Nationwide Restaurant Consultant

At OnSite, we have been inundated with requests for advice given the current economic climate. Much of that advice at the time of writing has focused on the need to raise capital, and the difficulty in doing so. This Article attempts, by way of introduction, to explain why the problem can be more acute for the hospitality industry than others, and provides some advice as to how to make yourself more worthy in the eyes of investors. The first thing to understand is that there is no need to panic:

There is money out there – it’s just harder to get to.

The Current Climate – What the $#&! is happening out there?

I don’t want to spend too much time on this; it’s pretty straightforward. Basically for years and years, financial institutions have been repackaging bad debt, and selling it on to other institutions in order to increase their profits generally, and finance the boom in M&A activity that we have seen over the past decade, specifically. As a famous TV network executive once said, “Finance is the art of passing money from hand to hand until it finally disappears”. So, of course, the problem is (and always was – it’s not a surprise to these guys, right – please, someone tell me they’re not actually surprised) that, at some point, someone has to pay. And right now, that someone is, well…, pretty much everyone in the World.

Who Cares?

Well, it’s a fair question. But apart from the blindingly obvious answer that it means consumers generally are more cautious about spending their money, experience shows us that there is a more important reason when looking at fundraising: Individual investors tend to spread their money across a variety of risks. Most will put X% into “safe” investments, Y% into ventures which are more than promising (i.e., where they can be fairly sure that they’ll at least break even) and then a small Z% into risky ventures, like bars, nightclubs and restaurants, in the hope that they will find the next California Pizza Kitchen (but they are very prepared to lose Z if need be). That’s what capital investment is all about – the spread of the risk.

So the problem is that, in the current climate, when previously safe investments (like a 150 year-old investment bank – Lehman Brothers) are no longer safe, investors either shift their capital out of Y and Z into X, or they shift it into the space under the mattress. (I’m not joking – these are the guys who invented the expression, “Cash is King” and, right now, they’re taking it to heart.)

Even institutions who are in the business of risk capital (venture capitalists and private equity houses), who invest mostly in the Z category (with a little in Y), are adjusting their risk spread to exclude anything which: (a) they don’t understand; (b) has its success driven by trendiness or the “cool” factor; or (c) which does not bear a good chance of delivering returns to them fairly quickly.

I shouldn’t have to tell you that for financiers, they would place hospitality venues firmly in the (a) and (b) category at the best of times. They would much rather make investments in proprietary technology (inherent value) or old manufacturing (lots of cost centers they can eradicate). As Suze Orman said, “It’s better to do nothing with your money than something you don’t understand”. So what do we have to do? We have to help them to recategorise us. We have to show them that an investment in our businesses will be as likely to deliver a return as in almost any other. And you should have faith – you can deliver the same % returns, if you do it properly.

After all, you have one thing in your favour – hospitality businesses tend to generate and process large volumes of cash. These guys love that. In fact, they love it more than almost anything else.

Nine Steps To Giving Yourself a Fighting Chance

As discussed above, your business is going to be firmly in the Z category (and somewhere near the bottom) before you’ve even left the gate. So here are nine tips for moving yourself out of the investment dead zone:

