Purchasing a pub: Insights from Startups.co.uk.

The Pub Industry: Who It’s Suited To

Have you ever envisioned trading the daily grind for the charm of running a country pub? Or perhaps the vibrant social scene of a local town pub resonates more with you? If so, you are not alone in that aspiration.

Despite a decline in the number of pubs in recent years, acquiring a pub remains a popular venture, and it’s easy to see why. As of 2008, the UK boasted over 55,000 pubs, showcasing the vast scope of this market.

However, managing a pub extends beyond simply engaging with customers and serving drinks. Before you invest your resources and embark on a business journey, it’s critical to evaluate essential aspects and make informed decisions.

Understanding the Pub Sector

The pub industry stands as one of Britain’s most recognized sectors. Millions identify as regular pubgoers. In fact, research indicates that over a quarter of adults visit a pub at least once a week, not solely for beverages.

Pubs are thriving social hubs. According to Mintel, 38% of patrons choose a pub for its atmosphere, while 26% are attracted by the clientele. Only 20% prioritize beverage selection. Thus, establishing an inviting atmosphere where people want to gather represents one of the primary challenges for pub owners.

One effective approach to enhance your business is by providing dining options. Currently, pubs rank as the leading choice for dining out in the UK, with 90% offering food. The culinary options extend well beyond traditional offerings, encompassing French, Italian, and even Asian cuisines.

Additionally, pubs deliver a diverse array of entertainment. Many establishments feature live music, comedy nights, and trivia competitions, while others facilitate leisurely activities like pool, darts, or large-screen sports viewing.

On a broader scale, pubs situated in residential areas, whether urban or rural, play a vital role within their communities. Many local sports teams are affiliated with neighborhood pubs, and these venues often serve as essential employers, occasionally even providing community services like post offices, medical services, or youth clubs.

Who is Well-Suited for Pub Ownership?

Pubs attract individuals from various backgrounds—business professionals, law enforcement, military personnel, retail workers, and of course, those with prior pub experience. With the wide variety of pubs available, there is likely one that aligns with your interests.

However, personal characteristics and skill sets are more crucial than past occupations. “Drive and determination are key,” asserts John Walker, Deputy Director of the British Institute of Innkeeping (BII). “Many harbor romantic ideas about running a pub. It’s a challenging role, often involving extremely long hours—starting with early morning deliveries and potentially ending after midnight.”

If you plan to operate the pub with a partner, be aware that the demanding schedule can strain relationships. Not every couple thrives while working together for 14 to 18 hours daily. Furthermore, enjoying interactions with customers is essential; “Licensees often play the roles of friend, counselor, and confidant,” says Walker. They must also maintain the firmness necessary to manage unruly patrons.

Today’s pub owners also require strong commercial acumen as they effectively act as managing directors of their establishments.

This role involves delivering exceptional customer service while overseeing client behavior, often requiring tact and assertiveness due to the implications for licensing and income. You will manage a close-knit team and must stay informed about employment laws, management strategies, and training. Moreover, financial oversight is imperative.

Familiarity with licensing regulations, health and safety standards, and food hygiene is critical. As a community figure, you may also engage with law enforcement and local authorities to address issues related to crime and public disorder through initiatives like Pub Watch.

Research and Regulatory Considerations

Tenancies, Leased Houses, and Freehouses

Managing a tenancy or lease represents the most common and straightforward entry point into the pub industry. Approximately half of all pubs operate under this model, typically consisting of smaller, older establishments located in suburban areas, estates, or villages. In these cases, a pub company owns the premises and rents it out to an individual who runs the business as a sole trader.

A tenancy is often the most accessible route into the business, particularly for those on a budget. Initial costs include fixtures, fittings, and existing stock, along with a deposit to cover the first drinks bill. After this, the rent is contingent on the pub’s performance.

Tenancies usually span three years, after which a rent review takes place, allowing for the opportunity to renew or move on. This model offers flexibility in case things don’t go as planned, and property maintenance falls under the landlord’s responsibilities. However, if you successfully grow the business, this growth may not translate into personal financial reward when it’s time to pass on the tenancy. During a rent review, a profitable pub may see increased costs regardless of the effort invested.

Long-term leases provide an alternative option, allowing lessees to sell their lease at market value—a significant advantage over tenancies. Leaseholds can last for up to 21 years, enabling individuals to build wealth and incentivizing them to invest time and resources into enhancing the business.

In exchange for the potential for greater rewards, lessees are expected to interface with more commercial rent and maintain the property. They may also receive additional support, including business advice and discounted purchasing options.

Both leased and tenanted pubs are termed ‘tied houses’ because they are expected to purchase certain products exclusively from the owner of the estate, typically beer and cider, while having the freedom to acquire wines, spirits, and soft drinks from various suppliers.

For applying to a tenancy, you approach the landlord directly, whether a national pub company, a regional brewery, or a small local operator. Leaseholds are typically acquired from the current lessee. In both cases, training and support may be available if needed.

Freehouses Explained

Approximately one-third of UK pubs operate as freehouses, meaning they are independent from any breweries or pub companies. Freehouses are fully owned or mortgaged by individuals. Sometimes they may have ties due to loans or grants from breweries.

Acquiring a freehouse necessitates a greater investment as you are purchasing the property along with the business. However, if you achieve success, the financial rewards can be substantial.

Legal Compliance and Training Requirements

To sell alcohol for on-premises consumption, you must obtain a license issued by local magistrates. Requirements include being over 18, having no criminal record, proving you are a ‘fit and proper’ person, and understanding your legal and social responsibilities.

