Prudence pays

Paul Davey, managing director of Davey & Co, advises careful business planning in forecasting property values

My experience as a business agent over the past 20 years has shown consistently that owners wishing to sell their businesses tend to fall into two categories: those who had a well-thought-out business plan with a clear end-state and exit strategy in mind when purchasing their business, and those who had not.

Those whose business plan was clear and who had proactively managed their business to realise their end-state in terms of market profile, turnover and profitability almost invariably achieved or exceeded their desired sale price.

Those who lacked such an organised, structured approach tended to be more reactive and, if they had an aspiration of a certain future value, they would be most likely to achieve it by accident, rather than by design.

Heightened market demand, with consequent rise in business values, coupled with a highly-supportive banking environment in recent years, has served business owners well and assisted in delivering more than satisfactory selling prices for most, improving many deficient or non-existent business plans.

However, on a cautionary note, I believe the market will harden over the year ahead and those wishing to sell would be well advised to consider the advice I offer here, which I believe will play a crucial role in determining the saleability and selling price of their pubs.

Significant difference

When looking ahead, try to think in terms of how businesses are valued. For leasehold businesses, profitability is critical. For freehold businesses, net annual turnover can be as important, or more important, than bottom-line profit.

The reason for the difference? Leasehold business buyers invest in future profitability

in operating the business, while freehold buyers can factor in potential yield on freehold investment if they intend to lease the premises. Freehold buyers can also take into account the value to them of adding your turnover to the overall volume sales of their chain or estate.

In addition they will also impose their business model to constrain your existing fixed and variable overheads within pre-determined ratios as a sales percentage, so their view on operating profit will differ from yours.

Thorough preparation

Lessees particularly need to ensure that their businesses are well-prepared in advance of going to market. Potential curve balls - such as a forthcoming rent review and the pros-

pect of an expensive dilapidations claim - need to be considered and anticipated.

Freehold sellers need to ensure they have a complete, up-to-date picture of their sales, particularly a moving annual total (MAT) analysis from their wet-trade suppliers showing volume throughput, by product, and beer and composite barrelage numbers.

Freehold sellers who believe that they possess the scope to add facilities, such as letting accommodation, or extending to provide more restaurant covers, should make enquiries at their local planning department in order to ensure that, even in the absence of formal consents, potential can be promoted to attract buyers who would otherwise not consider the business.

my top tips for all sellers

l Chase your accountant and obtain your last year-end trading accounts. Most buyers want to see at least the last three years' formal trading accounts that have been produced by your accountant.

l Keep copies of your VAT returns for the period from your last year-end to date. These will provide officially-filed numbers, promoting confidence in the integrity of your business.

l Prepare management accounts for the current year to date, showing a detailed sales analysis and a breakdown of current operating costs.

l Make sure you have copies of any planning consents, schematic drawings and notes about any exploratory enquiries you make at your local planning department relating to any potential extensions or additions to your existing facilities such as letting accommodation, additional dining facilities or potential partial re-development of the site.

l Consider how you want the sale conducted - confidentially or on the open market? Your agent will advise on the merits and risks of both approaches.

l Take advice early. Try to avoid becoming the victim of circumstances and set your own agenda for your sale.

l Lessees should check the schedule of condition when they take the lease and take advice over potential dilapidations costs. If you have a rent review coming up, take advice about the likely outcome as it will affect your value.

l Freeholders should ensure that they obtain up-to-date MAT and barrelage data from suppliers.

l Freeholders need to beware of acquisition agents - they act solely in the interests of corporate buyers, not yours.