If you have had a good trading period and are considering expanding your empire, financial backing is crucial.
In an ideal world, expansion using existing capital would be the favoured approach, but that is not always an option for operators.
But getting the right funding in place will ensure that any operator can move quickly to secure a desired property.
This is increasingly important as the purchase market remains buoyant, meaning pub groups need to be able to move quickly.
According to Fleurets’ annual Survey of Pub Prices report published in January, property transactions are showing resilience with freehold prices up 14.6% to £416,624 and leasehold sale prices up 31% to £51,980.
There are a raft of funding options available, with bank lending, crowdfunding and the Enterprise Investment Scheme (EIS) proving popular.
Traditional bank funding is still the first port of call for many operators especially those buying freeholds and there has been a raft of new entrants such as challenger banks coming onto the market in recent years, prompted by the impact of the credit crunch.
Christie Finance’s managing director Nicholas Baker agrees the purchase market is still buoyant and says there are a lot more lenders getting involved rather than just the high-street banks.
He admits that as long as the operator “ticks all the boxes”, bank lending is the best value. A strong operator with a mature level of trade and a business trading in line with expectations is considered a better risk for the high-street bank, he argues.
Acorn Finance owner Paul Thompson agrees high-street banks have the best rates, but warns they have got a certain lending criteria that, in some cases, will reject multiple operators wanting to expand.
This is especially common when pub groups are looking to buy boarded-up pubs or pubs with bad trading figures. “It can be too much too soon for them,” he says.But there are funding routes that can be used to get round this challenge.
Turning to crowdfunding
“We can use some of the crowdfunding sites or bridging lenders. Non-traditional lenders will lend against the purchase price of the site. Once there is a year of accounts then we can get it refinanced,” Thompson says.
He says that the challenger lenders are an option as well because they are lot more flexible in how they underwrite and work with operators.
He also suggests that crowdfunding lenders can also be an option either as a major fund or as a top-up to a loan. And there are other types of crowdfunders that will take an equity stake in the business.
Thompson highlights another major challenge for operators in that most lenders are not keen on lending on wet-led pubs.
However, it is not impossible as long as the funding proposition “makes it impossible for them to say no” and the long-term viability can be demonstrated to the lender, he says.
While bank lending can be the best-value funding, it can be a slow process for an operator that wants to move quickly and get their hands on a new pub that has come onto the market.
“Banks are not the most fleet of foot,” argues Baker. “If speed is of the essence, you are probably not going down the high-street route. Their processes, systems and ways of operating have legacy issues that the challengers and some of the more entrepreneurial operators just don’t have.”
He says that crowdfunding with a lender can happen in as little as 72 hours, allowing a pubco to move quickly to secure a site.
“Some pubcos are going down the equity route when they could go down the debt route,” he argues. “Where pubcos need to be careful is when they are giving away equity. Are there other options? Who really wants to give away a chunk of their business?”
AlixPartners managing director Graeme Smith agrees that crowdfunding has gained in popularity in recent years but admits it is “still a little untested” and “who knows where it will be in five years time?”
He highlights Oakman Inns as an example of a company that has used crowdfunding successfully.
He says companies, such as Oakman, will have a lot of loyal customers that will want to invest in them.
“They like the business, the product and Peter Borg-Neal’s approach and track record,” he says.
Oakman chief executive Borg-Neal has already said that crowdfunding can provide a good opportunity for the pub sector, but has raised concern that it is not strongly regulated enough with people over-promising and under-delivering.
Consider sale and leaseback
Meanwhile, Smith says there are also other options pubcos should consider such as sale and leasebacks, which will raise capital.
He also suggests joint venture arrangements, which will allow pubcos to expand within the tenanted and leased market.
“If you get businesses with five to 10 sites looking to expand, then operators are doing deals with pubcos themselves and entering into these joint-venture arrangements like Hippo Inns,” he says.“If they have a team with a proven track record of running multiple pubs and have proven themselves to be good retailers, why wouldn’t you want them running pubs in your estate?”
This can give the landlord a share in the upside of the value of the pub with the pubco operating it in the best way possible and maximising the profitability.
Many companies in the sector, including Oakman Inns, have also used another area of funding to expand and raise funding – the Enterprise Investment Scheme (EIS). It offers tax reliefs to individual investors who buy new shares in a company.Kris Gumbrell, chief executive officer at Brewhouse & Kitchen, says EIS has worked well for his company, which has increased from one to 19 sites in the past four years.Brewhouse & Kitchen has opened up many closed pubs that had no trading figures, making bank lending “impossible”, he admits.
But EIS has proved a popular choice for his business that has created around 300 new jobs.
“You tend to have a larger number of smaller-stake investors who are coming in underpinned by certain tax benefits,” he says.“EIS investors are usually sophisticated and have a lot of good advice and don’t tend to interfere on a day-to-day basis.”
He says another major benefit is their enthusiasm for the business.
“A key part of investment is that you get a large group of enthusiastic and interested investors who are great to work with. Because of the way EIS is structured, no one can have more than 30% of the whole shareholding and that means everyone is collaborative.”
Engagement in the business
One pitfall of the system is that it takes a lot of administration and the company has to have annual general meetings and extraordinary general meetings.
But the benefit is that the company has people that are engaged in the concept.
“We have just completed another fundraiser where it was not EIS eligible but our fundraisers still followed us in,” he says.
However, he has called for more Government help for the EIS scheme, which underwent a number of changes in the Finance Act 2015. He says this was to bring the rules in line with European legislation and saw the ceiling of funding reduced to £12m from £15m.
“What would be nice with Brexit is, now that we are coming out of Europe, for the Government to review the rules again and make them more generous,” he says. The current EIS scheme is limited because it restricts the range of businesses that can qualify, he argues.
“If you are running a pubco you can’t have too many rooms because it is non-qualifying,” Gumbrell says.
He believes that Brexit is a “great opportunity” because EIS could subsequently be reviewed and something “more dynamic” may be created rather than being “hog-tied” by European regulation.
Funding a rollout of a pub businesses can be a complicated process. It is crucial to get the right backers and ensure they can recoup their investment whatever route the operator chooses.