Thinking about taking on a pub? Don't be one of the
newcomers who overlook some simple golden rules,
says Tony Halstead
Thinking of buying a pub? Well, the answer from most corners of the licensed trade is don't - unless you are totally committed to a career pulling pints and prepared to take professional advice every inch of the way.
First-time buyers probably account for almost half of all freehold and leasehold transactions, but the proportion of new entrants apparently prepared to ignore golden rules still staggers trade experts.
The road to a successful pub purchase is a long and often difficult one and the obstacles along the way require advice from different professional advisers. Go your own way and the consequences may well be very costly.
One property agent estimates specialist advice could save a host as much as £250,000 over the lifetime of a standard lease. Ignoring the experts will almost certainly result in costly bills and a negative effect on the business.
"The golden advice must be to get specialist guidance at every step and if you are a first-time buyer consider the services of a 'mentor', which a good agent can provide for you," says GA-Select managing director Graham Allman.
"Beware of solicitors who claim they can handle a lease transfer, as this is a specialist field and you need a law firm with a licensed-trade property background.
"Similarly get the help of an accountant who understands the pub trade because you need more than just a book-keeper, yet the sad fact is a majority of buyers do not do this. Training is also vital and, although many pub companies can provide this, there are plenty of other agencies who can do the job," he says.
Allman believes any new entrant should gather breath at every stage of the purchase and consider whether the next move should take place with the guidance of a professional.
Even when a newcomer has signed on the dotted line it's important to retain good advisers in the shape of accountants and stock-takers to ensure the new business starts off and remains in the best possible shape.
Martin Nicholson, partner at Sheffield-based agents Brownill Vickers & Platts, also believes professional advice is crucial.
"Too many people still believe they can run a pub, but never discover the truth until they actually get behind the bar. Prospective licensees can refuse to spend £1,000 on a survey one day and then land themselves with a £10,000 liability for roof repairs the next.
"There is still a reluctance by many people to take professional advice but to my mind it's probably the best money any budding host can spend," Nicholson says.
The bulk of first-time entrants to the trade take their first pub on tenancy or leasehold terms - the most cost-effective way to start out.
Nicholson reports there is no shortage of new recruits willing to take on a pub and estimates first-timers account for more than half of those approaching his company. Finance is the other main issue - one which is now posing problems for the recruitment side of the industry.
"The economic slowdown is definitely making it more difficult for licensees to raise the necessary money," reports Nicholson.
"Twelve months ago I would have said this was relatively straightforward, but mortgage and credit crunches have changed the picture.
"Banks look more favourably at an applicant with a good business plan and experience, perhaps already having run a pub on a simple tenancy agreement," he says.
The importance of your homework
Pub purchasers generally fit into two camps - lifestyle buyers and hard-nosed commercial businessmen - according to property agent Paul Davey of Midlands-based Davey & Son.
"Plenty of buyers still want a pub from an emotive point of view, rather than the commercial returns of a business," he reveals.
"This sort of purchaser looks at life from the customer side of the bar and has little appreciation of what makes a pub tick.
"The other camp will weigh up a pub purely from the commercial and business angle and will examine every detail of the business to assess its profitability.
"But lifestyle buyers have to appreciate what goes on in a pub back-of-house and the disciplines needed to run a successful business.
"Many people do not realise running a pub is a 24/7 career, and there is a massive amount of work to do even when closed," he adds.
Davey said there is now a significant
number of new buyers acquiring pubs in their own locality. "These people invariably know the pub and the local area, so they probably have a better understanding of how the business can be successful," he says.
Director of agents Fleurets, Simon Hall, believes first-timers should study every aspect of a pub business.
"First-timers in particular need to do their homework thoroughly, because there are still too many buyers without a proper understanding of the financial skills required.
"I think practical experience is also vital and I would always recommend a first-time buyer to get some experience behind a bar even if it means working on a voluntary basis," he said.
Neil Morgan, head of the pubs division for Christie+Co, advises buyers to take a "level-headed" view of the pub they want to acquire.
"It's important that they look at the business from every angle and explore all the possibilities from a trading viewpoint.
"Apart from the pub itself, an astute buyer will also look closely at the locality to weigh up the immediate catchment area and potential customer profile.
"Liking the look of a pub is only the start of a purchase process, because there is an enormous checklist that buyers need to tick before committing themselves," he warns.
Financing the deal
Getting the finance to purchase a freehold pub or a lease remains one of the key elements of any deal.
Despite the current mortgage and credit squeeze, loans are still available as long as buyers approach a specialist lender.
Licensed-trade broker Acorn Commercial Finance says some high-street lenders are changing their criteria, but specialist companies are still financing pub deals.
"Nothing has changed. Some people looking for loans may think there may be difficulties and are shopping around more," said partner Paul Thompson.
Typical freehold buyers put down 25% of the capital cost, with the remainder financed by a loan secured against the property.
Leasehold buyers may need to find 50% of the purchase cost, with the remainder financed with a loan made against the lease, but supported by security, often a house.
Terms would be based on the applicant's business experience and the type of pub.
Thompson warns, however, that buyers should also budget for "extras" which include valuation, lending and solicitors' fees, stock, fixtures and fittings and, in the case of leasehold buyers, a deposit and the first quarter's rent in advance.
High success rates
The pub and hotel market is one of the safest sectors in which to take on a business for the first time, according to figures supplied by agents GA-Select.
Statistics reveal the success rate for a freehold business reaches as much as 95% over the first two years of trading with leased pubs showing a 93% success rate.
In stark contrast, business casualties in the restaurant sector reach an astonishing 90% failure rate in the first year.
The figures also reveal the average time spent by a licensee in a pub is now 2.75 years before they move on and acquire a new business.
A total of 85% first-time entrants go on to take on a larger pub business, with 15% electing to leave the industry.
Managing director Graham Allman describes today's pubs as "yesterday's post offices" as a means of providing a home combined with a route to self-employment.