Bars, restaurants and hotels tend to be highly scalable and have therefore long been of great interest to private equity. Recent figures indicate that 25% of all M&A activity in the UK hospitality sector in 2016 was driven by private equity.
Valuations are believed to have been more than 12 times earnings in some cases. The high street is packed with names backed by private equity: Byron Burger, Be At One, Côte, Café Rouge and Las Iguanas to name just a few and higher up the market there are the likes of D&D Restaurants, Hawksmoor and Hilton Hotels. So could private equity investment be the right choice for your business?
The attractions of large amounts of readily available capital at a generous valuation are obvious, especially at a time when the sector is seeing margins squeezed by rising rents and staff costs, but it does come at a price. It is likely to involve giving a significant level of control over your business to the investor who will almost certainly require a seat on your board, various veto rights and may well want to make significant changes to your management team. The level of control the investor has is likely to increase (often to full board control) in the event that key financial targets are missed. As with any major transaction, your relationship with the investor, the ‘fit’ of your organisations and getting appropriate expert advice on the detailed terms is essential.