Protecting your assets

Running a pub is difficult enough without insurance issues and financial conundrums weighing you down. Take a load off with some help from the experts, says Graham Ridout

Buying a pub is the biggest investment that a licensee will ever make. Therefore, getting the right deal when raising finance and taking out the correct insurance cover are vital if the business is to thrive.

There is no better way to get off to a good start in business than seeking out specialist advice before taking out a loan, so says Paul Thompson, a partner with York-based Acorn Commercial Finance.

He says using a broker is a better bet for getting a loan than approaching the big high-street banks. "The Big Five rely on business that comes through the door," he says. "They don't have to be bullish. Instead, we use lenders that are specialists in the sector, such as Abbey, Alliance & Leicester, and CHL."

He contends that the cash-flow of the prospective business is more important than the interest rate on the loan.

"Businesses don't go bankrupt because of high interest rates, but through insufficient cash-flow. The main thing to consider when repaying the loan is the cash-flow you

expect from the business - especially at the beginning."

Calculate for contingencies

Thompson reckons a typical loan nowadays

is around £650,000. If repaid over a 30-year period, with an interest rate of 7.5% (1.75% above the base rate), this equates to a monthly figure of £4,544.

He calculates that the monthly repayment would be £6,025, if repaid over a 15-year term. However, he cautions against going for too short a loan period. "The difference between a 15-year and 30-year period is just shy of £1,500 per month.

"People need all the extra money they can get when starting a business and need to put something aside in, say, a deposit account for contingencies like having to replace the dishwasher."

He says that putting money into a "rainy-day pot" will also impress the lenders if business projections don't live up to expectations and the loan has to be refinanced.

Another factor that leads to many business failures, says Thompson, is under-capitalisation. "We look at four factors when assessing a loan - the experience of the people running the business; their input, either from capital or property; the security of the business they are buying; and the ability to repay the loan."

Ironically, he says that it is easier to get a

loan for a £10m hotel than one for a £20,000 leasehold. "If it's a £20,000 leasehold, then generally it isn't making any money, and the people who are attracted to it either don't know what they are doing or have no idea what they're letting themselves in for."

Dave Cartwright of Cartwright Commercial Finance agrees that many people enter the trade without taking professional advice.

He comments: "Last week, I had a couple who wanted to buy a pub that had a turn-over of only £120,000 per annum and a net profit of £10,000, where the leasehold price was £50,000. Once I explained the accounts, thankfully, they pulled out."

He continues: "We are giving much more advice to people before they buy than

we've ever done before. It's important for

people to get a professional to go through

the audited accounts and insist on seeing the VAT receipts before buying. It only takes a couple of hours."

Cartwright says this could avoid a case he's heard about where the couple quit after only five weeks at a pub. "Too many people expect instant success when taking over a pub, but you have got to give it six months to a year to turn things around."

Cartwright has noticed "the big banks are getting tighter" over loans. He explains: "Most used to give 75% of the loan-to-value ratio, now, they have pulled that back to 70%."

By using other banks, Cartwright is able to get the ratio up to 85%. He adds: "A lot

more people are looking to re-finance their loans because they've had major expenditures like building smoking shelters. But re-financing nowadays is a lot harder, especially on leaseholds."

Cautious current climate

Chris Heard, managing director of leasehold lending specialist Marlborough Leisure, agrees. He says: "There is no doubt that

banks are looking at all borrowing propositions with a higher degree of scrutiny. This means that the type of specialist professional assistance we offer is likely to be more necessary than before.

"My guess is that the general climate within the banking sector for at least 18 months is best categorised as "extremely cautious" and this, in turn, is likely to exert downward pressure on pub valuations, both in the resale market and at rent reviews."

A final word of caution comes from Acorn partner Paul Thompson. He says: "There have been, and continue to be, unscrupulous brokers that take advantage of licensees who are not sophisticated business people when it comes to complex financial matters."

To avoid this pitfall, Thompson says: "Use a firm that is a member of the National Association of Commercial Finance Brokers.

"All members have to have professional indemnity insurance and abide by a code of practice."

Insurance tips

Before taking out insurance, licensees should consider these top tips:

l Don't necessarily take the cheapest premium as the policy is likely to exclude some of the items that you might need insuring

l Always read the small print to see what you are covered for and, perhaps more importantly, what isn't covered

l Choose a broker or an insurer who specialises in the licensed trade

l When the insurance is due for renewal, make sure that items and fittings that have been added over the past year are included, such as plasma screens, smoking shelters, or new kitchen equipment

l Go for a "new for old" policy as this will replace damaged items with new

l Make sure accidental damage is included

l Look carefully at the terms and

conditions covering consequential losses to ensure the business income is protected should disasters like floods or fires strike the pub.

Insurance matters

Insurance is one business expense that many people skimp

on when starting out in the trade. "When people first go into a pub, they might have paid £7,000 for the furniture and fittings and insure just for that amount, yet the true replacement figure could be £30,000. Also, some people don't have

any insurance at all."

These are the startling comments of Katrina Curd, office manager of Maidstone-based Terry Osborne Insurance.

She continues: "Pubs aren't having a good time at present and a lot of licensees are trying to save money."

While licensees might be tempted by lower premiums, many have found to their cost that it was a false economy when they have had to make a claim. Curd explains: "If you are under-insured, you will only get a percentage of the claim. We always ask people to check that the sum insured is adequate and we recommend a minimum of £30,000 for furniture and fittings."

She says there is also a tendency among landlords to "hold back information", such as not disclosing they have a late licence, host entertainment events, or employ door supervisors. These omissions would mean the venue is uninsured if an incident took place.