What does it cost?
Tenancy costs start at around £20,000 and go up to £50,000. This pays for the fixtures and fittings and a deposit covering you if you can’t pay your drinks bill. The rent depends on the pub – its size, what type it is, whether it serves food and so on – but is generally estimated at about 12% of turnover.
The market is very competitive so it’s best to write out a business plan and consult a specialist lawyer before investing.
Buying a leasehold is complicated because the performance of the business will determine the amount you have to pay for the goodwill of the company. This will be negotiated with the previous leaseholder based on the accounts for the business in addition to the fixtures, fittings and stock. Prices can start as low as £30,000 but rise steeply for more successful pubs.
A tied lease is the cheaper option. The premiums on this type of lease, where you have to sell the drinks sold to you by the brewery, are lower or sometimes even non-existent.
“The premium on the lease depends on the state of the building,” Coltart says. “If it’s poorly decorated and needs a lot of work, there could even be zero premium, but you’d be spending up to £100,000 on doing it up.
“The ballpark figure you would need to invest is around £150,000 for a reasonably basic tied lease, or for an undertrading free lease,” he advises.
Remember that you’re not just paying for the premium on the lease, but all fees, stock and staff as well.
The most expensive option is buying a freehouse, which will include the value of the building, the fixtures and fittings and the business as a going concern. The cost of a freehouse is often around one and a half times its turnover and prices start at around £120,000. Prices can often be much higher than this though, as independent buyers compete with big pub companies. Coltart points out that in a major city, particularly London, the initial investment could be as much as £3 million.
Once you’ve found a business you like, you’ll need to finance the purchase.
Most lenders will provide up to 70% of the price of a freehouse. Some of the rest of the funding needed can be obtained from a brewery loan but this would come with ties and may limit your ability to negotiate stock prices and develop the business as you wish.
You would then need £5,000 to cover incidental costs (legal fees etc.) and £10,000 for stock and as insurance against a low period, adding up to a total of around £50,000. As the size of the pub and the profitability of the business increase, so will the amount of investment.
“A strong track record in the trade will inevitably mean you are more likely to secure better start-up finance. ‘Do what you know’ is one of the basic rules for a business start-up and, statistically, experience increases the chances of success,” adds Andrew Turzynski, senior business manager at First National Commercial banking.
Once you’ve got your pub, as with any business, you need to make sure excatly what is eating into your revenues.
Wages, for example, can often be a big stumbling block for the unprepared, says Richard Coltart.
“Wages will cost in the region of 20-25% of the exc. VAT turnover, including the manager. If you’re managing it yourself then it will be slightly cheaper.”