Private equity firms are continuing to invest heavily in the F&B sector as consumer passion for health and wellness helps fuel the drive. With competition high among investors, there’s an increasing appetite for earlier stage F&B businesses; the sector’s shift towards outsourcing has also helped to de-risk F&B business in the eyes of investors. We’ve seen Bridges Fund Management recently invest in school catering services business Innovate Services, NVM in healthy snacks producer The Primal Pantry, BGF in high protein food and supplements business Muscle Food and investment syndicate Adjuvo in high-protein ice cream brand Wheyhey.
Further along the lifecycle, Perwyn LLP backed the MBO of Freshcut Foods and Piper realised its investment in the cocktail bar chain Be at One on the sale of the business to Slug & Lettuce chain owner Stonegate Pub Co. These all illustrate the range of investment opportunities for F&B founders and business leaders out there.
Where to start
So, with a multitude of sources of equity capital, tapping into these requires help. Your accountants or lawyers may well be able to guide you; bear in mind that your business’s sector, size, maturity and the investment requirement will immediately determine potential investor options. In short, the typical sources are high net worth individuals and venture capital firms or perhaps a combination of both. The approaches of these different investors can vary dramatically. (The British Private Equity and Venture Capital Association is a useful starting point (www.bvca.co.uk)).
In terms of process, most investments follow a similar path. Prepare an initial brief “taster” for an investor to review followed by a more formal business plan, presentations and discussions with investor(s) and finally an offer letter setting out the terms of the investor’s proposal. The legals follow – the formal legal documentation typically accompanied by investor due diligence on your business. As a rule of thumb, you should allow a few months from the start of investor discussions to receipt of the cash – a long time in the catering business
First impressions count
It’s impossible to overstate the importance of first impressions. An owner must prepare thoroughly for the initial meetings with the investor. A solid grasp not just of your business and its financials but also your market and the threats and opportunities will be essential – think Dragon’s Den and then some. You will also need to defend the amount and purpose of the investment being sought.
What investors look for
So what will an investor look for? A number of factors will influence any investor’s decision to invest:
- You, your passion, commitment and experience. Investors avoid “lifestyle” businesses
- Strength and balance of your management team
- Your vision for the business, growth strategy and plans for an exit
- The business’s edge (USP)
- Your systems (the food and drink sector is heavily regulated and an investor will be keen to understand your compliance functions)
- Financials and the business’s cash generation and profitability
- Sector, competition and growth opportunities – essentially the scalability of your business
It’s all in the details
Investors will expect you to have your ducks in a row before you approach them, This means covering off IPR registrations, key employment contracts, property leases signed and so on. In the F&B business, you’ll need clear supplier contracts in place too. An investor will run its own due diligence on your business. It’s vital to have resolved any housekeeping issues before this exercise starts – or at least be in a position to point out any problems to the investor. Trust and transparency is key – investors respond more favourably to being told about an issue than discovering one.
Set the tone for the relationship
It’s a smart move to anticipate the kind of input to expect from your investors at this stage. Investors won’t want to be involved in the day-to-day but will invariably look for three things:
- Regular information
- Influence over major decisions
- Access (in the form of board representation)
It’s important to remember that third party finance brings accountability and good governance expectations – not necessarily bad things, in any sector.
Remember to choose your investor carefully. In addition to personal chemistry and the depth of their pockets, an investor will ideally be a good sounding board and door opener with experience of your sector and valuable connections. You may want to think about this in the complex world of F&B.
Investor do’s and don’ts
A final checklist for any F&B businesses thinking about that next level investment:
- Make sure your business is ready to receive investors – resolve any issues before you start
- Trust and transparency are key for an investor
- Get your management team and business plan in shape
- Know your market and the opportunities – we’re operating in a fast evolving market right now with high profile closures from Jamie’s Italian through to Byron dominating headlines
- Don’t confuse value and price when choosing an investor
- Don’t be afraid to walk away