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A buyer's market

22 January 2009
A buyer's market

Making the decision to buy a hospitality business is not something that should to be taken lightly, especially if you plan to quit your job and sell your house to help fund the purchase. In fact, in the current economic climate, when banks' lending criteria are as tight as a drum and with businesses seemingly folding on a daily basis, some may view it as downright foolhardy. However, the reality is that if you have access to finance, it may be a great time to buy.

While declining values and negative equity are the talk of the residential property market, the sector of hospitality businesses, whose values are based more on variables such as the length of the lease and trading performance than their bricks and mortar, is decidedly rosier, and there are some compelling reasons to buy now.

As Neil Morgan, head of pubs and restaurants at Christie & Co, points out, the healthy supply of good sites coming on to the pub and restaurant market, for example, is in marked contrast to the tough competition for sites and high rents seen in recent years and keen-to-sell vendors are increasingly willing to negotiate on their asking price. "With the lack of acquisition activity from the major pubcos at this current time, it has never been a better time for individuals or regional operators to make realistic offers for good-quality assets," adds Morgan.

When these factors are viewed together, Chris Moore, head of hotels at property agents Colliers Robert Barry, says it "absolutely" makes sense to buy at the moment. "For example, hotels and pubs in tourist areas will benefit from the shift in exchange rates, which have now made the UK more attractive to nationals for holidays or short breaks at home, and for foreign visitors to come here." He adds: "Buyers who commit themselves now will have the benefits of that cash flow in the spring and summer of 2009."

What's more, the recent spate of pricing corrections we've seen in the hotels and pubs market is largely complete, says Moore, who expects to see some stability return to the market this year.

Finance

Hospitality business values vary markedly depending on the type of business you are after. Whereas the leasehold for a tatty wet-led pub can be had for a few thousand pounds, freehold hotels in prime areas go for millions.

When it comes to seeking finance, one option is to shop around among the commercial arms of high-street banks like Barclays and Alliance & Leicester. Alternatively, you could instruct a broker to find you a suitable lender. A good broker will quickly give you an idea of how much you can borrow, spot potential pitfalls in the accounts and tell you if an asking price is fair. The National Association of Commercial Financial Brokers' website (www. nacfb.co.uk) contains a comprehensive list of brokers who know the industry. Some, like Christie Finance (www.christiefinance.com), have strong links with licensed property agents.

Naturally, one downside of the current slump in residential property values is that if you are planning to use revenue from the sale or remortgaging of your home to fund your purchase, you will have less money to play with. This is important, as lenders will typically stump up only 50-75% of the purchase price of a property, depending on whether it's leasehold or freehold, so you will need a plan to come up with the rest - possibly borrowing from friends and family.

Understandably, in the current economic climate, lenders will be looking to take as little risk as possible. As such, it is crucial to show that you have given due care and attention to your cash projections in your business plan (your broker or lender can help you draft this). These projections should be based upon close scrutiny of the business and its recent performance, particularly the last three years' accounts, and details of any plans you have to build the business, such as boosting food sales or adding rooms. Be clear about how you expect to pay back the loan, and emphasise areas like relevant training or experience that may make lenders look favourably upon your application.

Looking for a site

Having ascertained how much you can borrow it's time to see what you can get for your money. But before you start looking for properties you need to be clear about your overall aim. For example, are you looking for an income generator, an investment or more of a "lifestyle" business that will provide a family home as well as an income? This will have a huge impact on the type - and location - of properties you should view.

When you've identified your target areas you should conduct some thorough research. If you are unfamiliar with the areas, spend some time there and try to gauge the level of local competition and consider how you will make your business stand out. Ask yourself where your trade will come from, looking at factors like footfall and local businesses. Also, try to establish the existence of any groups you aim to target, such as rich empty-nesters or young couples with disposable income who eat out regularly, and consider how you could attract these different markets using promotions like lunchtime specials, events and early-bird discounts as part of a wider marketing strategy.

Looking on the websites of licensed property agents such as Colliers Robert Barry and Christie & Co will give you a rough idea of what - and where - you can afford to buy, as well as the contact details of their regional offices, which will be able to supply you with more detailed information on the local market. Property ads can also be found in magazines like Caterer and on our website, www.caterersearch.com.

Think outside the box

When it comes to considering sites and conducting viewings there is a fine line between compromising on quality and being flexible, but it pays to keep an open mind. Put simply, the less rigid you are in your search criteria, the more choice you will have. Look for potential. For example, a failing wet-led boozer may be a great spot for your restaurant idea, or you might save money by buying a property that is not ideal for your needs in its current state but that could easily be made fit for purpose by, for example, tweaking the layout or adding rooms.

That said, if you're looking to bag a bargain, remember that cheapest isn't necessarily best. Moore points out that while you could pick up a shabby, bargain-priced boozer in an undesirable area for a song, if you spend a bit more, you could get a solid and proven business that produces a good income - and offers a level of security - from the outset. Similarly, unless you have grand plans for a destination restaurant, for example, choosing a business in an off-the-beaten-track location with low footfall because it's cheaper may well prove a false economy.

If you are taking over a going concern and plan to run it in a similar way to the previous owners, consider how you could grow the business, for instance by improving the food offering in a pub, changing the menus or opening hours in a restaurant or lengthening the operating season of a hotel. Also consider how you intend to put your stamp on the business. For example, a lick of paint and some recovered chairs, some changes to the lighting and a few new pictures can make all the difference to a restaurant and won't cost much either, while reusing existing kitchen equipment can reduce start-up costs.

If your prospective property needs a bit more than TLC, make sure your finances will stretch to cover any works needed. Contact a qualified chartered surveyor and your local planning officer before buying such a property to get an idea of what is and isn't possible under local planning restrictions. Other likely useful contacts include a good solicitor, an accountant and a licensing lawyer who will be able to ensure all the licences you require are in place and in good order.

Other areas to consider before getting the keys include staffing. Divide key tasks between yourself and your partner or partners and find out the plans of any existing staff - could they be persuaded to stay on, should that be desired, to help make the takeover go more easily?

If you're starting from scratch, make recruitment a key focus early on to help you hit the ground running on that all-important opening night.

Been there, done that - words from the wise

Experienced hoteliers Jeremy and Louise Leeds bought their first property, the Parkmore hotel in Yarm, North Yorkshire, in March 2007, using funding from the Alliance & Leicester Commercial Bank. Here, Jeremy gives his top five tips for successfully buying your own hospitality business:

  • Know your market. Before applying for funding, ensure that you have a good knowledge of the sector and are, therefore, aware of the potential pitfalls in addition to the perceived benefits.
  • Understand your financial requirements. Do your research and make plans. Ensure that the funding you request covers all your needs.
  • Shop around. A good working relationship with your bank can help you succeed. Make sure your chosen bank offers support at every step of the way, even after the deal has been done.
  • Put a good team around you. Starting with the bank, build up a trusted team of experts to provide advice, including an accountant and a lawyer, and then go for it.
  • Follow your dreams. Stay focused on your end objective and work hard at it. It's amazing what you can achieve.
  • www.parkmorehotel.co.uk
  • www.alliance-leicestercommercialbank.co.uk
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