5 essential questions to ask when buying a pub
The life of the local publican is often romanticised, but behind the adventure and sense of community that come with being a pub landlord, you’ll find a lot of hard work and late nights.
Buying a pub is a big decision - you need to make sure that you research each pub for sale carefully before signing on the dotted line. These 5 basic questions can help you drill down to the nitty-gritty of a pub business as a going concern, and ensure that the pub you eventually purchase is the right one for you.
In the pubs trade, the phrase ‘wet/dry’ split refers to the percentage of sales revenue coming from drink sales (‘wet’) versus food sales (‘dry’). A pub that takes most of its money through ‘wet’ sales won’t need as many kitchen staff, will have lower food costs and may not even have a commercial kitchen. Bear in mind that in a wet-led pub, the percentage profit margins will often be lower due to beer duty and other alcohol-related taxes, so the turnover needs to be high.
With ‘dry’ food sales, the publican has much more control over how they price and cost their menu; this helps establish a larger margin on each plate sold, and for this reason, ‘dry’ led pubs are often a better option for experienced caterers.
Similar to buying a restaurant or a café, when you buy a pub you should consider the number of covers. ‘Covers’ refers to how many seated diners your premises can accommodate at any given moment. In short, the covers roughly expresses your new pub’s “capacity to earn”. If you want to increase your food sales when you take over the pub, you need to think closely on how you will achieve this. Can you create more covers by optimising the layout of your pub? Can you squeeze more earnings potential from the existing number of covers by increasing footfall, or offering special meal deals on quiet nights? Think carefully and practically about what you can achieve, and make sure that the premises can physically sustain the kind of earnings you are looking for.
Many pubs in the UK are ultimately owned by a brewery. Pub landlords rent the pub from the brewery, and the rental agreement will include rules about selling the parent brewery’s beer on an exclusive or part-exclusive basis. These kinds of pubs are known as ‘leased’ or ‘tied’ pubs, and they tend to cost significantly less to buy compared to freehold pubs without a brewery tie. Freehold pubs (often known as ‘free of tie’ or ‘free house’ pubs) are fully owned by the landlord, who can pick and choose the drinks brands they want to sell. Both ‘tied’ and ‘free house’ business models can work very well, but you need to understand what you’re committing to, and the limitations of both business models before you sign on the dotted line.
When you buy an existing business of any kind, you are buying into a money-making operation that is already up and running. There are lots of benefits to this (the business model has been proven to work, you have a base of customers and staff already understand the business inside-out), but it comes with its own set of commitments, too. For instance, you have a legal obligation to continue to employ any permanent staff on the same terms that they currently have. Make sure that your business plan is not dependent on you cutting the staffing costs overnight to become a sole owner-operator; you might be physically capable of the additional workload, but due to European law, you might not be able to legally do this. You can learn more about these legal responisibilities here.
In most cases, long-term staff members are an asset for your business – you can benefit from their experience, and they will be known to the locals. In the pubs trade, a friendly face can add consistency and stability to a business handover period.
You don’t need to be a 100 bedroom hotel to make money from overnight guests – many small pubs within reach of wedding venues and conference centres can earn a decent amount of extra cash from a handful of letting rooms. If the pub does have letting rooms, make sure you research this aspect of the business as carefully as you would if you were buying a hotel – look at online reviews, check out the local competition to get a sense of room rates and peak-trough periods in the year. Read our hotel buyer’s guide for more help. Pubs with letting rooms generally carry a higher price tag to reflect the increased earnings potential, so make sure you research the opportunity thoroughly.
As with any purchase, the motto is always ‘buyer beware’ – you need to ask questions when in doubt, fact-check everything and make sure that your purchase decision is backed up by sound financials.
What other questions would you ask when buying a pub? Let us know in the comments below…
By Sam Haythornthwaite at DaltonsBusiness.com