Anybody know anything about pubs?

I first came across pubs as clients in the 1970's.

Lots of tied houses, a few freehouses back then.  The freehouses had a hard time financially (due to the greed of their landlords - rather like 2012).

Nowadays, I have just one pub client, a freehouse - in my opinion it's the only viable way to go.

As for tied houses,  the last time I advised a prospective buyer of such an enterprise I described it to them as "legalised financial slavery" in the business plan and was relieved that they chose NOT to purchase the pub concerned.  Rather like most of the franchises that I've seen, actually, but unfortunately franchisees usually fail to do a business plan (being hoodwinked by lies from hawkers of franchises) and therefore end up with a lot of financial disappointment.

I have never had any issues with pubs as clients, first concern is viability (if they don't make enough profit they can't afford accountants fees), second concern is keeping good records being a cash business (weekly recording system with cash and bank balancing built in essential).

Buying a pub freehold as a freehouse SHOULD BE a buyers market with the current state of the market.  If a full time manager is employed there might be problems earning a profit unless the turnover is high enough.

A business plan is highly recommended before commitment to any purchase.

I agree my advice is do not touch tied pubs as they are the fastest way to bankruptcy.

However a couple of pointers

Check the background of the existing owners and find out whether they have taken over pubs in the past and disposed of them after 3/4 years. Around here it there is a family who take over run down pubs build up the turnover by all the usual methods. - good food, cheap beer , good atmosphere and then sell at an inflated price. Generally the turnover immediately drops and their new one soars leaving the incomer with egg on face.

Check carefully the gross margins - should be 55-60% on both wet & dry.

Obvously the client will have visited all the pubs in the area to find out comparable prices and why customers frequent them This should take at least a month with regular visits

I also try not to touch pubs or restaurants having seen too much misery and dreams dashed

I've dealt with a fair few pubs and clubs over the years.  One common trend with virtually them all was staff theft of one form or another, whether it's actually stealing money, or stock, or simply giving away food/drinks to their friends and family.  

I've heard all the usually stories about why the gross profit is lower than expected - i.e. faulty pumps, leakage from old pipework, discounting, competitive pricing, etc. to hide the underlying staff theft.  Professional stocktakers not only act as a deterrent, they also know all the cons and can spot them a mile away and they usually give a fairly accurate report of any unexplained shortfalls.

As for food, same applies, you need to be on top of it as regards wastage etc - GP of 75% isn't unreasonable and should be aimed for or exceeded.  A food GP of 50% or less means the chef or other staff is taking away a car boot of meat for their friends and family - don't allow yourself to be fooled otherwise.  OK, it may occasionally be due to an idiot chef who hasn't a clue about portion control or stock control, but that's another reason to get rid!

Don't forget all the machines, i.e. the gaming machines, pool table, cigarette vending machine, condom and sanitary machines, nor the payphone.  I've actually seen club accounts where the takings from these have just never been recorded (straight into the manager's pocket) and no-one has ever realised (just assumed it was included in the till takings) - yet the income from these can be huge!

And don't forget the more obvious threat of theft.  We once had a British Legion Club as a client where the steward and his wife did a moonlight flit, not just taking a very good weekend's takings (several thousand pounds), but also stripped the place of all its cigarettes, wines and spirits stock (many more thousands of pounds worth) - they must have been working for a few hours during the night and must have needed a small van.  All possible because of shoddy systems and no internal security!

I'd suggest that your client would need to take a very active interest in the business and rotate his shifts between times and also between reception desk, bar and kitchen, so that he has a clear view of everyone working there.  It's no good him staying in the bar and not seeing the kitchen, or only working the daytime shift and leaving staff to do evenings, or only being in the kitchen at mealtimes and not seeing the early morning deliveries, etc. I'd suggest that rather than giving himself the top manager's job, that he doesn't allocate himself any job at all, but instead acts as a "floater" so that his eyes and ears are everywhere!

I have been involved in the bookkeeping and accounts for pubs for the last 12 years, both  freehouse's and tied houses.

The ones that suceed are organised and have tight cash control's, they have a regular sturdy stream of customers but the most imprtant thing thay have had is hard working reliable staff. The beer and food could be fantastic anywhere but if the person serving it is a miserable sod it tends to put people off! The thing is this goes for both freehouses and tied houses. The problem is finding them as pubs generally have such a high turnover of staff. But good staff in a relaxed warm welcoming environment will pull people in.

I've had horror stories from many clients who have dealt with Punch over the years but at the same time well run pubs have never had a problem with them.Tied pubs are more likely to lead to cashflow issues but the best thing to do, as Benard said above, is for your client to do his homework first including whether or not it is tied and if it is, look at the company who you are tied in with. Most tied in contracts, especially Punch, tie you in to buying beer from them rather than brewerys direct. They themselves are already buying from the brewerys and all you are doing is paying Punch's margin on the purchase which then adds further costs to your sales price and thus annoying customers. But is not just Punch that do this, unles your landlord is a brewery it will be very rare to find one that doesn't tie you into buying direct from them.

