Types of Licensed Premises
Having decided that you feel like a career change, what sort of business do you want?
Freehouse (Freehold Hotel, Restaurant, Off Licence)
Totally free of tie (with no restrictions on what you can buy and who you can buy from). You can get a lease without restrictions but they are quite rare, usually local authority, country estate or private individuals.
With a genuine freehold freehouse you can do what you like with within the Planning and Licensing Laws. Although they are considerably more expensive, run properly they have good capital growth. If you buy a freehouse, unless you join and organisation like the BII (British Institute of Innkeeping www.bii.org): you may find it quite difficult to keep up to date with current legislation etc. A large number of freehouse owners become loners and are often well out of touch with the latest changes.
Just before the change in the licensing laws in 2005 I visited a freehouse where there was a lady licensee, as part of a campaign to make licensees aware of the changes in the licensing act and the move from the magistrates to the local authority as the licensing authority. I went into the freehouse and saw the lady’s husband and he said he would like to talk to me, she came out and I asked if she was fully aware of the new changes. She said her solicitor had told her that she had everything that she needed to hold a licence, which was the old one day qualification. I said that the licensing was changing completely in November 05 and she had to apply for the various licenses etc required by the new Act. She said she knew nothing about it and didn’t believe me. I said it was an Act of Parliament, she said that they would get all the pubs in the village to object and it would be dropped. I said it was somewhat more serious than that, she replied that she found me totally intimidating and told me to leave the premises. She had totally ignored all the press and TV news and was living in her own little world and chose to ignore the change in the Licensing Act in November 05 very much to her cost – you need up to date information.
Cookseys DMP link to their web site www.cookseysdmp.co.uk
Lease from A Pub Company, Brewer or Landlord
They frequently claim to be Freehouses, but in most cases they are totally or partially tied to buying all their wet stock (at limited discount, if any) through the Pub Co. A lease is normally full Repairing and Insuring and for a variety of periods from 10-21 years. Leases are considerably cheaper than freeholds, the higher the rent in respect of a poor turnover or profitability, the cheaper the price of the lease. If the business can be made profitable, there is a certain amount of capital growth to be made on your initial purchase price.
The Pub Co’s and Brewers have a large number of hotels and restaurants amongst all their pubs, it then becomes a question of sorting through them to identify the genuine hotels etc. They may be called an Inn or Hotel but they may not have been used as such for many years, you need to check with the Planners of their present classification.
If a previous lessee decide to drop the hotel side for a reduction in rates it can cause problems, as I discovered recently.
If you decide on a lease with any discussions or agreements with the Pub Co representative, ensure that it is confirmed in writing or going to extreme lengths take a tape recorder with you. This may sound draconian, but it helps. Unless it is confirmed in writing a new BDM (Business Development Manager) will walk away from it. Not every Pub Co is like that, some are excellent, but you won’t know until you deal with them. A lot is down to the individual BDM, if he is being pushed to let a property, he could say anything which he may well believe at the time, but he may be over ruled by someone higher unless you have it in writing. However nice and friendly he may appear do not agree to anything until they confirm in writing. They have more people chasing their leases than they have available, if my information is correct, which gives them the whip hand. The Pub Co’s refer to their pubs, hotels, restaurants etc as freehouses, compared to tenancies where you are only allowed to sell the brewery beers, though most have deals to sell a large variety of other beers that they do not brew, these days. The Pub Co’s do not brew beers but sell most of the available beers on the market. As a lessee in most cases you are tied to buying these beers etc from the Pub Co’s, they sell them to you with limited or no discount. If you have a genuine freehouse and can buy direct from the brewers, at this moment of time you can get up to £180.00 per barrel (36 gals) discount, this makes it very difficult to compete price wise if you are getting no discount buying through a Pub Co.
Leases can be bought through commercial agents, who are normally selling them for an existing lessee. Unfortunately being an existing lease it is very hard and can be costly to change the conditions of the lease, if the Pub Co’s are selling a new lease it is possible to negotiate other terms within the lease, if they really think you will make a success of the pub. If you don’t try you won’t find out.
There are some leases still operating where the Pub Co has taken over a company and they are able to buy out of the Tie. Check the limitations on your buying agreements within the lease.
