Banking on the future

Alex Rowland is thinking of buying a leasehold pub, but has concerns about the rent and raising additional finance

My wife and I are looking into buying our own pub. We have found one we really like, in an area we know well, and believe there is considerable scope for growth of turnover.

On the market for £120,000, the pub is supply-tied with a pubco and the lease has 20 years remaining on it. The current turnover is £315,000 and the annual rent £44,000. Trade is currently 65% wet to 35% dry.

In terms of its layout, the pub has a bar with space for around 40 covers and a 100-cover restaurant, part of which can be sectioned off for use as private dining or a function room. There is also a beer garden outside.

Although I have worked in pubs before, my background has been more in the motor trade as a salesman. My wife has experience as a travel agent.

We are looking at this venture as a new beginning and have put together a business plan to increase the food offering, with a new menu based on using fresh, local produce.

We also want to start hosting events and charity fun days to help boost income. We think there is a niche in the market for a food offering that falls between standard pub grub and the high-class restaurants in the town.

We really believe that a good-quality offer at affordable prices will prove a real winner. The plan is to become a venue where local businesses can host meetings and conferences. By increasing the wine offer, we also hope to attract the ladies-who-lunch crowd.

I have a clean credit history and we can raise a £60,000 deposit. My concerns are:

1. Lease agreements have had a bad press. Is it a good idea to go ahead with this type of purchase?

2. I feel the starting rent may be a little high - is there a way to argue it down from the off?

3. Will they penalise me for upping turnover at the pub?

4. Would I be better to hold out and wait for a freehold pub?

5. Will it even be possible to arrange finance to buy this pub?

6. How much extra do I need to borrow for costs, and how much could I borrow for improvements?

Chris Heard managing director, Marlborough Leisure

You seem to have identified a business with real potential. The scale of the dining facilities indicates to me that the food sales are way under their potential - so you would appear to be on the right track with your business idea.

I have picked out some key points in isolation:

1. In simple terms, a beer tie (most tied leases only restrict beer sales) means that the lessee pays around 20% more (after allowing for the benefit of the various volume schemes operated by the pubco/brewery) for beer compared to a non-tied operator. On the other hand, the tied lease system means that purchasers such as yourselves, with limited capital, have the opportunity of trading a very busy pub.

2. I agree that the rent is high when looked at in ratio to the sales being generated, but my guess is that it is the sales that are wrong, not the rent. In other words, if a further 25% or so of sales can be generated by relaunching the food offering, the rent will look reasonable. Consequently, the idea would be to attack the purchase price as pubco/brewery landlords do not reduce rents on leases already in existence.

4. Unfortunately, in your current financial situation, you do not have enough capital to consider a freehold project.

5. Broadly speaking, the purchase looks achievable, but in order to give an exact answer that also covered your additional points, I would need a full picture of your asset and liability profile, plus details of any additional expenditure in connection with the relaunch of the food business.

It is absolutely essential that the business is fully

capitalised from day one, otherwise you run the risk of not having enough capital to test your business idea.

Paul Thompson partner, Acorn Commercial Finance

l Why is the pub not already making its potential turnover?

l The pub seems a little overpriced; I'd like to see some accounts for the vendor.

l With the lack of security within a lease, lenders would expect more experience, perhaps "shadowing" a trade friend.

l Alex states he can "raise" £60,000. If this is being borrowed against the house, I'd need a full asset and liability statement to assess the financial situation.

With a lease, you should get a profitable pub for not too great an outlay and support from the pub company. But in some cases, the rent and the beer tie make it difficult; the support is only as good as your area manager; and people are trying to sell at the best price they can. If you fail in a lease, you may still be liable for the rent.

Freehold is usually seen as a preferable route, but these are rare and the low deposit would make it very hard indeed.

In view of the lack of experience, I would only be comfortable looking at a pub with existing trade, and accounts to prove it. This would limit you to a purchase price in the region of £275,000 and it is rare to find a pub at that level. The alternative would be to purchase without accounts, a closed unit. Although this would improve your buying power (to approximately £400,000) it would mean greater risk (no existing trade) and a far higher interest rate.

If you have £60,000, you need to borrow £90,000 to get up to £120,000. Additional costs will be around £30,000 (legal fees, lending fees, stock, etc). The total requirement would thus be £150,000. To do this I would estimate that you would need significant security, perhaps up to £90,000.

Graham Allman managing director, GA-Select

Many people enter the trade without direct experience, but with transferable skills from other careers, such as those of Alex and his wife. Training companies can provide the relevant licence and necessary business training, along with a mentor support function to see you through the first year of trading.

Lease agreements are fine and an excellent entry into the trade, but make sure you take professional advice to fully understand your obligations. I have many clients who have built successful leased pub businesses with profits in excess of £100,000 per annum.

With the amount of capital Alex has available, I would recommend not going down the freehold route. Best to have a plan, take the first step on the ladder, build the business up, sell on at a profit and then go for the freehold. This may take more than one "churn" but at least the journey has begun.

The rent seems challenging at 14% for a tied pub, but not out of the way; is the pub over-rented or under-trading for the rent charged? Your business plan will determine the answer to this question. It is unlikely that the pubco will reduce the rent, but there is no harm in asking and they may give you a short-term reduction or holiday.

You should not be penalised for increasing turnover unless you are on a turnover rent. Remember, you don't have to show the pubco your books unless it states so in the lease. Please also note that it's the profits that matter and not the sales. You would expect to pay somewhere between 20% and 40% of net turnover for a leased pub or one-and-a-half to two-and-a-half times net profits.

Alex Rowland's response

I thank the experts for their advice. There really is more to buying a pub than just having the dream and jumping in head first.

It shows just how important it is to take proper professional advice. Having done more research, I now better understand what it takes and the risks involved.

I have taken up Paul Thompson's idea of gaining some more experience and have arranged a few shifts at a pub. I think we know what to expect in terms of the long hours and hard graft and we are prepared to put that in.

Also, despite our lack of experience I think we have many transferable skills. Both our trades are about selling and giving good customer service. I believe we have a good business plan and if