Most people set up a pub business as a lifestyle decision with a view to making a decent living, but a good few also dream about the ‘what could be’ scenario and that means cashing in at some point.
There are many ways to value a business, including earnings multiples, asset valuation, cost to set up and replicate, discounted cash flow, or industry-based models. But, regardless of which model applies, there are some fundamental issues that will underpin how much the business is worth.
Assuming that a seller will want to maximise the price received and the buyer will want to negotiate it down, the following are key areas where the haggling normally begins.
Tangible v intangible assets
Whether you are running a local pub or a 50-bedroom hotel, your most valuable financial asset is normally intangible and that is your reputation. Reputation breaks down into a number of factors and, financially, is referred to as ‘goodwill’.
It would, typically, include things such as intellectual property, customer loyalty, your corporate brand, and the increasingly important customer database.
Tangible assets, on the other hand, are generally easy to value and offer little differentiation, whether it is the property, unless it is in a particularly key location, catering equipment or stock. Also, tangible assets broadly have the same value from pub to pub so, barring prudent good practice such as demonstrating the necessary compliance with health & safety, food standard regulations, general upkeep, etc, your most important considerations are in those intangible assets.
Assessing the value of your business
To work out the value of your pub business, you need to look at what makes the business different and better than the competition and, to do this, you should consider the following:
A Business accounts and financial reporting
You must ensure your business’s accounts and accompanying financials appear in a coherent and user-friendly format for a would-be buyer. Spend time before any discussions to pull together all the necessary documentation that supports any valuation.
B Copyright and database rights ownership
One area that can impact price and comes as a surprise to business owners is that they often don’t own their own copyright and database rights. By law, these rights will vest automatically with the developer, be it website or marketing agency, as the creator of the relevant works, even though you paid for the creation. You should check that the developer transferred ownership of those rights to you so that you are free to operate and sell the site with the business.
C Intellectual rights ownership — brand names
Ownership of intellectual property is often one of the most disputed issues between competing businesses so the buyer will want to ensure that the company fully owns any trademarks or corporate branding.
The key component for most hospitality businesses is their reputation, which includes intellectual property assets, and typically includes brand names or even signature dishes. For more information there is a good Government guide and checklist to intellectual property valuations at: www.ipo.gov.uk.
D Trademarks
Securing a trademark helps protect your name from use by similar businesses. Failure to register also leaves your business vulnerable to actions, such as ‘passing off’, where a competing business takes advantage of the reputation of another’s goods or services, or trademark infringement where a company uses a name, which is the same or similar to a registered trade or service mark already owned by another business.
While there are legal remedies for both scenarios, including court injunction and damages, the reality is that rectifying the issue can be costly and may also affect the reputation of your business in the meantime.
E Customer databases and the Data Protection Act
Another key consideration is whether you have databases of customers because these, too, could add significant value. But, here, the key legal issue is the Data Protection Act, which is also often overlooked but requires every business that holds personal data electronically for the provision of services to register with the Information Commissioner’s website.
Ignoring the fact that if they fail to register they are committing an offence, the bigger issue on a sale is that you may need to give indemnities to a purchaser, which could negatively impact on value, should the buyer claim on those indemnities. Data could include anything from holding information for customer loyalty schemes to holding emails to send out newsletters or offers.
F Legal contracts with key customers/suppliers
Other legal issues that need addressing are to ensure contracts with key customers/suppliers are in place and are not terminable in the event of a change of ownership; often a ‘change of control’ clause sits in many contracts. Therefore, if third-party relationships are key to the operation of your pub business, you will want to ensure that a sale will not result in those contracts coming to an end.
G Share buybacks
If share buybacks are not carried out in compliance with the Companies Act, they are deemed to be void. In other words, the law treats them as never having happened, meaning there may still be people who technically remain shareholders unintentionally.
The solution is to get paperwork re-signed, so you need to make sure that time is factored in for tracing the relevant people down for this purpose and then having what could prove to be a somewhat awkward conversation.
H Human resources
Whether you run a pub, café, B&B, or hotel, people are key to your success. It is, therefore, essential that all of your staff policies are correct and up to date and that contracts accurately reflect role, salary, benefits, etc.
Other human resources issues include having a record of working hours and whether staff have signed an opt-out form regarding the EU’s working time directive. You need to hold any records of any benefits provided and copies of relevant policies, such as compliance with the new auto-enrolement pension regulations.
Also, you should have a record of any contractors or workers that are used and a copy of any relevant contract/agreement that is in place.
I Financial backing — personal guarantees
Finally, in relation to financing, if a director or shareholder has given a personal guarantee, it is essential to ensure that this is terminated upon any sale.
If a director or shareholder has personally guaranteed bank loans, for example, and it just so happens that the buyer intends to utilise facilities from the same bank after it has bought the company, then the outgoing director or shareholder may unwittingly find that he continues to be personally liable.
Jeremy Over is partner for corporate and commercial at Moore Blatch, a law firm specialising in merger and acquisitions for smaller companies