How to Start Up a Pub
Dreaming of running a pub? Not sure which of a managed, tenancy, leased or freehold pub is right for you? When looking for pubs for sale there are a lot of decisions to make, but as commercial mortgage brokers, Acorn.Finance are able to help.
When an entrepreneur embarks on the venture of quitting their job, dropping out of the rat race and running a pub, their head is full of dreams and business ideas of how their dream pub will run and exactly how they aim to make their money. However, the harsh reality is that the road to becoming a successful business person is rife with challenges. These hurdles prevent many such businesses from even getting past the planning stage.
To begin with, a business plan is needed, as potential lenders require a basic understanding of the business proposal. This is so they can assess whether they wish to become stakeholders given the risks. It can often be difficult to know where to start when writing a business plan, but a good one should outline all major aspects of how the owner organizes the pub and how they will make their money.
A typical format would start with an executive summary of the proposal, followed by a overall business description. Investors need outlines of how the owner will run sales and marketing too so they can see money making potential. Financial forecasts will be necessary and finally, plans for development in the future. A SWOT analysis can also prove very useful to help identify threats to the business. For example, local competitors or a non-ideal demographic.
Acorn.Finance often provide support during this preliminary stage of business development. We also have years of experience with getting budding pub landlords the advice they need and property they want. Additionally, when it comes to getting a business plan off the ground accountants are often willing to help too. There are all sorts of places to go for those aiming to set out on their business venture. If the business idea is one that looks as though it will attract custom, then this stage can be quite straightforward.
Perhaps the hardest part of starting up a business such as a pub is getting the necessary funding to do so. This is because investors need to have confidence that they will get back a good return on investment. It can often take a lot of searching to find a lender for a business idea, because investors need to see the 4 C’s of credit.
Banks need to know that they can get their money back should you default on your repayments. Therefore it is often necessary to have a house or other assets that the loan can be taken out against. Collateral also encourages hard work for the prosperity of the business, since if the business fails the owner will lose out.
The type of person that the investors are potentially lending to. This usually relates to credit scores, debt, and the overall financial profile of the potential business owner.
Usually refers to machinery or other equipment that the business may own that could be sold by the bank in the case of liquidation. For example, if a potential business owner already has equipment from a previously owned pub.
Capacity to Repay
In order for the business to recoup their original investment, they want a business opportunity where income exceeds expenditure. Here an investor wants to see realistic sales forecasts to show that your pub can and will make money.
There is help available in the form of start-up loans, which can be used in conjunction with other funding.
Finding Pubs for Sale
Finding the location that is just right for the type of pub you want to run can be difficult. This is because demographics, local wealth, immediate surrounding areas and local tastes all need to be considered. A prospective business owner needs to consider carefully where they will locate when running a pub. This could be close to home for a convenient commute or somewhere with a better demographic or infrastructure. When looking for pubs for sale, website such as Fleurets offer an extensive selection.
Buying the Property
When a suitable property does come along, going about purchasing it can be an arduous process. Large sums of money need spending, not just on the property itself but on the financing of the mortgage.
Acorn.Finance aim to streamline and improve this process, and as commercial mortgage brokers, they are able to find from their pool of 250 lenders a deal that will suit the client as best as possible.
Managed, Tenancy, Lease or Freehold Pub
These are the four main types of pub ownership arrangement, and a prospective owner needs to decide which will suit them best.
The company or brewery that owns such a pub employs and trains managers but owns the business. This is the cheapest option for running a pub, but you will be an employee of the company as opposed to your own boss.
With a tenancy arrangement the manager rents the premises from a landlord over a relatively short time frame, usually from 3-5 years. Tenancies often comes with a tie, such as the tenant having to purchase beer or related products from the landlord. This kind of business arrangement is non-assignable. This means that when the tenant withdraws from the arrangement they cannot take their capital goods/business with them.
This option involves renting the premises from a landlord, but running the pub as though it were your own. This is usually over a longer period than with a tenancy. The lessee keeps the profits, bears the losses and can also sell the business at any time. However, they are not permitted to sell the property itself. Leasing is more expensive than a managed pub, but gives the owner more freedom and better income prospects.
The most expensive method of running a pub, however there is the opportunity to reap much greater long-term rewards. Roughly a third of all pub landlords in the UK own their pubs outright. This means that they have freedom to choose suppliers and are able to lease the premises or put up their pub for sale if they choose. Entering into such an arrangement can cost anywhere upwards of £150,000. (July 2017)
Wider Economic Factors
Even if a prospective pub owner knows where they want to start their business, has secured a loan and knows what kind of management arrangement they would like, there is always the question of how much risk they are taking on, given that opening up a new business is a very risky endeavor. This is due to the fact that start-ups have less money to deal with cash flow shortages in the short run.
The Brexit Referendum in June 2016 caused the Pound to weaken greatly, to the extent that in October GBP to USD exchange rates reached a 168 year low, at £1 = $1.217, and has more recently climbed back up to $1.30. This economic volatility with ongoing Brexit negotiations begs the question; is this a sensible time to start a business? This weak pound is good for exporters but is a detriment to importers, therefore holidays to Britain are comparatively cheap. As a result, pub owners may even see an increase in tourist revenue, despite how many are worried about the economic climate.
Additionally, a survey of 416 businesses carried out by eBay revealed that British small business confidence was on the rebound as of April 2017. This is despite small businesses having tended towards pessimism in December of the preceding year. However, the business owners interviewed did voice their concern for rising inflation increasing supplier costs and forcing their prices higher.
Therefore given the current performance of the economy, consistently low interest rates, increased tourism into the UK and higher business confidence, it could very well be a profitable time for those running a pub.
Words by Jack Ferguson