If you think a quick tidy up and a bit of polish on the horse brasses will secure a better pub valuation, you might be in for a shock. Making the place look nice certainly won’t hurt but the reality is that how your pub looks aesthetically is just the tip of the iceberg when it comes to valuation and selling up.
Agents are looking for as full and clear a picture of your business as possible. Recent accounts and trading information is paramount and having orderly accounts that agents can see could add thousands of pounds to your pub’s price tag.
Savills head of licensed leisure Kevin Marsh says agents will start with the basic questions: “Is it freehold or is it leasehold? That is always where we’re going to begin because it will clearly make a difference. If it’s freehold, we will want to know if there are there any covenants attached to the title? If it’s leasehold, what are the lease terms?
“Typically, a leasehold interest is worth more the longer there is left unexpired on the lease. A freehold is likely to be worth more if there are no covenants attached to the title because it gives flexibility in the future for potentially its redevelopment.”
Valued as a going concern
Guy Simmonds managing director Stephen Taylor says: “Unless closed, or with consent for alternative use, pubs are obviously a business and should be valued as a going concern. In most instances, therefore, the valuation will directly correlate to turnover and verified re-constituted net profits achieved.
“A leasehold going concern valuation will include the business, together with the trade fixtures and fittings. It will not include the variable stock, which is valued separately and paid for by the purchaser upon completion.
“A freehold entirety going concern valuation will also obviously include the freehold element, in addition to the goodwill, and trade fixtures and fittings.
“To arrive at a ‘true and fair’ reconstituted net profit, we talk in depth to the business operator about their personal business circumstances, method of operating, staffing levels, etc.”
Factors that publicans influence
The most obvious factors that publicans can influence in a valuation are the state of their business – that means having your house in order in every sense.
Fleurets divisional director Ed Sandall says: “I would then suggest that any publican looks at capital expenditure and presentation of the property.
“If you know you’re coming up to a refinancing deadline in say 12 months’ time and you’ve got some capital expenditure that you believe will be beneficial to the business or just dealing with that nagging repair that you always put off, the last thing you want to is to have somebody assess a cost that may be fixing it.
“Just like if you were selling your house and you had a badly decorated wall where the plaster had gone, it’s not particularly appealing. Therefore, someone might say the adjustment that somebody would have to make to correct it will cost more than it would if you commissioned the work yourself.”
Sandall adds: “A bit like selling your house, make sure that everything presents well because somebody has to buy into the fact that there isn’t a lot of capital expenditure required on day one.
Savills’ Marsh says that the condition of the pub and its accounts are the most basic, yet important, factor in a valuation that the publican can have an influence on.
He explains: “The most obvious factor is your ability to control the condition of the pub and the quality of accounts.
“If you are able to present people with a very clear picture of what it is that they’re buying then clearly that’s a good thing and maximises value. If there is any doubt as to what somebody is buying then that detrimentally effects value.”
Having information to hand
Marsh adds: “In my experience, you get a feeling about a property when you walk in and you ask for information and the publican has got it to hand. For example, staff contracts, a photocopy of the premises licence, a copy of the PAT testing, a copy of the asbestos certificate and report – the good operators have these things immediately to hand.
“When you see all of this information, you get to know that the business is well run and that gives a buyer confidence about what they’re buying. If things seem haphazard then almost always the operation of the business is hap-hazard as well.”
Fleurets’ Sandall continues: “A valuation will be based on quality, detailed accounts. Usually three years if possible.
“Aside to just the physical documents, owned and occupied pubs often have a number of non-recurring or exceptional items within the profit and loss. These could be owner’s telephones, directors’ drawings that might appear in the wage cost line, it’s about having a prepared and transparent understanding of your profit and loss account.
“If you’re a leaseholder, obviously a copy of the lease and any supporting documents, such as rent review memorandum, would prove what your departing rent is.”
He says rates assessment are also key. “Have you appealed your rates and if so, where are you up to in the appeals process? So, effectively, if there is an adjustment to the profit and loss, the valuer can see the documents,” says Sandall
“The same would be true for any adjustments to utilities. If the past three years’ utilities bill haven’t been negotiated and you’ve just secured a new contract that might reduce outgoings, have a copy of the most recent bill so you can prove that adjustment is warranted because any bank would want to know that.”
Marsh concludes that the process of getting both aesthetics and documentation in order before a valuation should be a familiar one.
“It’s a little bit analogous to going and buying a car,” he says. “If it’s got a service history and looks good when you go and check the alloy wheels and the bodywork, you’ll probably pay more than something that has dubious mileage, no service history, and has been banged about a bit.
“It’s kind of obvious I suppose from that perspective. You’re looking to try to take away uncertainty from a buyer’s mind.”
Dealing with add backs
Taylor says that after agents have examined the verified accounts the next process is to ‘add back’ various accepted possible items. “This may include ‘extraordinary’ expenditure for the last year, such as a replacement roof or toilets, etc. We would also ‘add back’ mortgage interest if freehold, and depreciation in both freehold and leasehold instances.
“Obviously, the rent cannot be added back if the business is a leasehold valuation.
“This is all standard and good practice for valuing businesses, and accepted by the lenders, who will send their own valuer who will be working to a similar criteria.”
Taylor warns that this is the point where the site’s asking price could be exaggerated. “What is not acceptable practice is when an agent creates ridiculous ‘add backs’ to create an inflated and unobtainable asking price, presumably to gain instructions [from the seller].
“In these scenarios, such an agent is clearly acting against the best interests of the vendor client, and the business will simply stagnate in the marketplace, becoming unsaleable. Even if potential interest is generated, the purchasers and lenders valuers will ‘down value’ by such a huge margin, that all credibility and confidence is immediately lost, and consequently
the interest and potential sale usually and swiftly evaporates.”
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