agreement, first.

10. Take appropriate adviceConsider the legal, accounting, tax and corporate finance ramifications of opening a new business. Having a great idea or concept is all very well and good, but getting the right advice is essential to the success of the business.Look for experience and know how from those giving advice – yes, it will likely cost you, but better a relatively small fee now that a large fine later!

For more legal advice on starting up a new business contact Joelson Wilson LLP