Buying a food pub
Although pubs are closing at an alarming rate, it is mainly drinks-led businesses that are affected - those with strong food offerings appear to have a much greater chance of success and longevity. Ben Walker reports.
At first glance, the latest statistics on UK pub closures do not reflect well on the sector. Up and down the country, a record number of pubs are closing for business every week. Most will remain boarded up and unused - some sites will be sold for alternative use.
The latest figures released by the British Beer & Pub Association (BBPA) show that the situation is worsening. Pubs closed at a rate of 52 per week in the first half of 2009, compared with 39 per week in the second half of 2008.
Yet a closer look at the data reveals that food-led pubs are largely exempt from this trend of obsolescence. Only one dining pub is shutting each week, compared with 51 drinks-led pubs.
"People do not drink as much as they used to," says Simon Chaplin, a director in the corporate pub and restaurant division of business property agent Christie & Co.
"If there are too many pubs in a particular location, it is usually the business that couldn't provide a smoking solution or offer decent food that fails."
UK alcohol consumption per head fell in 2008 and was 6.1% lower than in 2004, according to the BBPA and HM Revenue & Customs. The most common causes of drinks-led pubs failing are debt, funding difficulties or the ill health of the operator.
Pubs with strong food offerings, however, have a much greater chance of success and longevity. Furthermore, branded pubs and café-style bars are actually opening at a rate of two a week, says the BBPA report.
The status and nature of the pub as a dining destination has changed dramatically in recent years. The accomplished cooking in many pub kitchens is now rightly recognised and celebrated.
"Good-quality chefs want to operate out of pubs, whereas in the past they wouldn't have even considered it," says Chaplin.
The good news for dining pub entrepreneurs is that the sheer volume of pub closures means there are plenty of sites to choose from. Small multiple operators such as Wiltshire-based Heartstone Inns are currently snapping up distressed assets at bargain prices.
Chris Green, director of Greencliffe Taverns, an independent operator of three Yorkshire dining pubs, agrees that there are plenty of opportunities and says it is possible to cherry-pick a closed business that was considered good when it was open.
NIL-PREMIUM LEASE
In recent years, Green has taken over pubs that have ceased trading, including two nil-premium leases of about 20 years from pub company Enterprise Inns. Nil premium means that the buyer is not purchasing the goodwill or existing business the pub has built up. This can be because the previous tenants ran it badly, the pub was closed for some time, or the accounts were not made available.
When Greencliffe Taverns took over the Chevin Inn in Menston, Ilkley, it had been shut for 18 months following tragic events. A pub fire killed the landlady and her husband was sent to prison for manslaughter. The pub was originally a drinks-led operation, and Green was sensitive to the circumstances surrounding its closure and kept its reopening as a dining pub very low-key.
"When reopening a closed venue you tend to get a lot of interest in the first few weeks. The trick is in maintaining that interest through good communication and winning the trust of the community," he says.
The alternative to a closed business is to buy a going concern. Successful dining pubs usually come on to the market because the owners get tired or want to retire.
"It's damn hard work running a dining pub and after 10 years most people have had enough," says Leigh Parsons, a partner at property agent Knight Frank.
The case of the Appletree in Marton, North Yorkshire, however, is different. A former Caterer Adopted Business, the Appletree was named National Dining Pub of the Year 2008 by the Good Pub Guide. So why is it up for sale? The tenants and owner failed to agree upon a new lease. In April this year, tenant Melanie Drew told Caterersearch: "The landlord [Orchard Inns] offered us a seven-year lease without the option of renewal and we felt that this would put our business in jeopardy. We are left with no alternative but to close the Appletree and leave."
Drew has since taken over the Byland Abbey Inn, on the edge of the North York Moors National Park. Meanwhile the Appletree is available through property agent Fleurets as a new 10-year free-of-tie nil-premium lease with a starting rent of £30,000.
LOW-COST ENTRY
Fleurets and Christie & Co both have a wide range of nil-premium leases on their books, which represent a relatively low-cost means of entering the trade.
"People with around £70,000 are in a position to buy the fixtures and fittings and stock, pay the deposit and rent in advance and take over a trading business," says Simon Hall, a director at Fleurets.
As always, however, it is vital to check the small print of a nil-premium lease. Does the length of the lease give you enough time to implement your business plan and build up trade? Does the lease include any restrictions on alcohol and food supply or making alterations to the property? Can the lease be renewed or sold on - if so, after how long?
Then there are other significant expenses such as business rates and rent to consider. Rent should not amount to more than 8% of projected turnover, says Green at Greencliffe Taverns.
Parsons, at Knight Frank, has a word of caution for those considering taking over a highly successful business. "Catering goodwill is very fickle and can disappear with the vendor," he warns.
"Is the pub's success due to a larger-than-life landlord or a Michelin-starred chef? It can be hard to take such a business forward or stop it slipping back. You will need to be very confident and very good."
SECURITY
By far the best option for new entrants to the dining pub sector is to buy the freehold of a business that is doing OK but could do better, says Parsons. This provides the security that comes with full property ownership. You can also drive good bargains when purchasing by playing one brewery off against another.
"Breweries are currently offering generous discounts to free houses," he says.
Yet very few freehold gastropubs have changed hands in recent months. "The market for £300,000 to £800,000 freehold pubs has been very quiet over the past 18 months," says Hall at Fleurets.
"This type of operation tends to be successful enough not to have to sell. Also, buyers are largely private purchasers who have had great difficulty in raising funds."
The price differential between a failed business and a good business has narrowed in the current market because most of the evidence in valuation is coming from failed businesses.
This means that potential vendors of good-quality dining pubs who want to sell for lifestyle reasons are holding fire because they feel they are not currently getting a fair price.
However, there are some signs that this stand-off is set to loosen in the near term. "The residential market is picking up massively at the moment and leisure usually follows six to eight months later," says Parsons.
CASE STUDY
In August, Christie Finance, the sister broker of Christie & Co, helped David and Roxane Marjoram buy the £825,000 freehold of the One Bull pub in Bury St Edmunds, Suffolk.
As lessees, the couple originally took over the One Bull in 2008 after it had been closed and boarded up for six months. Owner Punch Taverns invested £150,000 and the Marjorams £100,000 in a complete refurbishment of the former drinking pub, which had catered for the young market and included pool tables and Sky sports channels.
The fact that the pub was closed for some months gave the Marjorams a brand new start and the opportunity to change its profile from a youth-orientated sports bar to a gastropub. The One Bull now features a 35-seat main bar, a further 30-seat lounge area, and a 60-seat restaurant to the rear of the property.
"Having already operated the One Bull for a year, we are delighted that we have been able to buy the freehold and strengthen our commitment to the business. We felt that this was an almost unique opportunity to buy a historical pub of this size in such a prominent town centre location," says David Marjoram.
"David and Roxane have transformed the One Bull into a well-regarded business which has built up an enviable reputation across the region," says Nicholas Baker, consultant at Christie Finance.
Punch Taverns has recently placed 28 freehold pubs on the market across southern England and East Anglia. Prices range from £160,000 to £375,000 and the properties are being marketed by King Sturge and Fleurets.
BUYING A GASTROPUB: THE CHECK LIST
- Find and compare two or three sites that meet your requirements. Remember that history, ambience and character are often part of the appeal of successful dining pubs.
- Does the catchment area provide the right demographic to support your business? Is the car park big enough?
- The more covers the better. This will allow you to make the most of weekend peaks in trade.
- Is the existing kitchen adequate? If not, is there the scope to enlarge it?
- Remember that a closed business can be fairly expensive to get up and running again and you will need to organise new licences, fire certificates and visits from health and environmental officers.
- If taking on a lease, you should currently be in a strong position to negotiate. Aim to establish a good relationship with the landlord that enables you to grow the business together.
- Is the lease long enough to implement your business plan? Can you sub-let or sell it on? If so, after how long? Is the rent affordable? A recommended rent level is no more than 8% of projected sales.
- A beer-tie lease may not be such a handicap for a gastropub when around half of your turnover will come from food. Ideally, however, you should be free to choose your own suppliers of wine and spirits.