A colleague who was a senior director in one of the largest brewers in the country said that before the Monopolies and Mergers Commission reduced the number of pubs that a brewer could own, causing the break up of the traditional large brewers, that they had a duty of care to the tenants of their pubs and the communities that they were in. He like me would like to see the situation reversed, where that care still existed.
Now we have Pub Co’s run by accountants who are nothing more than property companies, whose bottom line is profit. Sadly they lack the care that the family brewers have and they are now rapidly disappearing as soft targets for takeovers.
The traditional tenancy is normally through a Brewer, who restricts you to buying all their beer products and all the other lines that they supply. The traditional tenancy is anything from one to five years with the tenant being responsible for the internal maintenance. However with the growth of the Pub Companies a lot of these things have been changed and a tenancy is another name for a short term lease. A tenancy can often be bought for the price of the fixtures and fittings and can be the cheapest way of entry into the pub industry. There are specialist agents that deal with tenancies, but it is worth approaching the traditional family brewers. They brew their own beer and in the main look after their tenants. Be careful of the so called breweries who have become big corporate players; sadly they have learned a lot of lessons from the Pub Co’s. You become a number or name on a balance sheet. Read their small print and believe only that which you can verify and ensure that everything that is agreed verbally is confirmed in writing.
These are another twist on the lease, tenancy deal operated by some companies. Read the small print and conditions and ensure that you understand and are happy, after taking legal advice. The conditions and pitfalls relating to leasing and tenancies will apply. So ask as many questions as possible and insist on written confirmation on anything that is not in the franchise agreement, be careful of unattainable targets, insist on the last franchisees or tenants purchasing records for the last year. The company will have them, though they may be very reluctant to produce them, they may have five years before when the place was doing well, but last years figures may be a different story. If they are bad it could give you a whip hand in negotiations.
Type of Businesses
Type of Hotel.
Hotels come in a range of operations.
Starting at the bottom end which is a licensed guest house calling itself an hotel. This normally accommodates in excess of six people catering for breakfast and an evening meal, a small bar area, with a maximum of approximately ten bedrooms. These businesses are usually run by a husband and wife team, the husband having another job and the turnover is kept below the minimum VAT level, if they are in danger of falling within the VAT level, they take a holiday or close for redecoration. With the change in the licensing laws a lot of small licensed hotels, guest houses are seriously looking at the cost of having a licence and it’s responsibilities in terms of the return on sales of alcohol.
Ten to twenty four bedrooms, with a bar, restaurant and facilities (swimming pool, saunas etc). These are serious businesses and can turnover a large amount of money, again a husband and wife set up with possibly a manager.
Twenty bedrooms upward with all the facilities move toward corporate operations and very serious staff responsibilities, they can still be family operations, but they tend to be serious businesses and not a life style change.
A pub with accommodation, you have the full responsibilities of running a pub with breakfasts and evening meals for residents in addition to any catering demanded by the pub. If you only have a few bedrooms it is relatively straightforward, however if you have ten bedrooms plus you have a twenty four hour business and you need the staff to assist in the running of it. One major plus is the profit factor from accommodation, puts the profitability way up from an accounting point of view, which substantially enhances the capital value.
There are of course vastly different types of operations within the hotel business in terms of the type of customers that you wish to attract. It is vitally important to be able to identify these types.
Starting with the up to ten bedrooms in a seaside town or urban area, where your price is the local average, you have business people during the week and visitors at the week end. Their requirements are very straight forward, a comfortable bed with en suite facilities etc, good breakfast and a nice set evening meal, you don’t have to be the best chef in the world, just provide good value.
A similar size hotel in a country area, you may be able to get a higher price because of the lack of competition, you may not get as many residents as the urban hotel. Your accommodation has to be spot on and if you really want to do business, make your food superb. Dinner can be a set menu with three or four choices, stay away from large menus, the immediate assumption is that it has come out of the deep freeze. If you are new to commercial cooking, don’t be inhibited by trying new things, it’s not rocket science. Test them on the family and staff first, then the customers, you can always say, that if they don’t like it you won’t charge them for it. The customer feels special because you have asked them to try something new, they remember these little things.
