Moving into 2017 we are seeing fewer distressed sales compared to previous years - especially from the companies as they have largely consolidated in recent years. However the eventual introduction of the Pubs Code will negatively impact the market with previously leased pubs converted to tenancies. Additionally the uncertainty of the wider political and economic conditions will be a challenge to the industry, however as during the recession the industry will continue to meet those challenges.
The question remains on whether the government are doing enough to ensure that community pubs are being given enough protection from the hands of property developers. Towards the end of 2016, Greg Mulholland MP, proposed new legislation that would remove certain development rights from pubs. However, this proposal was met with criticism from the BBPA as they say this legislation would affect the independents as much as the larger pubcos. While addressing the issue that alternative use causes, we have witnessed that pubs being sold for alternative use is generally on the decline.
As a company we are supporting the #cutbeertax campaigners in their calls for the government to continue to reduce taxes on beer to help keep pubs affordable and therefore keep more pubs open.
We are expecting that the market will witness an increase in the number of deals under £2,000,000 as owners look to capitalise on the increasing lack of unique destination and community public houses on the market. There is currently fierce competition between the pubcos and general investors, which are driving up asking prices.
Understanding what the wet (drink) vs dry (food) revenue split is is key to assessing any pub for sale. Establishments with mainly wet sales will generally have lower costs as there are less kitchen staff required to generate revenue. With a wet led business the profit margins will also be reduced as you at more exposed to alcohol taxes. Dry led businesses tend to be far more profitable and flexible as they are not at the mercy of external factors (economy, beer taxes and brewers) and have control of the pricing of their menu. However dry led operations require more skill and tend to attract people that are experienced in catering.
As an individual entrepreneur in the industry you have far more leeway to build a destination - the larger pubcos simply do not have the flexibility to achieve this. Businesses that can attract families with garden areas and quality, affordable food will continue to prosper. Get this right and people will drive long distances to visit your pub. If you are not a good chef, or there isn’t one already in place, then you will to hire one as the success of dry led pub is dependant on the quality of the food. Although buying a freehouse will require greater outlay, the rewards and flexibility you will enjoy can greatly outweigh those experienced in a leasehold or tenancy arrangement. If you build upon the existing freehold, then you can be expecting to be achieving net profit (in excess of 25% for wet led and excess of 50% for dry) that will not disappear with rent repayments. When you come to eventually sell your business, non-brewery tied freeholds are always in strong demand due to the rarity of freeholds.
Finance can often be agreed at levels of up 70% of the price of the freehold of the pub with many lenders. We have recommended finance houses that we can refer to you. To make your purchase a success, you need to ensure that your purchase is correctly funded as their will be additional costs than just the purchase of the business outright.
When it comes to buying a pub, there are three different options available: tenancy, lease, and freehold.
Each of these structures offers it’s own advantages and disadvantages and you’ll need to carefully consider which option will be best for you before investing.
So let’s take a look at the different types of pubs out there:
Tenancies are the most common type of pub structure and tend to offer the easiest way to take your first steps into the pub industry. Under the tenancy, you’ll be responsible for the day-to-day management of the pub, including areas such as staffing, marketing, bookkeeping, managing stock, and maintaining fixtures and fittings.
What does it cost?
The price of a tenancy varies depending on a whole host of factors, but as a general rule, you should expect to invest anywhere between £15,000 and £50,000 to cover the tenancy, as well as the fixtures, fittings, and stock.
Ideal for those with little or no prior experience of running a pub, tenancies typically last for three years – allowing you to try your hand at running a pub without any long-term commitment and a relatively low start-up cost.
In addition to this, a good brewery or pub company will also provide on-going help and support, often including any relevant training as well as access to an area manager or business development manager.
A further benefit of a tenancy is that the owners of the property will take responsibility for any outside painting and major repairs to the building.
A tenancy arrangement is a great way to take your first steps into the pub industry, however there are a number of disadvantages you should be aware of.
Firstly, this kind of arrangement is somewhat inflexible in that you will be obliged to buy all beer and related products from the landlord or their preferred brewery, meaning you won’t be able to shop around for the best deals.
Many owners also take a cut from your amusement machines, and may restrict what machines you can actually install. What’s more, unlike buying the pub outright, you won’t be able to sell it on for financial gain at the end of your tenancy.
A pub lease works in a similar way to a tenancy in that you pay rent to the property owner. However a lease comes with a greater level of responsibility when it comes to repairs and maintenance.
What does it cost?
The purchase of a leasehold pub can cost anywhere from £50,000 to £250,000,
Unlike a tenancy, if your leased pub performs well, then you might have the opportunity to sell it on at a profit. However, make sure you check the terms of your contract as there may be a minimum time you need to own the pub before you can sell it (typically two years).
With contact terms usually spanning from 10 to 20+ years, leases also offer a higher level of stability, allowing you to plan on a longer-term basis.
In addition to this, the brewery or pub company your leasing from will usually provide on-going assistance, training, and support.
The nature of a lease means that you will face higher start-up costs as, in addition to a higher purchase cost, you will also be expected to cover things like legal fees, a structural survey, and stamp duty. As you will be responsible for the majority of repairs and maintenance throughout the lease, including external repairs, you’ll also face higher costs during the term of your contract.
Just like a tenancy, most lease terms will include a beer tie, meaning you won’t be able to negotiate better deals or introduce new beer ranges.
Finally, if you’re leasing a pub, you’ll have to be prepared to make a long-term commitment – you won’t just be able to up and leave if the going gets tough!
Owning a pub freehold means buying it outright, the property and the business is completely yours. With this in mind, it’s highly advisable to gain experience running a tenancy or a leased pub prior to taking on a freehold establishment.
What does it cost?
That all depends on what and where you’re buying. However. You should expect to spend anywhere between £60,000 and £1.5million. If you’re taking out a mortgage to fund the purchase, you’ll usually require a 30% deposit.
One of the main advantages of buying a pub on a freehold basis is that you’ll have complete freedom over your business, including your own product range. Unlike leases and tenancies, you won’t be faced with beer ties, meaning that you’ll be able to negotiate the best deals and order the drinks you want.
Although the initial cost of a freehold pub is significantly higher, if the value increases over time, you’ll have the opportunity to sell it on a substantial profit. In addition to this, the fact that you own the pub means you have long term security and can plan for the future without the fear of rent increases etc.
One of the major disadvantages of buying a freehold pub is that you will need to invest a significant amount of money to get set up, which, in turn, means you’ll be taking on a much greater financial risk. You’ll also be totally responsible for any repairs and maintenance, adding further on-going costs.
Whilst freehold will give you freedom from beer ties and other restrictions that can be imposed by breweries and pub companies, it also means that you won’t have access to their training and support services. This can be particularly concerning if you are new to running a pub.