It has now been over two months since bars, hotels and restaurants were allowed to reopen. Sadly, there are many sites which have not yet reopened or have taken the difficult decision to close permanently. Those businesses in the sector which have survived lockdown have been busy focussing on how to navigate the new, socially-distanced landscape. As we all begin to adjust to the "new normal", many businesses will now be turning their attention to the long term effects of the pandemic on their business model and their financing needs in order to survive, adapt and grow.
The Chancellor's Eat Out to Help Out Scheme closed on 31 August 2020, and has been widely deemed a success and proves (were proof ever needed) that the British public loves a deal. Indeed, some business have chosen to extend the scheme through September and bear the cost themselves. Notwithstanding the Government's efforts to support the sector, it is clear that some businesses may not survive (especially as the Coronavirus Job Retention Scheme begins to wind down). There have already been some casualties, however the impact of COVID-19 may allow surviving businesses to grow in a market that is now less crowded.
It is unrealistic to expect banks to provide the sector with the levels of financing likely required to fund further growth. We expect that in the near to medium term, businesses in the sector will have more success raising capital from the private equity and private capital communities. Although some private equity funds may have been forced to make additional capital available to support their portfolio companies, there is still substantial cash available for investment. Combining this with the fact that sound investments made now, in a depressed market, could give rise to some very attractive returns, means that many private equity investors will be keen to deploy capital as soon as possible.
However, valuations at present are still uncertain – although the sector has been reopened for the last two months, trading data will be skewed by the Eat Out to Help Out Scheme and it is still uncertain when significant commuter footfall will begin to return to city centres and, in the case of tourist hotspots, when international travel will resume. Investors may well want to see a few more months of trading data post-reopening in order to get a handle on emerging trends in the sector's new COVID-secure way of operating.
So what can businesses do now to better position themselves for investment? We have already seen many businesses embrace and leverage some of the trends that emerged during lockdown (such as an even greater focus on provenance and quality of food and drink, hyperlocal home delivery services to local consumers, and the importance of digital/online infrastructure). The businesses that are able and prepared to innovate, improve the digital side of their business and, looking ahead the next few years, overhaul their strategy, will be best-placed for attracting investment.
Before equity funders part with their cash, they will want to see a credible, sustainable plan for growth. A robust set of fundraising documents would include:
- an information memorandum setting out details of the business and highlighting the strategy for achieving growth (e.g. investing in digital/online infrastructure, franchising, licensing, acquisitions and/or opening new sites),
- financial projections, and
- legal and financial due diligence materials.
Investors will almost certainly expect a detailed summary of the impact of COVID-19 on the business. Businesses that are attractive to investors will be able to showcase resilience and adaptability in the face of COVID-19. Such a summary is likely to address:
- action taken to protect the business (e.g. rent deals, furlough, adaptive working programmes, deferrals of VAT/PAYE/business rates and applications for CBILs),
- the digital offering and how customers have been engaged with during and after lockdown,
- how the business model and working practices have adapted (which may still be evolving but should be clear at the time of fundraising),
- customer retention/visits/bookings since reopening and as compared against pre-lockdown numbers (and stripping out the impact of the Eat Out to Help Out Scheme), and
- preparedness for a second lockdown and ability to withstand further shocks.
While there is cause for optimism, a dose of pragmatism will be needed when it comes to valuations and the form of investment. Given ongoing uncertainties, market-topping, full valuation deals with shareholders selling out and exiting completely are unlikely to be seen for a while. However, less risky deal structures (from the investor's perspective) that offer investors some form of downside protection and an element of shared risk, are likely to prevail.
Business owners will need to consider whether it is better to wait (if they have the luxury of waiting) for valuations to move closer to pre-COVID-19 levels or whether to fundraise now. There will surely be businesses in the sector which are willing to accept a lower valuation now in order to secure funding to grow and outperform competitors as we emerge from the pandemic; these could end up being the big winners.