Choosing between freehold and lease

The search for the ideal pub business is not simply a question of considering location, style of operation, facilities and trading potential.

A key consideration is the tenure — freehold or leasehold. We always advise purchasers to evaluate each proposition as an investment, to look at the size of investment required, the risk, and the possible returns — both in terms of revenue profits and future capital gain potential.

When correctly valued, a freehold pub should be able to support borrowing of 75%, which means a purchase price of £300,000 requires a purchaser’s cash stake of at least £75,000 plus ingoing costs and working capital. The reward for that level of financial commitment is total control of the business combined with high GPs via the freedom to negotiate substantial supplier discounts.

In the longer term, in a stable market, growth in trading profits will be reflected in the value of the business — all to the benefit of the owner-operator.

So, is buying freehold automatically the right choice? Attractive supplier discounts and banks willing to lend against the freehold security don’t count for much if it turns out to be a failing business with low turnover.

Leasehold​

The dominance of pubcos’ ownership of pubs creates a huge selection of tied leasehold opportunities. Despite the effects of the fiercely debated tie, when rents are properly assessed, it is proven that some tied lessees can make an acceptable return on their investment and endeavours. But if rents are set at fanciful levels and tied supply terms take 20% off gross and net margins, one can see why many will only consider freeholds. However, we handle many tied leasehold assignments where trading accounts demonstrate established and consistently profitable businesses, which sell readily when they come to market.

A third and popular option, in which Guy Simmonds specialises, is free-of-tie leaseholds where the significant advantage of trading free of tie is combined with the cost-effectiveness of buying leasehold (at perhaps 12% of freehold value). Here the property will be owned by an individual (often a retiring publican) or investment company seeking an adequate rental return on their property investment, but who has no interest in the supply of wet products to the outlet. Amazingly, rents (set at open market levels) are often no more than for tied opportunities.