As many of you will know the Snowball company name comes from a book by arguably the greatest investor of all time, Warren Buffett, and one of his famous quotes, and there are many, is ‘Risk comes from not knowing what you’re doing’. In other words, you bring higher, and often unnecessary, levels of risk into the equation if you lack knowledge or understanding in particular areas. This is where external, third party and professional advice comes into its own. Naturally, you have to be dealing with advisors who know what they are talking about, but they will come with skills, knowledge and experience that you will not have, and are worth the cost.
Struggle without External Advice
I’ve seen several situations and examples recently where businesses and entrepreneurs have seen their businesses struggle or even fail and fit into the category of going it alone and/or not bringing in professional advice. Just recently I’ve been watching ‘The Hidden World of Hospitality’ with the chef, Tom Kerridge, where Tom has been visiting different parts of the hospitality industry. Great series and well worth a watch. In a recent episode there were two examples worth a closer look.
Example One – First Time Business Owner
The first was an afro-caribbean fusion restaurant in Windsor. The owners were first time business owners who had the idea to open a restaurant during lockdown. They had used all their savings to set the new restaurant up and had done a great job in setting it up and were working really hard, but clearly they had not run a restaurant before and to some extent naturally didn’t understand some of the fundamentals of running such a business.
Tom asked them what their gross profit was and they replied ‘about 30%’ – Tom’s face said it all and it clearly worried him. He later introduced them to a restaurant consultant who in one of their very first conversations told them gross profit should be 70% and that they needed to look at every dish and the use of every ingredient to work out the gross profit for each and every dish on the menu. Tom also advised them to reduce the menu size as it was too big, not to pursue a second restaurant before the first one was profitable and to change other aspects too. Without this advice, and the owners adopting it, the business would I’m very sure not have survived. Certainly, no hospitality business will survive for long with a 30% gross margin!
The External Viewpoint
Because the owners used all their own savings and did not have borrowing or investors, and I am assuming from the programme, no other advisors either, it meant there was no external viewpoint on the business, its business model or business plan. This likely meant the business plan was not vetted or reviewed and there were no covenants or conditions set. Had investors or lenders looked at the plan at day 1 they would have raised concerns, so having an external viewpoint can often be invaluable. The problem you often see where the owners use their own monies and savings is that they do not have to justify their business plan to anyone else. In this way things can be missed and assumptions may not be remotely realistic. In fact in some cases there isn’t even a business plan at all in order to look at the assumptions, or it is produced day 1 and then put in a drawer and then looked at again or tracked against the actual performance to see where it differs.
Example Two – Passive Investment = Accountability?
The other example from the same episode has similar issues but is slightly different. The initial story was of a successful vegetarian restaurant that had expanded and raised over £5m in crowdfunding to support their plans.
Stem and Glory was a vegan restaurant that begun in Cambridge and then expanded with the cash from crowdfunding into other areas including a very expensive prime part of London.
Watching the programme it seemed to me that all the investment had been via crowdfunding, and whilst this can be a very good source of funding for B2C businesses especially food and drink ones, I also know that the ‘crowd’ element is pretty passive and whilst they may receive some updates and information, the ‘crowd’ would not be holding a business and board to account like a fund or private equity firm would, or indeed a bank would with covenants and tests to measure performance. A lot of money was being spent and they had further big ideas and expansion, but I had an uneasy feeling watching it.
Towards the end of the programme they said the business had struggled after COVID and had increased costs, but nothing more was conveyed. After it had finished, I decided to look a bit further into it and sadly my concerns were correct. In May of this year the business sadly went into administration.
Time to Investigate
To find out a bit more about what had happened I looked at the Companies House filings and read the Administrators Report too. Clearly it has been a difficult time for many businesses in hospitality but there were certainly warning signs and red flags in there that I think would have been picked up by external advisors and/or investors closer to the business a lot sooner. This may not have necessarily prevented the business failing but the final site may not have been progressed and many who lost money may not have lost it.
Naturally I have not got access to the whole story of what went on but the Companies House filings and certainly the Administrators Report is very detailed and between them and a few assumptions, then I would make the following comments:
- There appears to have been internal concerns about much higher costs for the most recent venue at the time of the last crowdfunding deal and that it might cost double that being raised. I am assuming this was not stated in the pitch and therefore the monies taken would never have been enough to match what the plan was.
- It would seem to me that this last venue should not have gone ahead. It looks like crowdfunding was providing all the money for expansion and no monies were coming in from directors or other shareholders, although I don’t know that for a fact. This makes it easier to go ahead with something that other people are paying for/investing in and therefore taking they all the risks, and taking higher risks than they are aware of. Once the monies were in, there would be no further accountability as to where and how that money would be spent.
- Over £1.2m of creditors and HMRC lost out in the demise of the business and reading the list in the report, c£150k alone was to a shop-fitting business, so they I assume were fitting out the final venue and the money had run out long before they stopped work.
- A £500k recovery loan was provided towards the end, of which £250k was initially drawn and the second £250k was not allowed by the funder as I assume they had not met the conditions for the second drawdown. It is noticeable that this seems to be the first time any funder had said ‘no’ and they had clearly assessed the situation and were not happy with the performance or metrics they were seeing.
- Under the administration, the original site was then sold on a pre-pack basis to the main individual/director of the company for the sum of £15k, and now they can go again without all the weight of the last business and all the money owed. Personally, this always leaves a bit of a bad taste to me. I am not keen on pre-packs in most cases.
The value of Oversight
I believe in this situation actions could have been taken earlier to reduce the loss of monies to creditors and HMRC. Had there been more oversight or checks and balances in place from external advisors and/or the investors, the final situation could have been different. Even on the crowdfunding side, whilst I understand the passive nature of this type of shareholding, maybe there should be some additional ongoing diligence to ensure investors monies are a bit more protected. Totally get that it is equity investing and those investing know they could lose all their money in any of these investments, but more could be done.
Conclusion
My overall conclusion is that the use of external advisors can only be a good thing. They bring experience and knowledge and have usually been through whatever situation it is you are facing. They understand the pitfalls and can get you to where you want to be quicker and safer. And sometimes the best advice they can give you is not to do something, as that can be just as vital a comment. I will leave the final word to Red Adair who said ‘If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur’