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The Caterer

Buying a pub – going public?

26 March 2010 by
Buying a pub – going public?

The most significant impact of this recession on the UK pub sector has been to change the largest national pub companies from buyers to sellers. Punch Taverns, Enterprise Inns and Admiral Taverns all need to dispose of non-core units to pay down debt, and this has enabled smaller pub groups, regional brewers and private individuals to increase their estates.

Punch Taverns and Enterprise Inns are both in the process of "downsizing" from about 7,500 units to 5,000 over the next few years. Therefore some 5,000 businesses are likely to be transferring to new ownership. Groups such as Charles Wells, Shepherd Neame, Frederic Robinson, Geronimo Inns and Peach Pub Company all acquired freeholds from Punch Taverns during 2009.

"18 months ago there was a flood of corporate disposals and most of those have now been snapped up," says Simon Hall, a director based in the Leeds office of chartered surveyor Fleurets. As a result, prices in some areas have started to creep back up again. A year ago central London freeholds were priced at multiples of eight to 10 times EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) but are now more likely to be between 10 and 12 times EBITDA.

On a nationwide scale, the pub companies are reviewing their estates and adding new sites all the time. Admiral Taverns is adding 20 to 30 sites a month; Scottish & Newcastle Pub Company is selling another batch. Enterprise Inns is continuing to sell and leaseback packages of its pubs at auction. The company was due to sell the freeholds of seven London sites at an Allsops auction this week. Admiral Taverns has hundreds of freeholds and long leaseholds for sale through Fleurets for prices ranging from £50,000 to £600,000. The pubs are nationwide but with the majority in the Midlands and North.

"The national pub companies are constantly looking at their turnaround estates and in many cases deciding to sell," Hall says.

So what are the opportunities for the first-time buyer or small-scale entrepreneur interested in growing his pub business? The traditional tenancy route into the pub trade is probably the easiest and lowest-cost option, where the pub company or brewer offers most support to the operator. However, tenancies are not assignable - ie, you cannot "sell" the agreement on to someone else. If you have spent money and effort in improving the pub and increasing turnover you cannot "sell" it at a profit. The choice for the more experienced and well-financed entrepreneur, therefore, comes down to buying a freehold, free-of-tie leasehold or tied leasehold.


FREEHOLDS

Buying a freehold means you own the bricks and mortar and are responsible for everything related to the property. As previously highlighted, there are plenty of freeholds available but the opportunities to buy a nice food-led village inn are few since good-quality businesses currently have little incentive to sell.

"The landlord of a successful freehouse is going to ask himself: ‘If I'm currently making 25-30% net profit, what am I going to do to get the same return?' So unless they are retiring or there is a business reason for needing to sell, good-quality units are not coming to market," says Martin Davis, a director based in licensed property experts Christie & Co's Manchester office.

The majority of the bottom-end freeholds available are wet-led community boozers which have suffered from lack of investment and/or poor management, the smoking ban, competition from supermarkets, and crime.

The increasing obsolescence of many wet-led pubs is highlighted by the relatively high percentages that are converted into offices, nurseries, care homes or residential use. Forty-two per cent of the freehold pubs Fleurets sold last year went for alternative use.

Taking a run-down (or closed) pub and making a go of it will require plenty of blood, sweat, tears and time in this market, comments Paul Tallentyre, director of pubs at licensed property adviser Davis Coffer Lyons. "In most cases these pubs are for sale because they are in a saturated market or struggling to compete against other competition owing to lack of capital," he adds.


LEASEHOLD

A leasehold provides a cheaper route into the trade since you are effectively buying the business and not the property, plus it provides operational support from the pub company. Leases usually run for between 10 and 25 years, are assignable after a specified period (usually two years) - so, in theory, you can sell the business at a profit. Most leases are fully repairing, which means you are responsible for the upkeep of the property.

Lessees pay a premium that reflects the size and potential of the business but you will also probably be paying a five-figure annual rent on top of that. Your landlord will be keen on raising your rent at every opportunity. Don't let them get away with it.

A Business and Enterprise Committee (BEC) report in May 2009 criticised the dominance of pub companies and a lack of transparency regarding how they set rent and beer bills for their tenants and lessees.

Tallentyre stresses the importance of negotiating hard with the landlord to get the agreement that works for you and at the same time being realistic about the levels of trade you think you can achieve.

"Consider cash-flow and the worst-case scenario. Can you still pay the rent if you are taking only £1,000 a week?" he says. A viable level of rent is usually no more than 11% of projected turnover.

A free-of-tie leasehold gives you the freedom to choose your suppliers. There will be some good opportunities to purchase free-of-tie leases in London over the next 12 months, according to Rupert Clevely, chief executive of Geronimo Inns. "If you haven't got so much money to invest [in a freehold] I think there will be good opportunities to take over free-of-tie leases where people have overstretched themselves," he says.

Wellington Pub Company is the largest free-of-tie pub estate in the UK with about 850 tenanted pubs. The company has a wide range of pubs to let advertised on its website. Many are offered at nil premium and require ingoing costs of as little as £30,000 - but in some cases a commitment to repairs and a schedule of works. Its standard leases are normally for 20 years and assignable after two years.

A tied leasehold means a considerable proportion of your drinks have to be brought from the pub company, but tied leaseholds can be a good stepping stone to more independence. If run well, a tied lease can be sold at a profit in order to buy a free-of-tie lease.

The rents set by major pub companies can be reasonable, Davis argues. He advises looking for businesses with a number of income streams to maximise your chances of success. Does the pub have function rooms, a large car park, overnight accommodation or holiday let rooms? Is there scope for a café or brasserie?

Many successful pub entrepreneurs such as Rupert Clevely of Geronimo Inns and Tom and Ed Martin started their businesses by buying tied leaseholds from Enterprise Inns. Pub companies are now increasingly offering rent-free periods, step rents, discounts on barrelage and other incentives to new lessees. A beer-tie lease will not be such a handicap to a business specialising in food and wine.

"The kicking of the pub industry has gone a little too far," argues Hall. "People are looking at pub companies like they've got leprosy and turning a blind eye to the opportunities out there. It's a buyer's market. Tied leases are the easiest low-cost entry into the trade and there aren't enough people taking advantage of the great opportunities that are on offer at present."

CASE STUDY

Last month local first-time buyers Graham and Rachel Bucknall bought the freehold of the Bridge Inn in Ratho on the outskirts of Edinburgh for an undisclosed sum.

Graham previously ran his own IT business and Rachel worked in the food industry before raising a young family. They have lived in the village of Ratho for six years, where the Bridge Inn is the only pub.

When it came up for sale after being run by the same landlord for 25 years, they observed with interest how the new owners got on. When the pub was put on the market again five years later, the Bucknalls considered it an opportunity too good to miss. Becoming community publicans was the lifestyle change they were looking for.

Initial operational changes the Bucknalls have made have been to reduce the size of the menu and serve only fresh, locally sourced Scottish dishes. Also a greater effort is being made to welcome locals.

One of the main draws of the business is its patio and beer garden, overlooking the canal. The Bridge Inn also operates two barges which can be hired out for parties, weddings, and corporate events.

Stuart Ferguson Director at Christie & Co's Edinburgh Office who handled the sale, comments: "It is unusual and rare for such a quality bar/restaurant to become available for sale on the outskirts of Edinburgh. The Bridge Inn comes with a great amount of potential, and we are confident that Graham and Rachel will successfully tap into it."

www.bridgeinn.com

MAXIMISE YOUR CHANCES OF SUCCESS

  • Get good specialist advice. Create a sensible business plan. Is there a demand for your concept? Does the catchment area provide the right demographic to support your business?
  • Look at the competitors. It can be beneficial to have good operators nearby, so you can benchmark yourself against what they are achieving.
  • If taking on a lease, you should currently be in a strong position to negotiate. Aim to establish a good relationship with the owner that enables you to grow the business together.
  • Is the lease long enough to implement your business plan? Is the rent affordable? A recommended rent level is no more than 11% of projected sales. Don't sign any agreement until you are completely satisfied and have taken independent advice.
  • A beer-tie lease may not be such a handicap for a pub that specialises in food and wine.
  • Make sure you have enough cash to cover the ingoings and initial cash-flow. Breaking even in your first year of business is absolutely essential.
  • Once up and running, retrain all staff and do not over-work yourself; take at least one day off per week.
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