Trading places

May 9th, 2016 | Posted in: Features

You’ve been talking for a while about change, be it selling up or buying somewhere new, what are the options, and what are people looking for in the market? Mairi Clark investigates.

Expanding your business isn’t just about upgrading your offering, it can also mean by buying a new premises or selling your current one in favour of a change of direction.
As with all money deals, the devil is in the detail, and that detail is inevitably money. On both the buyer’s and seller’s side, the capability of the premises to make money is paramount. The seller has to prove that it’s a viable proposition, and the buyer has to prove that it has the money to buy it, which means they are either cash buyers or need financing from somewhere, most commonly a bank.
There’s often disagreement about the value of a premises from either side of the transaction, and more recently banks have been reluctant to lend against pubs, as they see them as high risk and have changed the terms of how they will lend money. Some banks will only look at what they call the ‘closed-doors’ value, i.e. what the actual building’s worth. The turnover may be great, which makes the owner think it’s worth a couple of million. But if the building’s only worth £500K, then that’s what the banks will base their loan on. “Money and valuations are real issues in the marketplace,” says Stuart Drysdale, associate director of Christie & Co. “One of the biggest problems we see is banks will offer buyers a loan of 65% of the market value (building value, goodwill, trading) or 70-80% of the ‘closed door’ value, as in whatever the building is actually worth, whichever is the lowest. Closed door value doesn’t mean that it’s a closed pub, just that the bank won’t take into account any turnover.”
Making your business bankable, is great for banks as they base decisions on the likelihood of them getting their money back. The first step of this is to help them understand how you’re planning to pay the money back. Plan well ahead if you have to do anything to make your business more ‘bankable’. If you think adapting your kitchen to do more covers will increase its value, it will only do so if you have – at a bare minimum – six months of trading figures to show the impact on turnover. It is impossible to do when you’re in the middle of negotiations. Also, securing a loan on a ‘non-licensed trade’ asset is easier, so consider what other assets you have that you could use for security.
Although the trade has experienced a downturn in business over the last decade, there are still opportunities for certain offerings, as you read about in these pages every month! So if you’re in the fortunate position of looking to buy new premises, a good thing to look at – as ever – is location, and city centres are proving to be the hub of the pub trade.
Punch Taverns, has shifted its focus from buying up premises, instead channelling its money into its existing estate of 230 pubs in Scotland. “We’re investing more in urban premises, rather than suburban,” says Brian Davidson, regional operations director for Punch. “We’ve found people’s priority is now more circuit pubs. A combination of factors have led this, partly the drink driving change and partly the shift towards healthier lifestyles. Weekend trade in city centres is strong and you find that generally if people are going out at the weekend, they’re more likely to use public transport than drive. So they want a bigger selection of premises.”
Alan Creevy, director of CDLH, agrees, “We’re finding quality city centre premises are going very well,” he says. “More remote/village type venues are slower to sell. No banks will touch a closed down pub, as there is no turnover to analyse. The best places to get help with that, is to go to a brewer like Tennents or Belhaven Greene King.”
CDLH has a valuation app on its website, called QuickVal, where freeholders can find out how much their pub could go for. “Although not 100% accurate, it gives an initial assessment of a pub’s worth.” says Creevy. “Several factors are taken into account by estate agencies when property agencies come up with what’s called a Fair Maintainable Operating Profit (FMOP). The yield will make up a proportion of its value and can be anything from 4 to 8 % of the overall value, but capital and location also are important. It’s impossible to get an average price as you can have a really small pub that takes £1.5m and a massive one that takes half that, but both will go for similar prices.”
The other thing to look at is where does the business currently get its trade from. If there is a local car showroom or another business that pours trade into the pub, double and triple check that the long-term future of that company is solid. Visit the premises at different times of the day to witness the clientele changes. Find out who would be your rivals. Question the landlord as much as you can, preferably before you get introduced to him by your agency! That way you get to see whether the seller is getting out because it’s not making money.
Obviously the most profitable purchase is to buy a freehold, as you are free to buy stock from anywhere – unless of course you’ve gained financing from one of the breweries- and you have control over every part of the business. You are also, however, responsible for any repairs; big or  small. The other alternative is buying a leasehold.
With a leasehold the price will be worked out based on turnover and the length remaining on the lease. Leases frequently contain a clause barring the sale or assignment of the lease within the first two years unless the lessee has agreed to a penalty being paid. Be vigilant with the terms of any contract with regard to the current state of the building, and what will be left and any repairs that are outstanding.
Leaseholds are proving very popular, says Jonathan Clough, a director of Smith & Clough Business Associates. He says, “Many people haven’t got the funding to buy a freehold. With the city centres being so popular, you’ll find that a whole building is owned by one landlord. Typically a lease will be sold for 1 or 2 times its yearly turnover. We’d expect any lease to have a minimum of 10 years left, although it’s not been unheard of shorter term leases being sold.”
Whether you’re buying or selling, the industry is still buoyant and if you’ve had your fill of the restaurant trade or generally just starting out, the advice above could guide you towards a future you deserve.

 

There are some points you should look at when looking to buy or sell your business:

PROOF OF TRADE
One of the most important, is the current trading position. Buyers will want to see normally 3 years’ audited accounts from a seller.

LEASE INFORMATION
If want to sell a lease on, potential buyers will want to know the details and restrictions of the lease, including any rent reviews, both ongoing and upcoming. Your landlord or managing agent also needs to know and will need to approve your prospective purchaser, so keep them in the loop and discuss how involved they want to be.

ARE YOU BOTH READY TO GO?
It’s amazing how often this is overlooked. Has the seller made future plans? As a buyer, are you ready to move quickly, so there’s a continuity of trade? Often the selling process can be all consuming, so start preparations early.
PRESENTATION
Like with houses, the way a pub is presented can affect the buyer as much as the trading figures. Set aside time and resources to finish off all of the niggly little jobs that could unnecessarily put off potential buyers. When looking at a potential purchase, work out how much a refurb, if needed, would cost.

STAFF
Staff are a real asset when it comes to pubs. If you’re selling, make sure they know. If they find out via gossip, they may not be so professional when a buyer comes round. See if you can find out if the buyer is planning to take them on. Similarly, if you’re buying somewhere do a recce on different nights to see if the problem is the staff.

SOLICITORS
Getting a specialist solicitor on board early, is money well spent. He/she can start to prepare your file, gain access to the original lease, check with the landlord’s team on matters such as suitability of potential lessees etc.

DILAPIDATIONS & REPAIR
Any items of disrepair need to be addressed at the outset as they will become an issue at a later stage if they have not been dealt with. Whether it is a condition of the assignment process or as part of a Survey and Valuation for funding, the later you leave it the bigger the problem will be.

IS THE ASKING PRICE FAIR?
Do not be tempted into asking an unrealistic price for your property as this will simply mean that it remains on the market and unsold. Similarly, don’t try to drive a seller’s price to rock bottom.Be astute when it come to agents, as some will entice sellers with elevated prices, but the property isn’t worth it.

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DRAM News Team

Editor at DRAM Magazine
DRAM magazine is Scotland’s leading monthly licensed trade magazine. It has been dedicated exclusively to the on-trade in Scotland for the past 23 years. It is independently owned, edited and published in Scotland. The DRAM is innovative, creative and original. First with the news, and the people in the news. Covering all the latest information on pubs, bars, clubs, restaurants and hotels in Scotland.

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