Many licensing benches recommend that candidates secure a British Institute of Innkeeping (BII) National Licensee’s certificate. While this does not guarantee success, it prepares applicants for the licensing process. If you want to expand the catering aspect, be sure to consult with your local environmental health department to meet operational standards.

For industry newcomers, comprehensive training is crucial. “In this highly competitive market, proper training is vital,” states John Walker, Deputy Director of the BII.

Landlords typically offer induction courses for new tenants or leaseholders, covering license application procedures while also introducing necessary business management skills, including legal compliance, financial oversight, marketing, cellar management, and food hygiene. There are also advanced training opportunities for established licensees.

As an innkeeper, you should consider joining the BII, the professional body representing the licensed trade, with over 15,000 members. Membership provides access to business advice, free helplines, credit card savings, and subsidized training programs.

Cost of Entering the Pub Industry

The costs associated with a tenancy typically cover the fixtures and fittings and a deposit to safeguard against unpaid drinks bills. Rent varies based on the pub’s size, type, and food offerings, but it is generally estimated to be around 12% of turnover.

“When negotiating rent, approach the landlord with a clear perspective. Examine the turnover and use the 12% figure as a reference for sustainability,” advises John Walker, Deputy Director of the BII. The overarching objective for pub companies is to extract maximum value from the property without jeopardizing business viability, so be prepared to negotiate effectively. Given the competitiveness of the market, crafting a comprehensive business plan and consulting a specialist lawyer before making any financial commitments is recommended.

Many landlords may offer a rent reduction for the initial three months to facilitate your startup phase. When engaging in a tenancy or lease, always inquire about available training and support packages.

The process of purchasing a leasehold is more complex as the business’s performance will dictate the goodwill price when negotiating with the current leaseholder, factoring in business accounts alongside fixtures, fittings, and stock. Prices can begin at a low point but escalate significantly for high-performing pubs.

The most considerable investment lies in acquiring a freehouse, encompassing the value of both the building and the business. A freehouse’s selling price is often approximately one and a half times its turnover.

Once you identify a pub that piques your interest, financing your purchase will likely be necessary. “A common obstacle is entering the venture underfunded. It’s essential to balance your capital contributions with borrowed funds; otherwise, you risk becoming an unpaid employee of the bank,” cautions John Graham, an expert from licensed property agents AW Gore & Co.

Most lenders typically cover up to 70% of a freehouse’s price. Some of the required 30% can sometimes be sourced through brewery loans, though this may impose limitations on your negotiation capabilities regarding stock prices and business development.

You should also prepare for incidental costs (including legal fees) and set aside at least £10,000 for stock and insurance against lean periods. All these expenses accumulate. As the pub’s size and profitability increase, so will your financial commitments.

A strong track record in the industry can significantly enhance your chances of securing favorable startup financing. “Do what you know” is a basic principle of business startups, and statistically, experience improves the likelihood of success,” adds Andrew Turzynski, Senior Business Manager at First National Commercial Banking.

Lastly, consider evaluating the option of buying an existing pub business versus our guide on starting a pub from scratch to determine the most viable path for your venture.

Potential Earnings in the Pub Industry

Many individuals enter the pub industry for lifestyle reasons, cherishing the experience over profits. However, others approach it strictly as a business and discover the financial rewards can be substantial with effective management.

The size and type of the pub will invariably influence your earnings potential, but generally, net profits hover around 20%-25% of turnover. Consider the value added to the business as you operate it.

While tenancy agreements usually mean you don’t benefit from the sale of the business upon transfer, a successful leasehold can yield significant gains during the sale process.

Owning a thriving freehouse can yield considerable returns. “If you have built a successful business in a freehold property, you are well-positioned for great financial success,” emphasizes Walker. Profits are not diminished by rent, although a substantial mortgage may exist. Nevertheless, the favorable market conditions mean you can optimize your investment returns upon selling. “The current market is tight, and successful freeholds attract significant interest,” corroborates John Graham from AW Gore & Co.

Strategies for Success in the Pub Business

“When considering a pub investment, analyze the financial metrics with a clear mind. Many individuals fail by chasing an idealized notion—such as owning a charming thatched tavern in Devon—without reviewing the financial data. Remember, you are investing in a business,” warns Andrew Turzynski, Senior Business Manager at First National Commercial Banking.

Due diligence involves reviewing turnover figures through accounts, VAT returns, and turnover certificates while closely questioning the vendor. Turzynski reminisces about a landlord who discovered too late that a substantial portion of revenue stemmed from after-hours drinking. Upon terminating that practice, he lost not only that revenue but also his core customer base, leading to the pub’s eventual failure.

Strategic planning is essential; you need to carefully identify the type of pub and market niche to determine how to grow the business efficiently. For instance, many urban pubs are simply “drinking establishments.” This model may not translate in rural areas, as Turzynski warns.

“Exercising caution when acquiring a country pub is paramount. Nowadays, many thrive as destination venues, attracting patrons who travel for quality dining experiences. Thus, you either need to be an adept chef or be willing to invest in hiring top culinary talent. With drink-driving laws in place, relying solely on alcohol sales will not ensure profitability.”

Country pubs should also capitalize on additional revenue through accommodation. “Accommodation revenue typically carries high margins, and guests provide a dependable audience, allowing them to enjoy a drink without concerns of getting behind the wheel,” explains Turzynski.

Additional funding may be essential for improving catering facilities or other aspects of the pub. Renovating a small village pub’s interior may require several thousand pounds.

No matter your level of experience, allocating resources toward staff and training is pivotal. This expense can be significant, especially given that experienced pub managers often command substantial salaries.