Scenario Two
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, the landlord wants £475,000 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 £435,000.
A fixed interest capital repayment mortgage over 25 years at 10% interest for £435,000 rate will cost in the region of £3,953 per month or £47,343 a year.
At a rate of 12% ROI you would need to generate profits of £57,377 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
- £22,434 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 £7,184 worse off a year (£138 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 £49.561 profit a year.
As the pub was working at 50% Gross Profit you would need to bring in another £118,947 in sales (or £2,287 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 £1,760 a week. It might be a struggle to do this, even by reducing some beer prices to attract more customers in.
As you can see a difference of only £50,000 in the price paid for the pub can make it less attractive a proposition … unfortunately this will be your decision and yours alone. You have to weigh up the pros and cons and work out whether you want to buy your pub.
The last piece of the jigsaw puzzle you need to consider are the inevitable repairs to the pub that you will have to undertake. If you are on a “fully repairing” lease you are probably no worse off by purchasing the property. If your landlord currently has responsibility for repairs then you will need to factor in the cost of repairs into your budgets and your business plan.
Now what happens if I do nothing? Well, I suppose, very little… you are no better or worse off financially, you are taking the same risk as you always have. Even if the property is sold on the terms of your existing tenancy agreement or lease will still be there so you will pay the same rent etc.
Unfortunately I, like you, don’t have a crystal ball so only time will tell what the future of your pub will be… if you want to know what your pub might be worth then click the link below to contact me for a low cost desk-top valuation.
As ever the calculations (above) are provided for guidance only (it may not be the valuation a vendor or lender puts on your pub) and you should seek independent financial advice before you buy a pub.
Top Tip From Neil Morgan, Head of Pubs at Christie’s – a mutliplier of anywhere from 5 to 9 of EBITDA is being achieved for pubs throughout the country (with exceptions at either end of the spectrum) and as much as 14 times EBITDA in central prime London.