Jamie Lamb, FD of hotel franchise operation Kew Green Hotels, explains how they financed their hotel business from start-up to mid-cap business.

“I’ve been involved in Kew Green Hotels for five years now, from just after the outset. I joined the company full time in February 2002. 

"As a start-up, the strategy was to grow the business quickly. We had  our initial funding in the bank and we wanted to get the set-up right before we opened some hotels; it was important to get all the financial procedures in place. Obviously cash flow management was important, because as a start-up we had venture capital backing and we wanted to be careful as to how we spent that money. Clearly the management team and our backers were very focussed on cash flow management in the early days.

"We raised the funding the day after September 11th. It wasn’t ideal timing, but nobody really knew what the implications were going to be, and fortunately it didn’t have that much impact on us.

"We were originally in the limited service hotel sector, so that was always seen as quite resilient, and most of our sites were outside London. Obviously the London hotel market  was dramatically impacted.  But we managed to open some hotels in early 2003, which were very successful. This was partly because of the brands that we chose and also because we always targeted very strong locations.,  It was fortunate that it was the day after rather than three months after, when people could start to see the impact and realised the scale of what had happened.

“We don’t own any of the brands, so this is effectively a franchise model– one of the most important things with hotels is to have a brand, as customers are becoming more and more brand-focused, after having bad experiences in the past with unbranded hotels. It appealed to us because you’re given an infrastructure and  the marketing power of the brand and there’s also a central reservation system. For us to set up something like that would just have been impossible.

"The interesting thing about the way the business was initially set up was that we entered into leases with development partners, so we had no bricks and mortar. This was because initially we had no track record – we couldn’t go out and raise the £30-40m to build hotels. 

"In December 2004 we bought 11 hotels from Whitbread which we now hold as freehold assets, which means that there is  a property slant to the business as well.  This was made possible because we started to generate a cash flow that could   support significant debt Also, as a team, we had a track record, which meant that  we had the credibility to go and raise the funding. Turning up and trying to borrow £30-40m on day one would have been a step too far.

"At the moment we are opening two new hotels a year. My view is that we can grow to 25 hotels without significantly changing our structure.

"We have very supportive backers –Moorfield and Bank of Scotland and this has been a key ingredient to our success. They have always supported the way we’ve wanted to develop the business. We’ve moved from having a small amount of debt to a facility where we can borrow tens of millions of pounds. We have a big chunk of property assets  and from a cashflow ratio perspective we’re not highly geared.

"The relationship has really evolved and whenever we’ve approached them with a proposition they’ve supported us. As a management team, it is easy to get bogged down in the detail of the business and therefore to get an external view of what we’re doing is very valuable as is the discipline of the board meeting.

"Clearly, the focus has changed over time– we tend not to examine the detail of individual hotels any more because we have 18 of them, so you tend to look more at the high-level picture. We also have an excellent non-executive chairman - Fritz Ternofsky - who makes sure that board meetings are focussed and challenging.”

Related tags: whitbread, cash flow management, kew green hotels, initial funding, raising finance, hotels, jamie lamb,