Searching for the pub of your dreams?

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Andrew Turzynski, senior business manager at commercial mortage lenders First National takes a cool look at the financial implications of buying a...

Andrew Turzynski, senior business manager at commercial mortage lenders First National takes a cool look at the financial implications of buying a freehouse today.

Over the coming months, big pub sell-offs such as those by Whitbread and Bass will have a trickle-down effect on the independent sector and more freehouses are likely to come onto the market. Could this be your opportunity to own the pub of your dreams?

As Elton John sang, "We all fall in love some time". When it happens to you, make sure it's not in the pub. Above all, make sure it's not with the pub. Because combining emotion, alcohol and the decision to buy a pub you happen to fancy at the time is lethal - and doomed to failure.

The independent pub sector is booming. More owner-landlords buying up, building up and running successful pubs to provide a distinctive offering in today's increasingly corporate market. Since the Beer Orders of 1989 the number of pubs operated independently has increased dramatically. The opportunity to run a successful pub is greater than ever.

But while a decision to go into business is by definition a personal one, the message in cold financial terms is clear - steer clear of emotional involvement in the early stages. Make the right move, though, and it could be one of the most rewarding decisions you will make.

The best place to look for the pub to build your future around is almost certainly not the pub. Your first stop should be a business transfer agent. Even before that, look at the ads in The Publican to acquaint yourself with the market.

When you find a pub you are interested in, remember that you are buying a business, not a home. Forget the thatched roof and the idyllic rural location. Detach yourself from the dream. Instead take a detailed look at the trade the pub is doing under its existing owners.

Most people will need to get a commercial mortgage to finance a pub purchase. That mortgage will have to be paid. If the net profit the pub is generating now wouldn't allow you to cover the mortgage you will need - and also to live - you will almost certainly not get a mortgage of that size.

Whatever the trade figures, you will need to find a cash stake to get started. If they present a convincing case as to their suitability and plans, someone with limited experience of pub management or taking over an under-performing pub might get up to 75 per cent of the bricks and mortar value of the as a commercial loan. With more experience a much bigger loan - up to 70 per cent of the pub's value as a going concern, including a valuation of goodwill, fixtures and fittings, stock and equipment) could be possible.

Ultimately any loan will be based on a business valuation by independent valuers taking into account current trade and - crucially - the prospective purchaser's business plan, experience, trading projections and development opportunities.

Whatever the valuation, the landlord-to-be will have to make up the difference between the loan and the purchase price from personal money or another source of finance, like a brewery loan.

A brewery loan will come with its own obligations and - whatever the structure of your business - you will be personally liable. It may also require you to buy and sell a certain amount of the brewer's beer at an agreed price. This would limit your ability to negotiate stock prices and could, in time, restrict your flexibility to develop your business as you wish.

Nevertheless, if things go well you could find yourself in a position to re-finance elsewhere later, consolidating a range of loans into one package and negotiating a better deal, too, on the basis of your now proven experience.

When calculating initial funds you should anticipate a build-up period before your financial projections for the business are achieved - particularly if you are investing a substantial sum to put your own plans into effect.

During this time you will need some contingency funds to live on. This note of caution should be built into all your preparation. Plan for the bad times as well as the good. Know your bottom line for survival when, as is inevitable, the market hits a downturn and business failures increase.

A strong track record in the trade will inevitably mean you are more likely to secure better start-up finance. "Do what you know" is one of the basic rules for a business start-up and, statistically, experience increases the chances of success.

Which brings us back to the figures. Look at them with a cool, clear head. In a cash business things are not always as they seem. Gross profit figures can be revealing. They should be between 45 and 55 percent of turnover. If they are only, say, 25 per cent - and the books show the current owner is buying and selling stock at the going rate - the pub must be leaking cash!

Turnover can be investigated by obtaining copies of accounts, VAT returns and a certificate of turnover, but also by a close questioning of the vendor. One new landlord discovered too late that a large percentage of revenue came from out-of-hours (ie illegal) drinking.

When he called time on the practice not only did he lose the out-of-hours turnover but, as the pub's "best" customers were involved, he also lost their custom at other times. The pub failed.

Look behind the scenes, too, even in the cellar. Don't buy stock that you won't be able to sell. If there's a cellar full of gin, are there enough customers for it?

Planning ahead, a careful assessment of the type of pub and the marketplace will help you decide how it can be developed successfully. For instance, some pubs are basically "boozers". Most - nine out of 10 - serve food. In fact, pubs serve more than 3.5 million meals per day. Independents can perform well against the standardised fare of many big chains and you may fancy a slice - or a bigger slice - of this £6billion annual market.

Planning is the essential ingredient of success. Some simple market research will provide a useful benchmark, telling you if there are other comparable outlets locally and whether this will work for or against you.

If you decide to develop the catering side, once again finance will be required. Any financing plan will need to recognise that funding for building and re-equipping for catering purposes will be withheld from the initial mortgage advance until after completion of the works. So you will probably require bridging facilities - or an arrangement with a brewery or builder. Indeed, this goes for any major refurbishment needed to fulfil your plans for the pub.

Regardless of your own experience, you may also need to invest in higher calibre staff and in training them, too - another significant overhead.

If all this is sobering, there is another side to independent pub ownership, as the last 10 years have proved. Many first-time buyers have grown pub businesses successfully, going on to expand their premises, activities and even open multiple outlets.

Running your own pub can be everything you dreamed. Take the case of the tenant who, fed up with rent increases based on the success he had brought to the pub, bought a run-down unit making £23,000 profit on a turnover of £100,000. He increased turnover and doubled his profit. Now he's planning to do the same with his second purchase. Ability, desire and experience have all been vital to his success. If you have those qualities you could be well-placed to persuade a commercial lender to back your plans.

Related topics: Property law

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