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The Caterer

Buying a hospitality business

20 January 2010 by
Buying a hospitality business

If you're thinking of buying your own restaurant, hotel, guest house or pub, now is a good time to start looking. Vendors are more likely to be flexible on price at this time of year, and you should complete on the deal by spring or summer, when trade starts picking up. Ben Walker looks at what you need to consider before you start searching.

The short days of January are traditionally a time when we reflect on the direction of our lives. Many of us will dream of quitting our job and becoming our own boss.

The beginning of the year is a good time to start looking for a hospitality business, according to Gavin Wright, a director at agent Christie & Co. Vendors who did not manage to sell in the previous year will be looking to offload their property quickly and are therefore more likely to be flexible on price.

The quietest trading months of the year before Easter allow owners to concentrate on selling, and professionals such as lawyers, accountants and agents, who are essential in getting transactions to take place, are all available, adds Henry Jackson, an associate at estate agent Knight Frank.

From finding a suitable business to completing on the deal usually takes three to six months, so if you start looking now, it is likely you will take over the business in time for spring or summer, when trade is picking up.

There is still a shortage of good quality stock on the market but if you can find something decent, average hotel values are at the lower end of the scale, at a multiple of eight times pre-tax profit, says Alastair Murchie, a director at licensed property specialist Colliers Robert Barry.

A further incentive is the lowest commercial interest rates for more than a decade, at around 4%.

HAVE YOU GOT WHAT IT TAKES?

The first question to ask yourself is have you got what it takes? The prospect of having to cook, serve and clean for the rest of your life just to repay the bank is enough to put many people off the idea. And the staggering number of independent hospitality ventures that fail each year is a sobering reminder that many are simply unprepared for the reality that awaits them.

The formal training requirements for running a restaurant, hotel, guest house or pub are minimal, which contributes to the high rate of failure in the sector. You will need to complete a one-day course to obtain a liquor licence, but that only covers licensing law and doesn't teach you how to buy a business or run one.

It will help your chances of success greatly if you have already reached a managerial level in the industry, have solid customer service skills and are prepared for the hands-on nature of being your own boss. It is also worth noting that without a track record in hospitality, a large deposit (for freeholds it is currently around 30% of value), or decent trading accounts from the vendor, it may be difficult to obtain funding.

Hospitality newcomers are therefore strongly advised to get a relevant qualification under their belts, such as those offered by the Institute of Hospitality or the British Institute of Innkeeping. Food hygiene courses and cellar management will also beef up a business plan.

If you're unsure about going it alone, then running a franchise operation for a chain is an option. This will provide you with valuable operational support while giving you a taste for running a business.

If, however, you're determined to take the plunge and buy your own business outright, read on.

WHERE TO LOOK

Having decided what type of business you want and at what price point, first look at the classified advertisements in Caterer and on Caterersearch.com, plus those in The Publican, Morning Advertiser and Daltons Weekly and their equivalent websites. Also check the websites of reputable property agents with experience in your desired sector and geographical area. This will give you a feel for what properties are on the market.

Having done your preliminary research, sign up with the agents. You will find regional office numbers in Caterer each week. Regular contact with a reputable property agent is especially important in areas where demand exceeds supply and good properties never make it on to the open market.

Agents will look on committed prospective buyers favourably, so once you have made contact, call every week to find out what new instructions they have taken on.

WHAT TO LOOK FOR

Look at every property that comes within your budget and area, and visit it as a customer. The first sight of a property creates the biggest impression, so ask yourself if the external appearance of the business looks welcoming. If not, can you make it welcoming? Window boxes, flowers, paint, good lighting and attractive signage can change an exterior in less than a week.

Graeme Bunn, a director at chartered surveyor Fleurets, says recent pub company disposals have resulted in a large number of bottom-end freehold pubs, private hotels and restaurants being put on the market. Such properties, however, will require buyers with real vision who can look beyond an off-putting, boarded-up exterior and see potential.

