Last Wednesday’s R200 event again highlighted the sector’s ability to attract some of the best entrepreneurs and management teams in the UK, but it was also highlighted that for every success story, many concept founders can still fall down the “black hole” of business growth.
According to leading US academic Chris Muller in his recently published book The Leader of Managers, there is a special time in the growth of multi-site companies that catches founders and entrepreneurs by surprise, which he believes can either be called the “Black Hole” of restaurant growth or the “Bermuda Triangle” in the life cycle of a business.
As he points out in the early stage of development it is taken for granted that new businesses have zero revenues and large opening expenses; this is the risky part of opening a business. “But, if things go well and the marketplace demands growth, revenues begin to increase much faster than expenses, which still continue to increase,” says Muller. “During this point, which for many businesses is the time from two to 10 sites, excitement can run very high, as can pressure to expand quite rapidly.”
It is at this point Muller argues that a “confluence of challenging issues come together and may create a metaphorical flood”. One of the first things to happen is that costs begin to grow quickly as the need for investment in infrastructure becomes crucial. Part of this new expense is the need for new employees, many to support a growing head office team.
Muller says: “With each increase in the span of control, around five to eight new units, a new leader of managers must be hired, trained and supported. As territories expand, so does the need to support travel for site visits, training for new managers and owners, as well as new crew members.” On top of this new systems have to be created and put in place, marketing spend rises, meetings are increasingly held at off-site locations and “sooner, rather than later, a larger space must be acquired for the corporate headquarters”.
“All of this is occurring while the ‘best and the brightest’ from older units, each of which has its own product lifecycle of maturity to contend with, are helping to drive the bright new unit openings,” says Muller. “Revenues at existing units become flat from a natural lack of attention, while new units cannot be opened fast enough to increase revenues above opening expenses, and investment in non-revenue producing infrastructure is happening at breakneck speed.” This is the “Black Hole” that many emerging or “hot” concept companies rush, never to be seen again.
Muller says: “If, and this is the ultimate big ‘if’ question, there has been planning well in advance for this time period, with significant capital resources secured in advance, multi-unit companies may come out on the other end as revenues quickly catch up and then grow faster than expenses. One of the most tragic outcomes of this challenge is that the well-meaning founder of the business will have been completely blind-sided by this experience and will be a casualty of this process.”
As everyone in the room at the R200 awards, or at the MA300 events held this year, can testify, surviving this Bermuda Triangle of growth should be every entrepreneurial company’s ultimate goal. Unfortunately it is not one that all can achieve.
A few more punches thrown
Keeping to self-imposed deadlines has not been a strong point of Punch Taverns when it comes to a conclusion to its restructuring talks, but that didn’t stop the company last week signalling that the first week in December would be when it would announce a revised restructuring proposal.
However, even this optimistic statement came with a caveat that the expected proposal would be put forward with “the broadest level of support achievable at that time and will then formally launch the implementation of that restructuring proposal shortly thereafter”.
Earlier this summer, finance director Steve Dando told M&C Report that he was “confident” Punch’s debt restructure would occur in the second half of 2013. Asked why the original deadline of the end of June was not met, he said: “It’s quite a complex restructure. There are 16 different tranches of debt, a lot of people need to agree to the restructure and it makes sense to give people as much time as possible.”
One group is senior noteholders, as represented by the Association of British Insurers noteholder committee, which have a blocking stake in the senior notes of both Punch A and B securitisations, meaning any changes to debt liability terms need to be acceptable to them. Again Punch announced that this committee, which earlier this year described the pub company’s restructuring proposals as being “some distance away from being acceptable to us”, had joined the process of engagement regarding its debt restructuring.
But that doesn’t mean they are in agreement, hence the “broadest level of support achievable” caveat.
According to a report in Reuters last week, the ABI Committee has been able to set out its demands, which includes any spare cash diverted to pay down their bonds, cash balances in the securitisation to be used to bring down senior leverage to 7x as soon as possible, with a target to reduce leverage further to below 5x EBITDA by the end of 2018, and no cash leakage outside the securitisations until senior leverage is down to 3x.
It points out that the committee is also willing to agree a looser debt service coverage ratio covenant to get the deleveraging through, which could also give the equity more operating flexibility (assuming that all of the spare cash was not tied up in amortising the senior). Other points from the ABI terms include allowing Class A notes to nominate directors for Punch.
The committee, which rejected earlier proposals as “too vague”, also said last week that it “believes that a fair and reasonable consensual deal could be reached between all stakeholders”.
After lenders rejected two earlier proposals put forward by the Punch’s board to restructure its £2.4bn debt pile, it will hope that the first week in December is a case of third time lucky, in the broadest sense.
