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December 11, 2023Choosing the perfect pub to lease or buy is a complex decision ...
You need to carefully consider a whole host of factors - which we'll cover in today's post.
A key disclaime first. Before buying or leasing any premise, you must consult a lawyer to review any agreements and negotiate on your behalf, alongside a valuation expert to review the financial figures before you jump into a decision. It is always in the pub owner’s interest to boost the value of the property or tenancy as much as possible – so it’s important to know what’s a fair deal in the current market environment. You may also be able to negotiate rent reductions as a tenant or reduce the property price if you’re purchasing – so don’t skimp out on getting advisors!
With that in mind, before you get to the stage of advisors getting involved, it can be helpful to build criteria for highlighting any bargains in the market. Identifying the perfect pub to lease or buy requires experience, but some of these factors might help to point you in the right direction.
By no means is this blog post an exclusive list of all the factors that you need to assess when looking to buy or lease a pub, but hopefully, it provides you with a useful indication of the most crucial ones. So let’s get started with the first point to consider …
1. Your skillset, risk tolerance and personality
Firstly, it's crucial to assess whether your personality is a suitable fit for the industry, as you’re often tied in for at least a couple of years and running a pub is a lifestyle, not a job. If you’re confident you have the characteristics to run a pub, then there are another few factors to consider.
If you are less experienced in the industry, you may find a shorter tenancy beneficial. With a short tenancy, you aren't tied in for an extensive term, as the tenancy usually ranges from 24 months to 5 years. This shorter tenancy can also be a great way to find your feet in the industry. However, this tenancy comes with higher costs and restricted freedom – you have to purchase the range offered by a pub company at much higher costs than a freehold pub. Therefore, your risk tolerance is also an important factor to consider – do you want to risk taking on a longer freehold lease where you have the freedom to choose a product range as you see fit, but you’re tied in for a longer term and are liable for repairs to the premise?
In line with this, you should also consider how your personality might influence your way of running the pub. Are you a skilled chef who could drive customers to the business in a gastro-pub style, or would you be a more involved landlord who people like to see in the pub? You may not even want to work in the business – meaning you need to consider the your choice even more carefully, as wage costs will be higher.
2. Location
Location is a crucial factor in influencing the current and potential earnings of a pub. When it comes to location, you want to evaluate:
- Foot traffic – how much footfall does your pub get? Is your pub in a prime location within walking distance of people’s homes? The higher the footfall there is, the greater opportunity you have to capture customers.
- Competition – how many competitors are there in the area? What are their key offerings, and how could you differentiate your business to drive sales to your pub?
-The nature of people that will go to your pub – will your customers be heavy drinkers or more food conscience individuals?
- Parking (if necessary) – if your pub is inaccessible, then is there sufficient space for customers to drive down.
- Developments planned for the area – are there any ongoing housing projects planned that will increase the customer base for the pub?
3. Reputation and atmosphere
Unless you have an extensive budget to remodel and remarket a pub, then assessing the atmosphere is crucial before purchasing or renting it. Visit the pub as a patron and review the layout, the design, the clientele and the overall feel of the pub before making a decision. You want to look at the staff, service, food and condition of the pub.
Your assessment to buy a pub based on its current atmosphere also depends on your risk appetite and involvement in running a pub. Perhaps you see upside in improving a pub’s atmosphere through sharper prices, promotions and building a good culture in the venue. But, this takes time and may not work, and instead you might prefer building on the strengths of an existing set-up.
4. Budget
You also must consider your budget when assessing the perfect pub for your needs. If you’re on a limited budget, then perhaps you need to look towards different options to reduce the cost of entry – such as shorter tenancies, which again come with their issues. In general, rents are roughly 12% of sales and may move with revenue depending on the tenancy agreement . So, whilst tenancies drive down the cost of entering the industry significantly, they also create an ongoing cost to the business that will influence how it’s run.
Alternatively, you could look at using debt to help fund the purchase price of a pub. However, do not do so unless you have sought financial and legal advice and have a convincing business plan that shows you can also service the debt during downturns. Failure to service debt is the number 1 cause of business collapse – so the decision requires careful consideration.
You should also budget for various other costs involved in a purchase (or entering a rental agreement), like deposits. A deposit will usually be at least 20% of the pub's value (which is based on its financials) for a purchase, and for a tenancy, it can be between 6 to 12 months of rent. You then also need to consider conveyancing costs, moving costs, refurbishment costs, insurance costs, service charges (if a leasehold) and, of course, taxes. This includes VAT on the purchase cost if the business is VAT-registered.
You should also consider purchasing the property within a limited company if it’s an investment, which will limit your downside and mean you pay corporation tax instead of income tax, which can reduce your tax liability. Always consult a tax specialist to assess the full tax implications of purchasing a pub and how to best mitigate these.
5. Financials
The purchase of a freehold or entering into a tenancy agreement is all based on the financials of the pub. As discussed, a rough guide for rents is around 12% of a pub's annual (likely) turnover.
In more detail, rents are often based on the divisible balance. This divisible balance is the remaining net profit after paying all business costs, which is then split between the lessee and the lessor. The split is usually 50:50, but there are rulings favouring the lessee when the divisible balance is smaller (like Brooker vs Unique where the split was 35:65 in favour of the lessee). In general, net profit for a pub should be between 20 – 25% of turnover, which creates a divisible balance and leads to rents of roughly 10 – 12.5% of turnover.
Therefore, when purchasing or renting a pub, you should always assess the key financials, including but not limited to:
- The current and historical profitability of the business.
- Cash flow forecasts
- Outstanding debts
- Additional funds required to rebrand or do a fit-out
- Employment agreements in place
- Warranties and indemnities (protection against losses) in place
Armed with these factors you should be a little more informed about the commercial viability of your investment into a pub tenancy or the purchase of a pub. You can start your search using websites that list out pub properties, with some of the best being:
Hopefully, on a high level, this guide helped to inform you a little more about how to pick the perfect pub for you. Once you get into the details, seek financial and legal advice before a purchase – but these are the key points to keep in mind during your selection process.
If there are any points you want us to dive deeper into then just leave a comment.
