Buying into the trade

Many licensees dream of buying their own pub but the problem is finance. Michelle Perrett looks at ways of raising the cash to buy your own freehold.

Despite spiralling property prices many licensees still dream of owning their own pub.

According to The Publican Market Report 2003, 30 per cent of you are looking to buy a pub over the next year.

And almost two-thirds of you still want to own your own freehold property, while only 26 per cent want to take on a tenancy or a lease.

But whatever type of pub you want to buy, you still need to finance it. And buying a pub property, whatever the deal, does not come cheap.

According to licensed property agent Fleurets, buying a leasehold property will cost you an average of £70,000, while an average freehold pub in the UK last year cost around £390,000.

Getting finance for a freehold property is always going to be easier due to the fact that you have bricks and mortar as security. Increasingly, lenders are moving away from offering finance for leases as they simply have no collateral if the business fails.

Paul Thompson, partner in Acorn Commercial, one of the largest financial independent brokers, which runs the website Publoans.com, said: "It is getting harder to do deals for leaseholds than ever before - but it is not impossible.

"If you have enough money to buy a lease you can probably afford to get a freehouse, although you will probably have to move out of London."

The Abbey National says it is receiving large numbers of applications for mortgages but is unwilling to get involved in the majority of leased pub properties.

Andrew Turzynski, senior business manager at the Abbey National, said: "If you have a short-term lease the value is not in the lease itself but in the freehold.

"But the market is still strong for freeholds as there are lots of people who want to run their own businesses.

"If you had someone with a house with a lot of equity in it then we could be happy to do it."

Licensees with good accounts, a strong credit history and trade experience who are buying a freehold will always be able to get the best mortgage rates.

"If we have got a good pub and an experienced applicant we can offer 75 per cent of the going concern," said Mr Turzynski.

"For someone who is not so experienced who is buying a good pub we can put up 75 per cent of the bricks and mortar."

But licensees looking to finance their next pub purchase have a wider range of deals on offer than ever before, from a range of lenders and for a variety of circumstances.

For example, a licensee who is in the process of selling their house to buy a pub may need some extra finance during the transition period.

Mr Thompson said: "If a licensee needs a quick deal we can get bridging finance for 75 per cent of the market value. It is expensive but if you are looking for short-term money it's ideal.

"Then they have got three months to get it sorted."

As a broker, Acorn Commercial does exclusive deals with lenders including brewers and banks. Mr Thompson said: "Many licensees are told they can't get a pub but sometimes it is as straightforward as simply talking to the right people."

How to: Raise the finance to buy a freehold​

• How much can I borrow?​

Typically 70 per cent to 75 per cent of whichever is lower between valuation and purchase price.

How will the business be valued?​

Property only (often termed "bricks and mortar") or the whole business/property as a going concern, depending upon the lender's policy.

Can I borrow against a business lease?​

This can be difficult as many lenders, including the Abbey, will only consider long leasehold (eg 99 years with nominal or peppercorn rent) or freehold property.

Do I have to have the balance of purchase price?​

• Lenders prefer you to put in as much cash as possible, but may allow capital raising against another property such as your home.

Vendor and brewery loans may be permitted under certain circumstances.

Does it matter where the property is located?​

You may have more difficulty raising finance, especially at higher levels of loan to value, where the property/business could be adversely affected by factors such as rural location, competition or poor local market conditions.

Do I need experience?​

• This is not essential as some lenders have schemes to accommodate different levels of experience

However, proven experience of owning or managing a
similar business may give access to higher levels of borrowing.

Do I always need to prove income?​

• Yes, if looking for the maximum borrowings against the full business valuation, ie based on two years good accounts.

No, if the loan is restricted to a percentage of property value only.

What costs will I typically face?​

• Lender's arrangement fee
• Lender's valuation and legal fees (at your expense)
• Your own solicitor's costs
• Stamp duty
• Stock and working capital
• Repair, redecoration, new equipment, etc if the pub needs it.

Where will I find sources of finance?​

Specialist commercial lenders.

What are my chances of borrowing?​

Lenders have their likes and dislikes, but most companies will look at each deal on its individual merits. A balance will be struck between financial strength, location, experience and the amount of cash available.

By Mark Hiscox, underwriting manager, Abbey National business.​

Starting out with Avebury Taverns​

Avebury Taverns has launched a lease called "Starters Dream" which it hopes will encourage more new licensees into the market.

The new deal, which offers a flexible agreement, is aimed at encouraging newcomers and budding entrepreneurs into the pub sector.

The flexible package is aimed at applicants who have restricted funding but the flair to run a successful business. The plan is that it will help remove the initial financial barriers that discourage people from entering the trade.

Avebury says it will consider each application and opportunity on its individual merits and, in specific circumstances, will tailor agreements to suit. Avebury will also provide assistance throughout the initial start-up period, before the licensee agrees a new and substantive agreement.

Yaser Martini, director of agent Fleurets, which is handling the sales, said: "It will give young people an opportunity as it can take people years to build up enough finance for a pub."

Avebury has also launched a new 25-year lease, which is assignable after two years. Licensees will be able to enter the business for as little as £25,000 per annum and discounts of up to £90 a barrel are available.

An open day for the 121 leases it has available will be held at the Leicester Stage Hotel, 299 Leicester Road, Wigston Fields, Leicester, LE18 1JW on November 6. For more information visit: www.fleurets.com/aveburypubs.