Belvoir, a Lincolnshire-based lettings agent, is drumming up interest in the City for a flotation on the Alternative Investment Market (Aim). Founder and chairman Mike Goddard is enticing potential investors with the promise of bumper dividends, hinting at a yield of 5 per cent in the first year, but we wonder whether there are other motives for seeking a listing.
Belvoir was only founded in 1995, but already it has 142 franchised offices that pay it 12 per cent of their turnover a year in exchange for branding, training and support. This business model is highly profitable and cash-generative, with pre-tax profits of £1.3m in the first nine months of 2011 on turnover of just £2.4m - a margin of 54 per cent.
There's also growth potential. The residential lettings market is perhaps the only expanding area of the entire property sector, thanks to the rise of the private rented sector. Owner-occupation peaked as a share of households in 2003, while social renting has been in decline for at least a decade.
Mr Goddard also wants to take market share in what remains a highly fragmented industry - Belvoir has an estimated 1.5 per cent of the market, trailing market leaders Countrywide and LSL. He plans to use the £3m proceeds of the current fund-raising to expand by making loans to franchisees, which have been increasingly hard to recruit since the credit crunch hit small-business lending.
We have several reservations about the Belvoir business model. The first is that in lending where the banks dare not, it is increasing risk. Management will have to be very disciplined to avoid bad loans. Also, previous attempts at empire-building in estate agency, by big banks and smaller players alike, have ended in tears (see Bah! Humbert, for instance).
Then, there is the dual focus on growth and income. If Mr Goddard is interested in growth, why is he keen on extracting such large dividends? For a company of Belvoir's small size, cash flow is surely a more obvious source of funds for expansion than a stock market quotation, with all its associated costs.
We wonder if the real reason for this fund-raising is an exit strategy. Mr Goddard set up the business after a career in the RAF, and is now 63. His wife plans to sell her shareholding alongside the fund-raising, leaving Mr Goddard with a 65 per cent share. He's tied in for two years, after which he will hit retirement age.
Still, having a retired chairman with a majority stake should be a good guarantor of dividends. And the figures suggest that Belvoir can easily afford them, even as recession looms for the wider UK economy. One to watch.