1. Be Prepared Son. Be Prepared.
   
   • Investors want to see focused people, with a good concept and, above all, a good, well thought-out plan:
     • DO some research on who you think would be best to approach – part of that research should include whether you know anyone who knows them or has delivered good results for them in the past. (Don’t be proud people – you should use whatever contacts you have to get through the front door.)
     • DO write a proper Business Plan. And get someone to help you – if you can’t afford us, call in a favour from your consultant friend (everyone has one), and ask your accountant friend (everyone has one of these too – they just don’t like to admit it) to help on the budget/projections.
     • DO include numbers! These guys only care about numbers. They only care about concepts, designs and feelings to the extent they make numbers better. These people have small hearts – feelings make them nervous.
     • DO NOT, under any circumstances, send the BP out to every member of the National Venture Capital Association. No bulk mail shots. Ever. Investors like to feel special. Investors like to feel that they have been targeted because you have already decided that the relationship would be a good fit. Taylor each plan to each investor if need be. And send out a few at a time.
     • DO try to find strategic investors (people who already own significant investments in hospitality or who can bring some retail experience to management) – they will be starting further up the curve. With institutional investors, I would advise against targeting funds who have never owned anything in the retail/leisure/hospitality sector. With individuals (business angels, etc), I would avoid people who just want to look cool and drink their own liquor in a nightclub – you are rarely going to be on the same page.
2. “Honesty is the Best Policy – When There is Money in It.” (Mark Twain)
   • You’ve got to be a complete idiot to lie to these people. Most of them stopped being accountants, lawyers or investment bankers because that was too easy for them. They’ve done hundreds of deals and have heard every possible variation on every lie by a previous owner, current partner or existing manager. They already think the hospitality industry is full of crooks, so prove that you’re not one of them.
   • Getting the numbers right in the Business Plan is what we call a 30-Second Deal Point – 30 seconds is that amount of time it will take them to walk out the door if they think you’re lying about it (and that includes lying by omission). Apart from anything else (see below), what these people are looking for is opportunity for growth – so don’t be afraid of showing them that things aren’t so good.
3. “Business? It’s Quite Simple. It’s Other People’s Money.” (Alexandre Dumas)
   • Never forget that it’s their money and, once again, that this is an industry financiers are inherently suspicious of. So manage their expectations – always under promise and over deliver. From the beginning. Again, don’t show them a golden, glowing business in your business plan or your negotiations. Show them a golden OPPORTUNITY.
4. “Half the Money I Spend on Advertising is Wasted; the Trouble is I Don’t Know Which Half.” (John Wanamaker)
   • Show them why this can be at least as good, if not better (remember what we said about cash above) than the other investments they’re looking at:
   1. • Show them how much cash you generate.Explain how your plans will translate into higher revenues and greater cost savings – increased margins mean more cash.
      • Talk to them about how, because of that increase in cash/saving, you will be able to make distributions of profits to them prior to them ‘exiting’ the investment (they LOVE that).
5. Show them the Exit
   • I don’t mean show them the door – I mean show them how and when they are likely to realize a full return on their capital investment. All investors have got both (not one) eyes on: (a) how they are going to get out; and (b) how much money they are going to earn when they do.
   • Explain it to them – we’re going to IPO (if you’re very ambitious), we’re aiming to pre-package a sale to X (if the concept lends itself to that) or we’re going to buy you out ourselves once our value has grown in line with projections. The fact is, you are almost always going to be able to refinance/bring in a new (often bigger) investor if things go well.
   • Investors measure profit, not just as a percentage return, but as a function of time. A 100% return within 6 months is worth more than a 300% return in 4 years. The question they ask is “How long will it take me to earn how much?”. The important thing is that you show them you’re always thinking about it and that you have a timeline in mind. (Timeline Tip: Anything more than five years is almost certainly too long.)
   • Paint them a picture, and make it based on reasonable assumptions, and numbers that you can deliver.
6. You’re Not Red Lobster Yet
   • So don’t pretend you are. You may think that your business is worth $20,000,000. It isn’t. It might be one day, but it isn’t now.
   • Be open-minded about the valuation they give you. These people measure value in a rigid manner, as part of an established financial construct. And the question they’ll be looking at is “what is it worth NOW?”. Don’t try and tell them how to do their job – you’d be horrified if they told you how to mix a cocktail.
   • If you look at this properly, it is an opportunity. You should almost discount the value before they sit down – see tip number 3: It’s the OPPORTUNITY they’re looking at.
7. And You’re Not the CEO of Red Lobster Either
   • Investors will always insist on incentive-based remuneration/equity for you. You have to earn your money, and your capital stake will only grow if you do well. Deal with it. These guys have zero interest in how much work you’ve put in already. If you were doing so well, you wouldn’t need them.
   1. • The main thing is to make sure that, if you do deliver¸ you are appropriately compensated – often investors will roll out a formula for increasing your equity stake if you produce results.That’s fine (and you should welcome it) provided that it adequately deals with what happens if you leave the business.
      • On this last point, the general rule is that “Good Leavers” (people who get sick or die, or who leave amicably) should be rewarded with the full value of their equity; “Bad Leavers” (people who get fired for cause, commit criminal acts, lie, etc) traditionally get nothing.
      • Be open-minded about the veto rights they will want – they will want to ensure that you can’t go out and buy equipment over and above a certain amount without their say-so, or sell assets without their say-so, etc.
8. Put Some Skin in the Game
   • It will be very irritating to you, but investors almost always require the owner-operator to have something more to lose. In the old days, they used to ask you to mortgage your house. Now, they’ll often settle for you to give them security over your interests in the business. Of course it’s irritating because you probably already have some cash investment in the business or, as I’m sure you would say, “if you measured how much time and the huge part of my life I’ve put into it,…etc, etc).
   • Stop whining. They don’t care. They are only interested in what MORE you have to lose if they make their investment. In their minds, it’s the only way to keep you honest – the theory is that you don’t care about what you’ve already lost.
   • (The only real exception is if you gave up something else (another job, another venue) in order to focus 100% on this. That is a sacrifice in their eyes. And that’s what they’re looking for.)
9. DON’T SCREW THEM
   • I’m saying it to you again so that you can’t claim I failed to warn you. Before these guys have sat down at the table with you, they have worked out the 100 different ways they can get hosed. You can be certain they will have thought of many others which you haven’t. Don’t do it. Ever. If you do, the word will get around and you will never raise another penny again. In this or any other venture.

Wrapping It Up

As ever, the above is not an exhaustive guide. When targeting an investment, and certainly when negotiating it, you should get help from professionals. It’s money well spent and will save you a great deal of aggravation in the long run (assuming you get the right help, of course). In addition, you could always consider borrowing the money. I guess my comment would be: (a) good luck with that in this climate; and (b) I never recommend that a client should introduce the trials and tribulations of servicing a loan, when they are most likely looking for investment because cash flow is tight. Unless you have a big enough cash/equity cushion, debt (particularly at today’s prices) will almost certainly make things worse.

- James Sinclair, OnSite Consulting

James is an expert in maximizing returns from hospitality venues, whether in relation to a start-up new venue, redeveloping an existing venue or saving problem venues from insolvency. In addition to owning a number of successful bars, nightclubs and restaurants himself, his advice is sought around the country by owners and operators who need his specialist expertise when tackling the specific problems they face.

If you are interested in any of our services, please don’t hesitate to contact us.