The last revenue stream for landlords is from suppliers. All those deals that the pubcos do on behalf of their tenants (you know the ones – “buy this at this specially negotiated rate”) will probably result in the landlord getting a commission from every sale made or service provided.
Some pubcos get huge amounts of Point of Sale (POS), glassware, garden umbrellas etc given to them by brewers and other drinks manufacturers free of charge. It is even contained in the supply contracts that pubco’s have with their suppliers that £X per barrel is put into a “marketing fund” to finance these items. The pubco’s then often charge their tenants for these items! As a free of tie trader you will find that suppliers’ representatives will provide many of these items to you free of charge. How much this would amount to will be dependent on individual suppliers and on how much of their product you are buying. You will be able to negotiate your own “marketing budget” with them and they will be keen to supply these items to retain your business.
When these revenue streams are all totted up the landlord can then decide on their valuation of your pub… typically this can be as much as seven times the annual income stream.
So far so good? Then let’s look at some scenarios that may assist you in answering those all important Big Questions (above).
A pub that is buying 200 barrels (at a discount of £50 per barrel) from the landlord, paying £25,000 rent, taking £5,000 from its machines and paying £3,000 for the building insurance.
This is what the landlord earns:
- £34,000 in beer discounts
- £25,000 in rent
- £5,000 on machines
- £3,000 on insurance
Total Revenue Stream (exclusive of other supplier contracts) = £64,750
Minimum Value they put on your pub (at 7 times revenue) = £453,250
(Remember this may not be the value a lender puts on the business)
In order to make a similar Return On Investment (ROI) that your landlord currently makes you will need to generate net profits of 12% of the amount you pay for the pub.
Say, for instance, you offer £425,000 and this is accepted (and your lender agrees the valuation) you will need to finance this amount. You can only put up £40,000 so you need to borrow £385,000.
A fixed interest capital repayment mortgage over 25 years at 10% interest for £385,000 rate will cost in the region of £3,498 per month or £41,982 a year.
At a rate of 12% ROI you would need to generate profits of £51,338 a year to justify buying the pub.
Here is the cost / benefit of buying the pub:
- £10,000 a year better off on your beer account
- £16,982 worse off paying a mortgage rather than rent
- £4,500 a year better of having all your machine income (but not the landlord’s royalties and discounts etc
- £750 better of by sourcing your own insurance as you are only going to pay your broker’s commission not your landlord’s commission
Net result is £1,752 worse off a year (£33 a week).
The pub was already making £15,000 profit per annum so to generate the required ROI you would need to make an extra £38,070 profit a year.
As the pub was working at 50% Gross Profit you would need to bring in another £91,367 in sales (or £1,757 per week) to make up the shortfall in profit.
But hang on? Isn’t the pub going to make more Gross Profit if I buy my beer for less? Even allowing for the increase in discount (above) a freehold pub might be able to increase its Gross Profit percentage to, say, 65%. This would mean having to generate another £1,352 a week. You could easily do this by reducing some beer prices to attract more customers in.