Budgeting for all the add-ons
Be alert to the hidden costs when buying a pub lease, says Simon Stracey, commercial director at Marlborough Leisure
Everyone knows that when you buy a house, you need to budget for a number of things over and above the advertised purchase price, such as stamp duty, legal costs and removal expenses. Much the same principle applies to buying a lease - only with much bigger numbers.
1 Purchase price
Unless you are can haggle this down, you need to provide sufficient funds to cover, typically, 10% of the sale price at exchange of contracts and the balancing 90% on the day that you complete. Where the business is not sold as a going concern (either a closed venue or, occasionally, a disposal by a large group operator), you also need to budget for VAT, which will be added to the purchase price.
2 Stamp duty
The current threshold for paying stamp
duty on a commercial transaction is £150,000, so this will not be a consideration in
many cases.
Thereafter, the same costs apply as in residential transactions, so you need to budget another 1% of the purchase price for transactions up to £250,000, 3% up to £500,000 and 4% thereafter.
One extra consideration applies where you are obtaining the grant of a new lease. In these circumstances, Stamp Duty Land Tax (SDLT) is levied upon the rent payable throughout the term of the lease.
The formula used to calculate your SDLT
liability is quite complicated but, for example, a new 20-year lease at a rent of £50,000 plus VAT would incur a stamp duty cost of £6,725. All this must be factored in.
3 Rent
Most landlords will expect you to lodge a deposit in respect of the rent. The major pubcos typically ask for a quarter of the annual rental figure, but be warned - some private landlords will often seek a more substantial amount. I have seen some cases where an entire year's rent has been demanded up front.
In addition, you will usually need to budget for payment of one month's rent in advance. Again, this condition tends to vary from lease to lease and may be as little as two weeks
or can be as much as three months.
4 SAV
This is a term that you will usually see alongside the advertised purchase price within an agent's sales particulars.
It stands for "stock at valuation" and usually comprises all the liquor and food stock on the premises on the day you complete your purchase.
Glassware and cleaning materials are also usually included within this calculation.
You should check with the vendor to determine what figure they think is realistic for the particular business you are buying and, if necessary, ask to apply an upper limit of stock that you will buy.
It is sensible to employ an independent stocktaker to value the stock on the day, thereby ensuring that you pay a fair price and only purchase saleable goods.
5 Legal and professional fees
An innocuous category that can include a surprisingly long list of beneficiaries. Top of the list is, of course, your solicitor, who will handle the assignment of the business into your name. Your solicitor may also address licensing matters and/or act on behalf of the bank, if you are borrowing money.
I strongly recommend that you employ an experienced trade-specialist lawyer to do this job and ask for the fee to be fixed in advance. In addition to your solicitor's fee, you will be responsible for all disbursements, such as local authority searches.
Other legal and professional costs will include a structural survey (highly recommended, as nowadays most leases impart full repairing responsibility upon the lessee), and an independent valuation of the business. Unlike the situation in the residential market, these are two separate disciplines.
6 Training
Many of the larger pubcos require you to complete a training course before they will allow the lease to be assigned to you. The cost varies, but can be as much as £995.
7 VAT
Most of the costs that you incur will be subject to VAT at 17.5%. You can recover this expense in due course, but you must allow for the total outlay in the first instance.
8 Working capital
As long as you have budgeted properly for all ingoing expenses, there shouldn't be any need for a large cash reserve, although it is sensible to allow for some sort of contingency, particularly if you expect to complete your purchase at a quiet time of year.
Finally, it is wise to complete a detailed cash flow forecast in order to assess when (and how significant) your peaks and troughs will be.
Costs involved in BUYING A pub LEASE
This example pub has sales of £380,000 a year and the lease is on the market for a £150,000 premium. The costs below show that, actually, to purchase the lease, you would need an extra £32,287.
Lease premium: £150,000
Stamp duty: £0
SAV: £5,000
Rent bond: £12,500
Advance rent: £4,167
Stocktaker's fees: £275
Legal costs: £3,000
Company formation (not obligatory): £250
Bank fees: £1,000
Structural survey: £1,250
Valuation: £1,250
Training fees: £995
Working capital/contingency: £1,000
VAT: £1,600
Total costs: £182,287
