Buying a business: Pubs

The industry and who it’s suited to

Have you ever dreamed of escaping the rat race and heading for the quiet life to run a country pub? Or do think the social scene and sense of community of a friendly town pub is right down your street? If so, you’re not alone.

Despite a fall in the number of public houses of late, a pub is still a popular businesses to buy – and it’s not surprising when you look at the size of the market. As of 2008, there were over 55,000 pubs in the UK.

But there’s more to running a pub than simply chatting with the locals and pulling the odd pint. Before you invest your money there are some important considerations and choices to make.

What is it?

The pub is probably one of the best-known industries in Britain. Millions of us count ourselves as pubgoers. Over a quarter of the adult population visit the pub at least once a week and they’re not just there for the booze.

Pubs are popular places to meet people. In research from Mintel, the market research company, 38% of pubgoers said they chose a pub for its atmosphere and 26% for the customers. Only 20% were worried about the choice of beer. So to make your business a success, creating an atmosphere in which people want to meet is one of the major challenges.

One way is by providing food. Pubs are currently the number one choice for eating out in the UK with nine out of ten pubs serving food. The business is worth billions. It’s not just the traditional steak and kidney pie either. You can now get French, Italian and even oriental cuisine.

Pubs also provide an astonishing range of entertainment. Many host live music, stand-up comedy or quizzes. Others simply let customers amuse themselves with pool, darts, big-screen sports or even ten pin bowling.

On a wider scale, pubs in residential areas, whether in the town or country, often play an important role in the community. Many sports teams are based around the local pub. They are important local employers and sometimes provide other community services such as post offices, doctor’s surgeries or youth clubs.

Who is it suited to?

Landlords are drawn from all walks of life: business, the police, the armed forces, shops, and, of course, other pubs. The variety of different pubs means that there will be one to suit your tastes.

More important than your previous occupation are the skills you have and your personality. “Drive and determination are key,” says John Walker, deputy director of the British Institute of Innkeeping (BII). “People have a romantic notion of what running a pub is about. It’s a difficult job with extremely long hours. You might get a drinks delivery at 6.00am and then be working until after midnight.”

If you are running it with your partner, the routine may put an enormous strain on your relationship. Not all couples are suited to working together for 14-18 hours a day. It is also extremely important that you like dealing with people. “Licensees are a friend, counsellor and confidante to their customers. Working with alcohol, they also need a strong personality to deal firmly with customers if they get out of order,” says Walker.

Modern pub owners also have to be commercially aware. They are effectively the managing director of their business.

This entails maintaining a high level of customer service and also managing the actions of your clients. Often tact and firmness are required because your licence and livelihood depends on their good behaviour. You will manage a close knit team of staff, so you will have to keep abreast of employment law, management techniques and training. You will also have to keep a close eye on the finances.

You will need to learn about licensing law as well as health and safety and food hygiene. Finally, as a figure of responsibility in the community, you may find yourself working with the police and other local authorities to combat crime and public disorder through schemes such as Pub Watch.

Research and regulations

Tenancies, leased houses and freehouses

By far the commonest and easiest way to get into the pub business is to run a tenancy or lease. Around half of pubs are run this way and they tend to be smaller and older pubs in suburbs, estates or villages. Tenanted and leased pubs are owned by the pub company and rented to an individual who then trades as a sole trader.

A tenancy is the easiest way to get into the business and the route that most people take – especially those starting on a budget. The initial cost is limited to the fixtures, fittings and the existing stock of the pub. You will also have to pay a deposit to the brewery to cover the drinks bill. After that you will pay a rent based on the performance of the pub.

A tenancy usually lasts for 3 years, after which there is a rent review and the agreement is renewed or the tenant moves on. This gives you flexibility if things don’t turn out as planned and the upkeep of the property is the landlord’s responsibility. But the big downside is that, if you have grown the business, you are not rewarded when you pass it on. In fact, if you have a rent review you could see your outgoings increase because the turnover has increased.

For this reason, long-term leases were introduced. The crucial point is that, unlike a tenancy, a lease can be sold on at market cost. And as a lessee you could receive a substantial sum depending on the value of the business as a going concern. Leases can last for up to 21 years and the ability to build wealth encourages lessees to invest time and money into improving or expanding the business.

In exchange for higher rewards, you will be expected to pay a more commercial rent than a tenant would and also to maintain the property. But you might also receive more support than traditional tenancies, such as business advice and discount buying.

Both tenanted and leased pubs are called ‘tied houses’, because they are expected to buy products from the companies that own the premises. Most ties are for beer and cider, leaving the pub free to buy wines, spirits and minerals from where it pleases.

To apply for a tenancy, you approach the landlord direct – usually either a national pub company, a regional one attached to a brewery or a small local one. Leaseholds are usually bought from the previous lessee. In both cases, training and support can be given if necessary.

Freehouses

Around a third of UK pubs are freehouses and as the name implies, they are independent from brewers or pub companies. Freehouses are owned outright, or mortgaged, by an individual. If they are tied to buying products from a brewery, it is usually a condition of a loan or grant from the brewery.

Buying a freehouse requires a greater investment because you’re buying the property as well as the business. If you make a success of it, though, the rewards can be huge.

Legal compliance and training

To sell alcohol for consumption on your premises you must have a licence, which is awarded by the local magistrates. You must be over 18 years old, have no criminal record, prove that you are a ‘fit and proper’ person and understand your legal and social responsibilities.

Most licensing benches advise candidates to hold a British Institute of Innkeeping (BII) National Licensee’s certificate. Although this is not a guarantee of success, it will prepare you for the application. If you plan to develop the catering side, you will also need to contact the local environmental health department to ensure that you meet their standards.

