Business Essentials: Who should Oi! Bagel butter up as it seeks to raise more dough?

The London chain has to raise £1m to open a string of new shops. Kate Hilpern explores the options

A ring of confidence surrounds Oi! Bagel. The London chain of fresh bagel shops, started in April 1999 with the investment of a venture capitalist, has grown steadily and now boasts seven outlets.

The problem is that the investment money has now been used up, yet the firm feels ready to expand and has options on a number of sites. "We want to know what are the best ways to raise capital in order to do this," says chief executive Steven King.

Oi! Bagel's turnover for this year is £2.9m and the company has been profitable for the past three years. This, explains Mr King, is where it stands out from its direct competitors. "Most have actually lost money."

The reason, he believes, is that unlike virtually any high-street rival, Oi! Bagel ferments the dough on site at each location, then steams and bakes it. "Most others - whether for bagels or baguettes - use partly baked products, which tend to be a bit dry," says Mr King. "In addition, our bagels are never any older than four hours, and when it comes to ingredients, we go that extra mile to source them. I attend food conferences and we try to use smaller producers that supply a better product than the mass market."

In fact, Oi! Bagel did so well even in its early days that Mr King attempted a public offering about two and a half years ago. "We were seeking to raise about £1.35m, but we pulled out just before the launch date because that was when the stock market took its first drop."

The company's next step was to do a tour of the City. "We saw many of the venture capitalist and private equity firms and, from that, we got four firm offers. But they all had a sting in their tail or conditions that just weren't acceptable to us, so we rejected them. Because we were making good profits and had a good internal cashflow, we decided to keep expanding using that instead."

But now Mr King wants to expand a bit faster and the cashflow has been exhausted. "We have three outlets under offer at the moment in London, and I'm also talking to BAA about opening outlets in airports, and to Network Rail about opening outlets in railway stations."

The options he is considering to raise the £1m he needs to do this include joining Ofex, the secondary market for the trading of unlisted shares; or turning to venture capitalists, business angels or high net worth individuals. "Banks have indicated that whatever equity we raise, they'll match it pound for pound with debt. And they've also said they could provide asset financing."

Mr King's preference is to go with high net worth individuals, as he believes they tend to be more flexible and don't normally impose too many conditions. "With one dominant shareholder, there tends to be a larger degree of control, which we'd like to avoid if we can."

If he can raise the £1m, Mr King believes that within two years, Oi! Bagel should have expanded to the point where he can rethink the flotation of the company to obtain extra funds to expand even further.

www.oibagel.com

WHAT THE EXPERTS SAY

Barry Franklin, business adviser, Business Link for London

"If cashflow is an issue, a period of consolidation might be wise. However, Mr King's bankers are positive about offering loan finance, so his business plan must be robust. Entrepreneurial spirit dictates that Oi! Bagel should go for growth and seize the expansion opportunities.

"There are various funding options. Franchising would allow the business to grow exponentially, rapidly adding sites in key locations.

"A listing on the Alternative Investment Market (AIM) would be less onerous and less expensive than a fully fledged flotation. This would enable Oi! Bagel to raise share capital and then, after two years, it could apply for a full listing.

"Although favoured, business angels and high net worth individuals with their personal investment can also be demanding. If time is critical, renegotiating with venture capital contacts could still be the answer - seven outlets in five years is no mean achievement."

Rupert Merson, partner at BDO Stoy Hayward and author of guides on business growth

"Oi! Bagel's real worry is not where to get the money from, but the real cost of the money.

"Venture capitalists are simple to deal with in the sense that their motives are clear, even if their investment agreements aren't. All venture capitalists are seeking investment growth and an obvious exit. The agreement is just their way of ensuring that Oi! Bagel delivers to the same agenda. With high growth potential and an exit already identified in the form of flotation, Oi! Bagel looks like a classic venture capitalist play.

"Yes, Oi! Bagel will need to sacrifice some freedom. But if financier and firm are pulling in the same direction, and the new money is the difference between fast growth and stagnation, this matters less."

Mike Conroy, senior marketing manager, HSBC Bank

"Having already rejected offers from venture capitalists and private equity firms, Oi! Bagel needs to think clearly about how it presents its needs now. It often takes more time and effort than expected to prepare an investment strategy, so seek professional advice. The willingness of banks to match funds can help make the deal, and they should also offer practical advice on how best to make the investment case.

"Make sure the business has an honest, warts-and-all plan. Investors are much more likely to be impressed by a strategic long-term view than something that looks too good to be true.

"Investors will not always require a majority stake if they are persuaded of the ability of the management. Business angels and private investors may happily put in smaller sums over time while leaving control to the existing owners."