Tenancies & Leases Guide: Finance

Specialist licensed trade accounts can help make the difference between success and failure for any tenant or lessee - which is an attractive proposition for the pub company too, of course.

The most common cause of failure among pub tenants is the lack of financial controls, especially during the first year of the business. Pubs are a cash business, and it's tempting to spend the money rather than save it for a boring old VAT bill. But it's when licensees suddenly find themselves in debt that the rent and the beer bill take their toll.

Pubcos have been aware of the problem for a long time but are conscious that their licensees are independent business people who don't want the landlord looking over their shoulder into the till. Nevertheless, specialist licensed trade accountants are increasingly being called in to keep the books straight.

Milestone has worked for Scottish & Newcastle Pub Enterprises for six years as the nominated accountant for the group's "open-book" franchise agreements. More recently it has been hired by Greene King Pub Partners to work with licensees on the brewer's new probationary agreement which insists that tenants use the firm to do the books and offer advice during their first year in the pub.

Steve Carter, managing director of Milestone, claims business failure among licensees is "reduced dramatically" with an accountant on the case.

"More companies are seeing the need to have an impact on their tenants' businesses through using an accountant, especially in the crucial first year," he said. "It costs them between £12,000 and £15,000 to change a tenant and we can give them an early warning when things are going wrong - it can even mean the company reduces the rent!"

Steve anticipates a new wave of franchise-style agreements will come in as pubcos need to demonstrate support for their licensees. Bedford brewer Charles Wells is already looking at a scheme.

"It recognises that it takes a while to establish a business, there is a lot of expense in the first year and stocktakers and accountants can help keep the licensee's head above the water and give them independent advice," Steve said.

Another firm offering an accountancy service to tenants is GRS Inns, the managed house subsidiary of Punch Taverns, which launched its Pub Accountant scheme last year. It is currently serving 120 licensees and is looking to build on that considerably (see below).

GRS charges licensees £35 a week for weekly profit and loss accounts, a break-even analysis and advice, and has also been trouble-shooting Punch pubs with a problem.

Managing director Howard Thornton is an accountant by trade and is astonished at the lack of financial controls in some pubs.

"We have been called into houses and found that they're actually making a profit - the problem is there are no financial controls," he said. "The lessee thinks they have been over-rented but in the majority of cases they have gone over the top with their spending, they've bought new cars but not paid their VAT. Nine out of 10 times they've overspent. It's so short-sighted."

Licensees might worry about the Big Brother impact of bringing in an accountant, especially one that's ultimately owned by Punch. But GRS operates independently according to strict professional ethics.

"When we go in we work as accountants," said Howard. "We don't divulge accounts to anyone."

Ultimately, it is down to the licensee's own discipline to keep themselves out of financial trouble.

"You've got to train yourself to do the basics, especially as margins become more tight," said Howard. "We go through every line on every profit and loss account every month. Things like that are very important. You have got to do the work every week - and it only takes half an hour."

Hare & Hounds races into the 21st century​

A Nottinghamshire pub is piloting new technology that aims to bring managed pub systems to tenancies and leases.

The Hare & Hounds at Warsop, run by brothers Andy and Dave Turley for three years, re-opened at the end of June after a £500,000 refurbishment that closed the pub for 10 weeks - and brought it into the 21st century.

As well as a modern design commissioned by landlord Hardys & Hansons the work has included installation of a complete business system that links touchscreen EPoS tills, back office computer, a cash machine and mobile top-up in the bar and cost-saving state-of-the-art telephones.

The system, called Innovation, is the brainchild of former Spirit Group IT director John Harrison and brings together Zonal EPoS and Moneybox ATMs among others to help tenants make better use of techologies.

If successful, the six-month trial at the Hare & Hounds could see more tenancies getting on board.

Andy Turley is already in no doubt about its value. "It's fantastic," he said. "For one thing it does away with the need to keep all those till rolls and the cash machine is working well for us because the machines in the town are always running out of money."

Punch keen to put its weight behind GRS​

GRS is the cuckoo in the tenanted and leased sector nest. With 85 pubs under management it is one of the country's bigger multiple operators, leasing houses from all the major pubcos. Yet it is also owned by one of them.

The firm became part of Punch when the latter bought the Pubmaster estate last year. Pubmaster had taken over GRS in 2000 with an eye to its temporary pub management service. But for the new team in charge at GRS, led by former finance director Howard Thornton (pictured)​, the focus under Punch is on the core, permanent estate.

"Punch has only really noticed us in the last six months," confessed Howard. "When he took us over, I don't think Punch chief Giles Thorley even knew we had 80 or 90 tenancies. But now we feel very involved and the future looks very positive.

"Punch is keen to build GRS. They want us to double our estate and we have a target of taking on 30 new tenancies and leases over the next year."

Half of those could come from Punch, the rest from other leased estates. Four or five Punch pubs in Scotland are under GRS temporary management at the moment and it could form a model for the future in which GRS gets a chance to turn a pub around and then first refusal on the permanent tenancy.

"We can cherry-pick, and if it isn't right for us, Punch can rent it to somebody else," explained Howard.

He believes ex-managed houses with high turnovers of £7,000 to £8,000 a week fit best with GRS's highly developed systems and ability to absorb the costs and he is already looking at possible spin-offs from the Laurel community estate sale.

It will mean a qualitative, as well as a quantitative, change at the company, which is based in Attleborough, Norfolk, but already has an estate that stretches from Scotland to the South Coast.

"Until now we've been successful because we've kept small, kept our overheads down," said Howard. "We're 10 years old next February and we've never borrowed money, never had an overdraft. We've only had a proper office for the last 18 months and there's only me now at director level - that's a pretty flat structure!"

GRS will take on another operations person, though, and is recruiting a catering consultant in a bid to introduce food at the majority of its wet-led pubs.

It has also reorganised its eight-strong network of area managers so that, as much as possible, an individual works with either the core estate or the fluctuating number of temporary pubs but not both at the same time.

"It's in the temporaries that we have most of the trouble and that has meant that at times we have tended to ignore the core part of our busi