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Financing your restaurant - the start-up

Founding, owning and managing a successful restaurant business is an ambition for many in the hospitality industry. With the UK restaurant industry forecasted to grow up to £52 billion by 2017 (Allegra Foodservice), this positive economic outlook will have many considering whether now is the time to take the plunge.

Aside from the all-important question of finding a site, another major decision for new restaurateurs will be how to finance the venture, both in start-up mode and as it looks to grow. Restaurant launches are capital intensive projects, with rent deposits, fit-out costs, licensing applications, marketing and staff training costs all needing to be paid before the first customers walk through the door. 

The first finance source most people think about is a business loan from a bank. But for an application to be successful, the bank is likely to want to see a significant amount of equity funding provided already by the entrepreneur and others. This is often friends, family or "business angels" – wealthy individuals who are experienced in business and who can provide both investment and advice. 

Other sources of equity finance include crowdfunding. This is when entrepreneurs can pitch their business to an online community of investors in return for shares. It can provide some valuable early publicity to the venture, and a useful test of whether the concept is resonating with customers. However, campaigns for start-up restaurants remain quite rare. Crowdfunding is considered a better option when the venture has become more established and is looking to roll-out beyond its first few sites. 

Top tips

  • Make sure your structure is "investable". This means ensuring that the business is set-up in a professional way from the outset and is well placed to grow and scale as proposed. Ask have you taken steps to ensure you own and protect the rights in your brand? Are the terms of the lease appropriate for your needs, both now and in the future? Have you built the right team around you in terms of operations, customer service and marketing? Are you clear on your regulatory / licensing obligations and how you will contract with suppliers and staff? 
  • Seek SEIS / EIS advanced assurance. The Seed Enterprise Investment Scheme (SEIS) is a significant tax incentive offered by HMRC to private investors in early stage businesses. It enables them to get 50% income tax relief on the amount invested and pay no capital gains tax on an exit, provided certain conditions are met.

    SEIS is targeted at companies in their first two years looking to raise up to £150,000 from third parties. Whilst the Enterprise Investment Scheme (EIS) is targeted at companies raising money thereafter; with the income tax relief reduced to 30% to reflect the lower risk. Private investors will often be very keen to invest through these schemes if at all possible. So obtaining ‘advanced assurance’ from HMRC that your proposition is a qualifying investment can be very useful. 
  • Get a shareholders' agreement. Third party investors will usually insist on ensuring their relationship with the company is properly documented. But even if you are raising money from friends and family, establishing a ‘governance structure’ so that everyone is clear how the business is to be run, how shares may be transferred, and what the expectations are as to a future exit is extremely important. Aside from ensuring that there is a legal agreement to fall back on in future, simply ensuring that all parties' expectations are clear from the outset has real benefits. It enables those involved to concentrate on building up the business rather than being distracted by shareholder issues.

First published by The Caterer on 16 October 2015.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2015. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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