I would never recommend anyone avoids investing in pubs but they have to do their research first before making any kind if decisions. Its long hours and short profits for too many out there at the moment.

Not my area but here's my twopennyworth: a business owner I knew in a similar cash business installed CCTV (done with the staff's knowledge so not "spycams"). Too easy for cash to walk otherwise.

A new owner can be seen as an easy touch to both staff and punters. What type of customers does it have now and what are the surrounding pubs like. He may have to take an aggressive attitude to the door to stop undesirables from getting in. Normally any one barred from a pub will make an appearance as soon as new owners turn up. Is he street smart to know all the moves. I have 1 pub (2 brothers ) and at least one of them is continuously there floating. If you allocate a job to yourself you are missing other things. Stock control and good information are a must plus a good nose and a lot of common sense plus an ability to speak to all types of people on their level. Finally although he shouldnt be rostered to do any job he should be able to do all jobs.

Also accountants discount should be discussed at an early stage

I am aware of a case where lottery millionaires bought some pubs.

End result was that they went bankrupt.

Causes included:

They were TIED pubs with terms too heavily weighted in the brewery / pubco's favour. (*)

The owners lacked knowledge of the trade

I believe that the Breweries are selling beer cheaper to Supermarkets than they are to Pubs. (##)

(*) Typical oft-repeated (and sometimes misleading) response from Brewery / pubco was along the lines "we do everything in our power to support our pub operators"   Solution: have a law requiring a rent rebate (plus 20%) to be made to tenant pubs to the extent that they can show that they could buy beer (etc) cheaper from independant suppliers

(##) Solution: a VAT rate of 40% to be charged on supermarket sales of beer/wine/spirits and this could subsidise a a "social rate" of VAT (say 5% or 10%) being payable on sales for food /alcahol consumed on the premises of pubs / restaurants.

i had client who read monthly stock report in detail, was very pleased with margins and forwarded year end stock figure from these. when i raised concerns over gp% client was confused, further investigations showed the manager was only supplying 3 weeks brewery bills to the stocktaker that were being used against full months takings, the other weeks goods were being 'redirected'!

stocktaker never queried this or brought it to owners attention.

Cant add much to what has been said above but it is always interesting to see where the current owner is pointing his security cameras.  If these are pointed mainly at the till and his staff this could suggest he has or has had a problem with staff.

I would also look at the distance from the beer fonts to the cellar.  Typically a pub will clean its pipes once a week and if the cellar is a distance away this will mean that several pints of perfectly good beer has to be thrown away.  This is often missed by a pub which concentrates largely on food. 

I've advised a number of shrewd investors in restaurant / pub / cafe chains over the years and picked up a few points! Initial things that spring to mind:

- 55% food sales is pretty good for a pub and usually much more profitable than wet sales. Well run restaurants should be able to make 70% gross margin on food sales. Less than this suggests work can be done around portion control, using less protein, better buying...

Key metrics they should look at (if the information is available!):

- Weekly sales - obviously vary hugely but to make a decent living for an owner/manager I'd be looking for >£10k a week. To put in context your average Pizza Express in a London suburb will do >£20k a week (after discounts, whic are prob 15% of sales!)

- LFL sales - most leisure businesses are sadly still probably doing slightly negative LFL sales - anything >5% for recent months might be especially alarming and I'd want to know the reason for (new competition, revised pricing etc?).

- Wages as a % of sales - have increased significantly over last 10 years. For well run pub/restaurants this should be c 35%-40% of sales.

- Controllable fixed costs - prob another 12% on cleaning, insurance, etc etc

- Rent - might not be relevant here if freehold. Given this is the biggest fixed cost by far its important to do sensitivity analysis to understand the headroom you have (i.e. if LFL sales fall by 10%, will you be able to pay your rent?? etc..)

Capex - when was it last fitted out, what was the cost, will a fit out be due soon? This is all cash out the door so you'd hope it wouldn't be needed for some years.

Licensing - through the Freedom of Information Act anyone can contact the council and ask for a file of any complaints or other investigations into any licensed premise, this will include details of any complaints from neighbours etc and in worst case scenario would highlight whether the license was under review by the council.

Re valuation - I'm assuming this is freehold? There is definitely a premium for restaurant licenses in well-heeled cities and towns and you would attribute some value to the fit-out. As a rule of thumb, you would pay no more than 1x sales for a leasehold restaurant, maybe as little as 0.5x sales for a small single site. If this business is freehold, then add that onto the value of the freehold (assuming vacant and no restaurant license).

Some external stats for you to benchmark against:

https://www.accountingandgeneral.co.uk/RunningAPubIndustryAverages-BBPA.pdf

It is possible to make money in freehold and tenanted pubs. I see the accommodation income and skew towards food as a good balance.

Its down to location, service and product - and no ability in maths or business plans will tell you the answer.