What are the key indicators of a potentially viable pub business?
For someone browsing the market with a view to investing in a pub, what are the key indicators of a potentially viable business?
Whether you’re upping sticks for pastures new or making your first move into the pub industry, Kevin Marsh, head of licensed leisure at Savills advises that there are some basic, overarching considerations that investors need to weigh up before taking the plunge.
“Is the pub going to make enough of a re-turn to balance out the effort and risk taken to run the business? Investing in a pub that needs a refurbishment, rooms added or any major changes will need to generate a large enough income to make these updates worthwhile.”
Marsh advises first-time investors to consider: “Is this going to provide me with more income than if I got a job with a regular salary? Running a pub is a full-time job, and thought needs to be given to whether taking on a pub business is going to be more fruitful than the wage you could earn in a more traditional role.”
If it’s making money, it almost always makes sense, but what are the key areas investors
need to delve into before putting their money
on the line?
Who’s on the books?
Christie & Co head of pubs and restaurants Simon Chaplin explains that given a new operator will inherit the staff currently working at a venue, it is important to ensure there’s a “good team” in place.
Fleurets divisional director Andy Frisby adds that ensuring a business is compliant with new staffing legislation, and gauging exactly who is on the books, is essential in assessing exactly what potential outgoings are going to be.
Frisby says: “We’ve seen many businesses fail because they’re paying the wrong level of wages and it’s very important when you’re buying a business because ‘transfer of undertakings’ (TUPE) applies. Staff are protected under this legislation and contractually you have to take them all on. You need to understand how many staff are there, how many full timers are there, how many part-timers are there, etc.
“The national living wage has also come in over the past year or so, therefore, when you’re looking at the historic profit and loss sheets, they’re not going to show the same wages for the same amount of work. You also need to make sure that all the pensions are in place, because everyone is entitled to one.”
Recent figures
Describing good record keeping as a “must”, Chaplin adds that a key question for potential investors is “do the sellers have data available and can they answer questions easily?”.
Guy Simmonds managing director Stephen Taylor explains: “All businesses, whether freehold or leasehold, assuming they are being sold as a going concern, should be valued correlating to the current declared reconstituted net profits within the annual verified, audited accounts.
“A potential pub business buyer, after formally viewing the business, should request the past two or three years’ verified, audited annual accounts from the selling agents together with latest copy VAT returns.
“The annual accounts will obviously be historical, although hopefully as recent as possible, while the VAT returns will provide up-to-date trading information in relation to recent turnover consistency, etc.
“The prospective buyer or interested party should then consult their specialist chartered accountants to gain their professional opinions and advice, plus base their own business plan upon these verified accounts.
“At this point, if finance is required, the lenders should be approached, and will probably give an indication ‘in principle’ as to whether the requisite funding may be made available, subject to the business being valued by their own stipulated valuer, again strictly in relation to verified annual accounts.
“If a business is being valued as a going concern (with a premium/sum being asked for goodwill) and no formal accounts are then available or forthcoming, then any shrewd potential purchaser will inevitably and quite rightly, reject such a business and turn their attention to other hundreds of genuine businesses available, complete with the essential verified and formal annual trading accounts.”
Know the trade
Chaplin explains: “If you are buying a lease, make sure you know if it will allow you to carry out the business you have in mind. Supply agreements, user clauses and trading hours limitations could affect your plans.
“Just because the current owner trades in a certain way does not mean the landlord will continue to be comfortable with it. Yes, these will get picked up by a solicitor, but this may not be until you have gone someway down the line, so it is best to get all of the information sooner rather than later. Even a freehold may have covenants, so make sure to check these out.”
Frisby adds: “You need to get a good understanding of beer volume that’s been through that site. In some instances, you can ask for stock reports. A lot of it is spending time in the site and understanding trade flows – do the actual turnover figures you’ve been provided reflect what you’re seeing?
“Looking through the profit-and-loss sheet itself, you need to understand whether the profit margins are sensible and whether the profit margins reflect the pricing – if they’re claiming to make an 80% profit margin but they’re only selling beer at £4 a pint, how on earth are they doing that?”
A feel for the area
Another key question that Chaplin advises potential investors to ask is, simply, “where is the current trade derived from?”
He says: “Back in the day, a factory closure could see the demise of six local pubs. This is not so much of an issue today, but if there is a prominent local employer, visitor attraction or planned road improvement, will it have an effect on the business if things change?”
Frisby agrees that it is massively important to get your bearings and understand the local area: “Understand who employers are in the area because that’s going to command how much disposable income there is. Also, whether there is any Government investment, development or road changes, that kind of thing. You don’t want to find that you’re on the periphery of what’s going on.
“It’s important to understand the broader marketplace because, if you’re buying a site, you’ve got to see some comparables to make sure you’re not overpaying.
“I would strongly recommend that people look at similar sites in similar areas through a variety of different agents’ websites.
“It’s also important to understand the competition. You might consider your idea very viable but, if there are seven or eight businesses in the area that are already doing that, is there space in the marketplace for you? Is there a demographic in the area for your idea?”
To find out more about pubs for sale, lease and tenancy visit our property site.
