FUNDING A SITE ROLL-OUTMay 2013 | Feature
“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.”