Fifteen bedrooms plus, you may be locked into the local price war in seaside resorts or tourist areas, you need to identify this. There is no point in getting into a price war with guest house rates because your overheads are far greater than a guest house. Be very careful with coach business, your prices are in a lot of cases cut to the fine, they can be good business but make sure your pricing and contract with the coach company is right.
Fifteen bedrooms plus in a country area, you need to turn this into a tasteful business with all the facilities that you can finance. If you have a good chef and staff, aim at functions like weddings, when your accommodation side is seasonally weak. If you have a good restaurant, functions will promote your restaurant. Look at the pricing of other similar establishments, then do your homework on competitive pricing to get the business in. Be careful in upgrading the premises, the costs can be extortionate, it may look like a great place, but if you have to throw £250,000 at it and it’s value has only gone up by £100,000 it needs thinking about. A lot of these older, larger hotels can be a serious money pit.
There are two types of pub as a rough guide.
These do not do any food and are purely drinking pubs. These are very hard to find, but they do exist. They are much easier to run since you do not have to employ the catering staff and all the additional essentials that go with catering. You need less staff, less space and the profit factor is lower, the overheads are much lower, since you are not using the vast amounts of gas and electricity running the kitchen and refrigeration for food and you don’t need the additional storage. Great if you can get it.
The majority of people want a food backed business, the profit and turnover is higher, but you need more staff and somebody to chef. If you have a chef make sure you know as much about cooking as he does, otherwise you can be held to ransom in times of stress. Chefs are notoriously fickle, they do a hard job and good ones are always trying to be poached by another business. Make sure that if the chef does not appear that you can take over and maintain the standard until you get a replacement. Your wife or partner may be a good cook, but the day will come when the chef does not appear and you have fifty dinners to organise. If your wife can cope she has to be a saint; if she can’t you could be heading for a divorce.
Having Decided To Buy a Pub, Hotel, Restaurant etc.
Having decided to buy a business, the first thing that you do is to set up a file recording all the information and ALL your expenses incurred in looking for that business, petrol, food and any accommodation etc. Your accountant will advise you as to all the expenditure that is acceptable whilst looking for a business. It is also a good exercise in preliminary accounting.
There are three immediate to hand publications:
1. Daltons Weekly (http://www.daltons.co.uk/)
Deals with all businesses and every newsagent recommends, but does not specialise in the pub industry;
2. Morning Advertiser (http://www.morningadvertiser.co.uk/)
A specialist guide to the licensed trade.
3. The Publican (http://www.thepublican.com/)
A further specialist licensed trade publication.
You can order the Morning Advertiser or the Publican through the newsagent or contact them direct from their respective Web Sites.
Both these publications have pages of pubs advertised under an assortment of commercial agents, they also have a regular supply of useful information relating to the pub industry.
Your first encounter will be with a Commercial Agent, who will either treat you like Royalty or make you feel that you have insufficient funds to buy the worst pub or business on their books.
They will make every business sound like the original “Roses round the Door”. Ignore all the chat, glossy photographs, incredible turnovers, wonderful private accommodation. Their primary aim is to sell the business. A large number work on the mail shot and large web sites with dozens of pictures, very few are interested in fitting a business to a person – a sale is a sale. To be fair their duty is to the Vendor their client, there could be a change in attitude on this point with selling leases, see (Guarantor/Privity of Contract Section). Commercial agents have evolved from estate agents in a lot of cases and they have minimal experience of running licensed property. Unfortunately the yard stick for valuing commercial property varies according to the buoyancy of the house market. The turnover and profitability should reflect the value of the business, this only happens when the market is very tough and people have to borrow money on the existing accounts to sustain a mortgage. When the market is buoyant the inevitable bricks and mortar and scarcity valuation far outstrips the business valuation, so be careful.
Look at every business that comes within your budget and area, visit and inspect as many as possible initially and get to recognise everything behind the scenes, how bad, how good, how practical, what sort of equipment that they use and it’s condition, whether you can live in the accommodation, or it can be improved quickly to the standard that you require.
Don’t forget the front of house obviously, but behind the scenes will be your home and if you can’t live there comfortably, you won’t be able to run a successful business there with all the pressures that are involved.