Economic uncertainty in the Indoor Play sector

Johnson Reed
7m read

No Indoor Play reader will have been unaffected by the economic uncertainty that envelopes the nation. We ask Johnson Reed’s Mark Johnson for his take on the UK finance scene and how this is impacting indoor play operators

What is the state of play finance wise in the UK and how is it affecting the sourcing of funding generally?

The banks remain very nervous and will for as long as the European crisis continues. Unquestionably, the eurozone problems are holding back the UK recovery and we can see signs of that across every sector that we deal with. Every one of them had seen consistent growth until the end of 2011, but the announcement that we had gone into double dip recession has put a halt to that.

This proves, of course, that the reluctance of the banks to lend money is all down to confidence and it’s hard to fathom at times. When we weren’t in recession, the government was telling us the economy was growing at 0.2% – what good is that to anyone really. The whole situation is still pretty precarious.

How are indoor play operators being affected?

If you’d opened a business in the indoor play sector seven years ago, getting the required funding would not have been a problem. It was too easy for people to open up, run the business badly and still make money. I’d liken that to the situation gyms found themselves in 10 or more years ago. They were opening on every street corner and they were a license to print money. The product worked, funding was easy to secure and because the demand was there, people got away with running gyms badly up tot a point.

The gym industry subsequently went through a difficult time as it matured and the indoor play sector is also maturing. As this happens, standards are naturally driven up and there will be some failures that might have got away with it in the past. Underwriters now will question you long and hard and they want to know how you are going to make money. They want to know why your business will succeed and why it will be different.

It is very difficult to secure facilities for anyone who does not have the right business plan, information and increasingly, a relevant background. More than ever, banks are also taking security on property into account. Many new operators are still trying to get facilities through the Enterprise Finance Guarantee (EFG) scheme, which is the coalition government’s version of what was called the Small Firm Loan Guarantee scheme by the previous government.

Although the coalition has hailed the new scheme as being more supportive of new start-ups and small businesses, it is providing less guarantee to the banks on the loans and therefore, they are less secure than in the past. So the EFG should not be looked upon as your right to get funding and the banks are likely to want to see that you have committed all of your own available security to the business before even considering you as qualified for a loan.

As a general rule, they are not handing out loans without operators being willing to match them 50/50 with their own finance. As this is a tricky time to get funding from banks in any sector, I believe people should ensure that they spread their risk. Use some of your own cash, use the banks and also get access to some asset finance – it could be very important to you that you can dip into different areas as the business develops.

Be responsible for your own business. Don’t rely too heavily on government support.

What is the key issue for any operator looking for funding in the prevailing economic climate?

Planning, planning and planning. And that is a continuous process. A key mistake we see a lot is that people believe that when they open the doors of their business on day one, they have made it. My wife has just had our second child and an analogy I often use is that a parent wouldn’t think that their job was done when a child is born. It’s just the start, of course, and it’s the time to go again.

Planning is very important beforehand, but good plans are the key to running a tight ship and without them, it is going to be virtually impossible to get the funding you need to grow your business.

How is the indoor play sector responding and what are your observations on the sector at this point in time?

The sector is clearly robust and well-established. It’s fair to say that the product is now proven and there is plenty of potential to make money if a business is well run. Of course, indoor play is influenced by the weather, but good operators will focus on less weather dependent areas of the business like parties to pay their bills with walk-ins to help make up the profit.

In a very difficult period for the country as a whole, we have not seen that many failures in the last four years and there’s a good chance that some of those who have failed did so because they weren’t handling the business as well as they should have been.

How can operators be doing to bolster their financial performance?

Every operator should be managing margins very carefully. Good housekeeping is essential. Don’t miss payments on your bank statements (standing orders or direct debits) and always pay suppliers on time, but negotiate extended payment terms wherever possible.

Businesses should also be reviewing their suppliers on a regular basis, at the very least annually. Especially utility suppliers. It is very easy to become complacent and there are always other options that may well be the difference between a profit and a loss.

And if you are struggling, it is very worthwhile keeping the people who have lent you money informed, rather than burying your head in the sand. It is in their interests that your business does not fail and they will want to work with you to find ways to improve your performance.

Another classic that applies to every sector is that one of the first ‘costs’ that businesses get rid of in times of difficulty is the marketing budget. Marketing is absolutely crucial and even if it seems like a cost at the time, it should be looked upon as an investment. It’s not difficult to write off marketing as unimportant if you don’t see immediate results, but as the famous quote says, “Half of my marketing works, I just don’t know which half”.

Another thing I think people should be looking at is Groupon or similar marketing methods, not just for the immediate financial results, but more as an effort to increase brand awareness and the centre’s status.

Is expansion or reinvestment in a business a risk at the moment?

Whatever the age of a business, there is always a risk involved with any investment. But if you have done your homework properly and carried out all the necessary market analysis, then that becomes a calculated risk and the odds will shorten in your favour.

Reinvestment is not optional, every indoor play business needs to stay fresh if it is to continue to attract new customers and retain existing customers. Even if it is a small amount, reinvestment in equipment can reinvigorate a business and also add some focus and impetus to your marketing efforts.

What does an operator need to get finance?

For a new business, lenders are looking for personal bank statements, a sound business plan, personal search information (credit rating), and equity and property assets. You have to prove you have the cash to invest and the nous to do that wisely and in a sustainable manner.

The financial climate has led to common sense underwriting being the order of the day. They want to know it all adds up otherwise they will be buying themselves a headache.

How is Johnson Reed performing at the moment – in indoor play in particular?

We’re seeing a strong number of enquiries across all the sectors we work in. There are probably less new start-up enquiries than we would have seen in 2007/08, but we are now working with a greater number of people who understand their sectors and are running their businesses competently, which makes them easier to secure finance for.

A lot of people who look for finance are actually financing a job for themselves, rather than a business and all too often they turn out to lack business acumen and find the responsibility of dealing with staff, suppliers and customers too much to deal with. People who want to secure funding these days need to show they have a bigger picture of the business and that they have the wherewithal to run it.

We still partner most of the manufacturers in the UK leisure market and especially in the soft play sector, where we work with suppliers of play equipment, laser guns, go karts etc… as well as other equipment such as catering kit and furniture.