"In the end, any business is only as good as its operator," Wright says. "Having the right concept in the right place often plays a large part in success, but there are plenty of examples of successful businesses that are not in great locations."

Once inside, take a close look at the fixtures and fittings. Are the furniture, carpets and curtains of decent quality or will they need replacing? Back of house is just as important as front of house, so go behind the scenes and take a good look at the condition of the equipment behind the bar and in the kitchen. Remember, if you are planning on living on the premises, the onsite accommodation needs to be comfortable to enable you to run a successful business.

Once you have decided on a property that you think is suitable, visit it at quiet and busy times. Find out why the business is up for sale, especially if there is no obvious reason. It could be worth asking regular customers or nearby shopkeepers, who are likely to know the full story.

Ask to see the audited accounts. If you are not familiar with looking at balance sheets, get an accountant to explain them to you. Ideally, you should look at the last three years of trading. Look at fuel, heating and lighting costs; identify the fixed costs and staffing costs.

If the turnover and profit performance are very poor, there is a risk that you are buying a fundamentally flawed business. On the other hand, outstanding trading figures present you with a very high standard to match as a new operator. By far the best option is to buy a business that is doing OK but could do better, Wright advises.

If you have set your sights on a particular property, ask to see the weekly turnover and create a graph to show the trading pattern throughout the year. This will enable you to highlight any reasons for slower trading periods and help you understand how these can be improved.

RASING THE FINANCE

Estimate your cash position then talk to a broker who can identify the funding packages available for your entry level. You should ensure that your broker is a member of the National Association of Commercial Finance Brokers and specialises in the licensed trade. Make sure you have calculated sufficient funds to cover the costs of the purchase plus a healthy amount of working capital.

Now you can begin your business plan, which you can only fully write after getting an idea of the turnover and trading pattern of your chosen acquisition. Do not predict massive sales growth.

However, the business must comfortably demonstrate the ability to repay your borrowing requirement. Also include your CV but only highlight relevant achievements and experience, such as team building, bookkeeping, stock control and IT.

As with buying any property, you should obtain a survey before proceeding with a purchase. This applies whether the property is freehold, leasehold, or a new letting. If you are taking responsibility for the repairs of the building you need to fully understand the condition of the premises and the responsibility you will be taking on.

INCREASE YOUR CHANCES OF SUCCESS

â- Fully research the area and your customer base and understand the quality of the competition you will be up against.

â- When making trading projections do not overestimate profitability and underestimate the costs involved.

â- Make sure you account for all costs in your business plan. These include repairs, insurance, business rates, health and safety checks and fire safety assessments.

â- Apart from the purchase cost, make sure you have a healthy amount of capital set aside for emergencies.

If you need funding for your new venture, your chances of success will be improved greatly if you already have a proven track record in the hospitality industry, and you have relevant qualifications under your belt

CASE STUDY : EXMOOR FOREST INN, MINEHEAD

Acting on behalf of private owners, Christie & Co sold the freehold of the Exmoor Forest Inn near Minehead, Somerset to first-time buyers Janis and Nick Smith, a couple with professional backgrounds in hospital catering management and IT respectively.

Situated on a main arterial route through Exmoor National Park, the inn comprises three bars, two dining rooms, a skittle alley and a 36-cover beer garden. The business also features 10 en suite letting rooms and a six-bedroom owner's accommodation.

The inn, which dates back to 1880, was sold for an undisclosed sum off a guide price of £750,000. The Smiths started looking for a rural property in the Dartmoor/Exmoor area at the start of 2009, made their first offer on the Forest Inn in August, and moved in during December.

Nick Smith says: "We aim to attract local trade to increase activity during the off-peak months."

Since moving in, the Smiths have relaunched the pub's website and have started marketing the bedrooms through online booking websites Lastminute.com and Eviivo.

Nick's advice to prospective buyers is to make sure you have an expert and supportive solicitor, financial adviser and bank behind you. Christie Finance secured a competitive funding package from HSBC bank, despite the current challenging lending conditions.

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