How to judge a good investment opportunity for your pub

By Michelle Perrett

- Last updated on GMT

Speculate to accumulate: hints and tips for achieving a good return on investment
Speculate to accumulate: hints and tips for achieving a good return on investment
You have to spend money to make money, so the saying goes, but it is always a bit of a gamble. Experts reveal what pubs can do to improve the odds of getting a good return on investment

Making that important investment in a pub business can seem daunting, especially as deciding which elements of the business need investment and how much to spend is a big commitment. 

It does not take a rocket scientist to explain that any investment needs to have a reason and a return. There is no point ploughing money into an area of the pub if there is no chance of it paying for itself. Whether the pub needs value added to the property, investment in staff training or even entertainment – one rule applies – there has to be a return on the investment. 

Licensed trade accountant David Jones says there is “one over-arching golden rule” that underpins everything. 

“You need to ensure that whatever capital amount you are spending you are going to get that back in extra profit in the first two years,” he says. 

“If you are going to spend £50,000 on something, you need to see £25,000 a year coming back in profit. Once you have invested, you need continuing profit after that.” 

For example, if a licensee is keen to invest in regular entertainment whether in kit or in hiring a band to drive business on a quiet night it has to be profitable. 

“Unless you are going to take three times extra in turnover, with the cost of the entertainment, you are losing money,” says Jones. “Turnover includes VAT and the cost of things such as beer. Putting on entertainment costs you money in terms of extra staffing, PR and advertising.”

He admits that he has had to tell clients in the past that certain plans are just not financially viable.

“Sometimes when people do have the money and are profitable, the natural reaction is to start reinvesting,” he argues. 

Paul Thompson owner of Acorn Finance agrees that every investment has to make financial sense. 

“You are either doing something that is going to save you money or doing something that is going to make you money,” he says. “They are the only two things you should be doing and anything else is a waste of time.”

He argues that the pub operator needs to understand why they are making the investment and conduct a cost-benefit analysis. 

“If you are thinking about adding a conservatory onto the restaurant. Ask yourself, is my restaurant full already? If I had another 20 covers, am I going to be making use of them?” he advises. 

It pays to shop around

Borrowing money is rarely cheap, but the difference between lending rates can be vast. Here is a snapshot of business loan rates for between £1,000 and £200,000 in September 2018 available on a loan comparison website:

 NatWest​ – Borrow £1,000 to £50,000 – 10.49% representative APR

 Yorkshire Bank​ – Borrow £10,000 to £150,000 – 12.8% representative APR

 
Ultimate Finance loan​ – Borrow £5,000 to £100,000 – 36.8% representative APR

 
Cube Funder​ – Borrow £5,000 to £100,000 – 51.45% representative APR

NB all APRs stated are guides, subject to individual circumstances and change

Squandering money

Ramzi Qattan director at property agent Christie & Co says it is quite easy to squander money and spend it on things that are not going to generate a capital return. 

“You have to think about what you are going to spend in order to achieve,” says Qattan.

“The bank will want to understand how that will affect your cash flow on a monthly basis and how that will affect the capital value of your business.”

He argues it is easy to spend a significant amount of money on a pub and not see the return. 

“If you own the freehold of the building then any investment you make in the bricks and mortar is yours, and you would hope you would be enhancing capital value in some way,” he says. 

“Whereas if you are investing in a leasehold asset you have to think very carefully about what you are going to get for that. It is the landlord’s building and you must have their approval. But then you are spending money to improve someone else’s asset.” 

He also argues that whatever the investment, there has to be time for it to bed in, such as a two to three-year period. 

Investment in staff

But it is not just about investing in the property. What if the pub is considering investment in the staff on site? 

Jamie Campbell, commercial officer at CPL Online, which is owned by CGA, says it is fundamental to view training as an investment and not a cost. 

“Yes, it is an expense and so needs to be managed but, beyond that, training is fundamental to the quality of customer service that directly links to a great customer experience,” he says. 

“And the quality of that customer experience will determine if they order an extra drink or course, how frequently they return and if they will be an advocate for your business to their friends.” 

The results of the latest CGA Business Leaders Survey highlight the importance of these factors to success. Quality of experience (81%) and customer service (72%) were seen as the top two drivers influencing a consumer’s decision as to where to eat and drink out. 

The good news was that the leaders saw the need to address this, with training (68%) and engagement (60%) the top two areas for increased investment in 2018.

Once the decision is made about the type of investment the pub wants and needs to make, it’s time to consider how to fund it? While the first port of call for many is the bank, there are many other lenders that can be considered. Pulling together clear paperwork, along with a business case, is essential to selling the idea and obtaining that income.

“It does not matter who you are asking for money, they will ask: ‘Why should we lend to you?’” Thompson says. But, he is a big fan of keeping it simple. 

“Whoever you are presenting it to probably does not want to read a 100-page document that they will have to search through for the relevant information,” he says. 

“It can be one page that is really clear. If you need a business case, add pages behind that and refer to them from the front page.”

Jones argues that “basic rules apply”, whoever the lender is. He says that many banks are “less interested” in investing in the pub sector, but advises that there are more alternative sources of funding. 

“There are two things that banks want: total security and proof of repayment,” he argues. 

Gamble for any pub

Deciding on an investment can be a gamble for any pub. But the licensee needs to consider what the business needs, how much the investment should be and how the business can ensure that this is returned within the first few years.           

Want to know more about finance and investment for your pub then download the MA’s guide to ‘Become Your Own Financial Adviser’. Just visit: https://shop.william-reed.com/brands/morning-advertiser.htm

Related topics: Professional Services & Utilities

Related news