Profiting by flotation

IT seems only a few months ago that cost-cutting and retrenchment were the order of the day for most businesses in the hospitality industry. But since then there has been a remarkable turnaround in sentiment, and expansion is now on the lips of many.

Much of the change in mood reflects an improvement in the general economy. A combination of low inflation and falling interest rates has boosted confidence and has sent share prices soaring.

For many businesses in the hospitality industry the big questions are whether now is the right time to invest after years of cost control and just where the money should come from. Investment of retained profits is the obvious source, and the least risky. But growth by this route alone can be too slow for ambitious operations.

Borrowing money gives access to more cash but is expensive. That is why an increasing number of companies are looking at other options, including stock market listings. A survey by Caterer & Hotelkeeper has revealed that a number of businesses in the hospitality industry are looking to go down this route in 1994 (see page 8).

For some of them it provides an opportunity to reduce debt, although investors are not keen on companies where this is clearly the aim of a flotation.

For all it allows staff to have a real stake in the success of a business. Share options for staff allow individuals to make significant profits, provided the company performs well.

In a well managed business that should increase loyalty and morale, both high on the list of priorities of many companies. It might also make staff less likely to leave for other jobs.

But there are drawbacks to a stock market flotation. Everything the company does becomes more public, and the pressure to perform is high on senior management. In addition, when things go wrong share prices can fall dramatically.

The recession has been slow to end and even now growth is fragile, with many other EC countries still struggling. And consumer spending power will be hit during 1994 by the measures announced at the last Budget.

As a result, no one can afford to be over-confident and take too many risks. Growth has to be based on sound performance in areas where management has already shown competence.

There were some spectacular failures last year in businesses where people got out of their depth or got too big for their boots. A stock market listing is not for everyone, but for those with the right strategy it could be the best move they ever make.