If you’re a newcomer to the industry you will also need training. “There is no doubt that in this enormously competitive marketplace, training is incredibly important,” states John Walker, deputy director of the BII.

The landlord will often run an induction course for people entering a tenancy or lease. As well as covering the licence application, this will also introduce you to all the skills you need to run a business successfully, including legal skills; financial management; marketing; beer and cellar skills; and food hygiene. There are also training courses for experienced licensees.

As an innkeeper, you should consider becoming a member of the BII. This is the professional body of the licensed trade with 15,000 members benefiting from business advice, free helplines, credit card savings and subsidised training courses.

How much does it cost?

Tenancy costs pay for the fixtures and fittings and a deposit covering you if you can’t pay your drinks bill. The rent depends on the pub – its size, what type it is, whether it does food etc. – but is generally estimated at about 12% of turnover.

“When discussing the rent with the landlord, remember that it is a negotiation. Look at the turnover and think about the 12% figure to get some idea about what the pub can sustain,” advises John Walker, deputy director of the British Institute of Innkeeping (BII). The pub company will want to get as much as they can without threatening the survival of the business, so be prepared to fight your corner. The market is very competitive so it’s best to write out a business plan and consult a specialist lawyer before investing.

They may give you a rent reduction for the first 3 months to help you get going. With a tenancy or lease, it’s also worth asking about the training and support package.

Buying a leasehold is a bit more complicated because the performance of the business will determine the amount you have to pay for the goodwill of the company. This will be negotiated with the previous leaseholder based on the accounts for the business in addition to the fixtures, fittings and stock. Prices can start low but rise steeply for more successful pubs.

The most expensive option is buying a freehouse, which will include the value of the building, the fixtures and fittings and the business as a going concern. The cost of a freehouse is often around one and a half times its turnover.

Once you’ve found a business you’re keen on, you’ll probably need to finance the purchase. “Often a major stumbling block is going into a project underfunded. You need to get the ratio of your own money and what you’re borrowing right, otherwise you risk becoming an unpaid employee of the bank,” warns John Graham, of licensed property agents, AW Gore & Co.

Most lenders will provide up to 70% of the price of a freehouse. Some of the 30% you need to provide can be obtained from a brewery loan but this would come with ties and may limit your ability to negotiate stock prices and develop the business as you wish.

You would then need another few thousand to cover incidental costs (legal fees etc.) and at least £10,000 for stock and as insurance against a low period. It all adds up. As the size of the pub and the profitability of the business increase, so will the amount of investment.

“A strong track record in the trade will inevitably mean you are more likely to secure better startup finance. ‘Do what you know’ is one of the basic rules for a business startup and, statistically, experience increases the chances of success,” adds Andrew Turzynski, senior business manager at First National Commercial banking.

You may find it worth considering buying a pub business in comparison with our guide on how to start a pub from scratch.

How much can I earn?

A lot of people run pubs for lifestyle reasons. They love running a pub and wouldn’t want to do anything else. However, there are others who run it strictly as a business and find that, if done well, it can be very financially rewarding.

“At the bottom end, there are lots of pubs that are struggling – and they are struggling to make a profit. At the top end, a very successful lease can make up to six figures [a year]. I would probably say that most pubs make a mid-range net profit. But when you factor in the free accommodation this becomes very attractive,” says John Walker, deputy director of the British Institute of Innkeepers.

This size of the pub will naturally affect how much money you can make, but in general the net profit should be around 20%-25% of turnover. However, you also need to think about the value that is being added on to the business as you run it.

With a tenancy you don’t profit from the sale of the business when you pass it on. However, if you’ve had success with a leasehold, you could be in for a windfall when you sell up.

“If you build the business, pass on the lease and sell the assignment, this is a commercial proposition and the money goes straight into your pocket. The assignment can run into six figures but it’s not uncommon to sell them for a good price,” says Walker.

Owning a successful freehouse is where you can really rake it in. “If you build the business in a freehold, then you really are sitting on a goldmine,” says Walker. The profit will not be eaten up in rent, although you may have a large mortgage. When you sell up, however, the strength of the market means you can maximise your investment. “There is a grave shortage of stock so the market for successful freeholds is very good,” confirms John Graham, of licensed property agents, AW Gore & Co.

Tips for success

“When you’re looking to invest in a pub look at the figures with a cool, clear head. A lot a people fail because they go for the chocolate box image – the thatched pub in Devon – without looking at the turnover. You have to remember that you are buying a business,” warns Andrew Turzynski, senior business manager at First National Commercial Banking.

You can investigate the turnover by looking at the accounts, VAT returns and a certificate of turnover but also by close questioning of the vendor. Turzynski recalls: “One new landlord discovered too late that a large percentage of revenue came from out of hours drinking. He called time on the practice. Not only did he lose the out of hours turnover, but as the pub’s ‘best’ customers were involved he also lost their custom at other times. The pub failed.”

You need to plan ahead, thinking carefully about the type of pub and the marketplace, to decide how it can be developed successfully. For instance, some pubs, especially in towns, are basically ‘boozers’. This model may not work out in the sticks, however, as Turzynski warns.

“You have to be careful buying a country pub. Most survive these days as destination pubs. People will travel long distances because they serve high quality food. This means that you either need to be a good chef or you need to be prepared to pay to hire one. Drink driving laws mean that country pubs will not turnover massive amounts purely on drinks.”

Country pubs should also take advantage of extra income from guests. “Accommodation has high margins and you have a captive audience. The people staying in the pubs can drink without worrying about driving,” explains Turzynski.

Extra finance will be required if you need to improve the catering facilities or any other part of the pub. Refurbishing the floor and upholstery of a small village pub, for example, would cost a few thousand pounds.

Regardless of your own experience you may also need to invest in staff and training. This is another significant overhead when you consider that experienced pub managers often demand a substantial salary.