Pub co or Freehouse?

This one is a long (long) read but worth getting to the bottom!!

Fred and Mary have always (for as long as they can remember) wanted to run a pub, they have no experience of running any sort of business what so-ever but as Fred has just lost his job and he is in his mid forties, they both reckon this is a good time to pursue that dream.

Mary, also in her mid forties, can easily give up her job behind the till at the local supermarket (when the time is right) not least because the £12k a year she earns for her full time duties has always seemed to her a poor reward for the effort she puts in.

Fred has been a store-man for a number of years at a local warehouse and his £19k pa is now lost, the company have however given him a redundancy package of £7k.

The three kids are at various stages of their education, with Sally doing A levels, Bert in year 9 and Rebecca in year 6. The combined wages of Fred and Mary over the past few years have been just about adequate to live quietly in their three bed semi, holidays and luxuries however have been sparse to say the least. They have maintained a mortgage on their property and have build up an equity stake of around £35k, they have little or no savings and so their fund to seek the pub of their dreams is around £40k.

Fred now has time on his hands and so starts his exploration of the various pubs available on the market and the various ways in which he and his missus could enter into the trade. He scours the web and finds there are “thousands” of pubs available and to his surprise finds there are many different ways in which to take one on, Free house, Tenancy with a tie, Tenancy without a tie, Free-house- free of Tie deal, Lease deal with a tie, Lease deal without a tie, Shared equity deal, Pub Management; all a bit confusing!

So he seeks advice, starting with his bank manager (same bank manager who told Richard Branson he would never make any money)who tells him to take up llama breeding in the Himalayas rather than take a pub, onto his solicitor (also Branson’s solicitor)who tells him he would be better off staying at home, getting hold of his cash and burning it in the fireplace as it would save time and effort in losing it. Undeterred however Fred does take one piece of advice from his solicitor; that as an entry point and first task he needs to get himself a Personal Licence (bit like getting a driving licence before you buy the car). Being equipped with this he is advised will at least have a bit of credibility with those who can asses his seriousness about taking on a pub.

He again scours the web and finds more “thousands” who deliver the course but settles on the most attractive looking company which offers not only the course but an on-going relationship should he eventually take on “The Dog and Duck” and yes you have guessed it he chooses Inn-Dispensable.

The course is brilliant, the tutor great and the result a pass for the BII Award for Personal Licence Holders, Inn-Dispensable then carry out his application for an actual Personal Licence and he is now “fully qualified” to take on a pub (well that is the only legal requirement!!)

Fred and Mary now decide it would be a good idea to again get in touch with that splendid tutor from Inn-Dispensable and learn about all of the upsides and downsides of the various ways in which they might invest their £40k and which of the bewildering options might best suit them.

Before Jack from Inn-Dispensable offers his advice he gently points out to F & M that “there is more to running a pub than pulling a few pints” “Really” say F&M, “what like”, well says Jack, “It is a business first and foremost and if you want to have half a chance of making it work, you need to be very expert in the following:

· Health & Safety/Risk Assessment
· Duties & responsibilities for Health & Safety at Work
· Risk Assessments
· RIDDOR
· First Aid
· C.O.S.H.H
· Fire regulations
· Manual Handling
· Employment Law
· TUPE (Transfer of Staff)
· Retail Legislation
· Consumer protection
· Mandatory conditions
· Weights and measures
· PRS & PPL
· WiFi
· Crime prevention
· Equality Act
· Smoking & Drugs
· Violence
· Finance Management
· Net & Gross Profit
· Book Keeping
· Gross Profit Calculations
· Sales Price Calculations
· Stocktaking
· Profit & Loss
· Cash flow
· Dish Costing
· V.A.T
· Budgets
· Breakeven
· Stock Control
· Stock taking
· Stock reports
· Ordering
· Security of cash
· Catering
· Menu planning
· Dish costing
· Food safety
· Enforcing agencies & legal requirements
· Storage, production and service of food
· Food Hygiene
· Legislation
· Gaming & Machines
· Legislation
· Maximising machine income
· Marketing & Merchandising
· Marketing Mix
· SWOT analysis
· Customer Occasions
· Business Trends
· Internal & External communication
· Customer Service
· The service profit path
· Effective service of products
· Selling skills
· Customer service path
· Business Planning  
· Mission statement & action planning
· Market position – SWOT/TOWS
· Competitor visits
· Modern Marketing Mix
· Pricing strategy
· Promotions diary
· Event planning checklist
· Setting C SMART objectives
· Retail standards and offer

Blimey says F &M how do we go about learning that little lot. Well says Jack, if you take the Pub Company deal ,they will put you on a course to cover it all, but if you take a Free-House , you will be on your tod! You will have to find it all on the web or pay a consultant to take you through it.
“Look” says Jack “I think the best thing you can do is to refine your search for the pub of your dreams along the lines of “what you can afford, where you want it to be, what sort of pub you want to run, how the kids can finish their education and what your lifestyle expectations are, then come back to me and we can work out the numbers and the way forward”.

Off go F & M, 500 miles and two months later they come back with two pubs they really want to pursue, one a Free house, the other a Pub Co lease.

Jack takes a look at the Balance sheet and Management Accounts of both pubs and what do you know they are identical with a turnover figure of £250k pa (ex VAT), bottom line profit of £30k (net of rent or finance charges), both around 180 barells a year,  same wet /dry mix, same margins, same wage costs, just about the same everything other than; the Free house is on the market for £400k and the Pub co lease is available for an ingoing of £22k plus a rent of £25k pa.

“We don’t mind either pub” says F & M , which is the best deal?

Well lets look at the numbers says Jack, but before we do I need to tell you that this is broad brush stuff, we as a company, do not offer accountancy advice, you will need to see your accountant to get a full appraisal but I can point out a few principle numbers, You would also be well advised to go onto our website and take the BII  PEAT (Pre Entry Awareness Training) course.

About the numbers; here goes;
The operational costs of running either pub are identical, so it’s the capital cost we need to view. Effectively if you take the pub co lease you will shell out ~£22k pa in rent but you will pay around £80 a barrel more for your beer (allegedly, this could change at any time if suppliers reduce their discounts to the Free trade) so over say ten years you will pay out a sort of premium of 10 x £22k plus 10 x 180 x £80 per barrel = £364k. At the end of the ten years you can sell the lease on for whatever you can get but likely (certainly) no less than the £22k you paid originally so net cost of this deal around £342k. With the other deal if you borrow say £380k at say 6% (currently but will never be as low again? Could grow to 10% plus over the next ten years) = £22.8 pa plus ten year repayment at £38k pa = £50.8k pa first year  and near to £500k over the ten years (but you get whatever you can achieve back when you sell it!
So “You pays your money and takes your choice!”.

Only one (major) flaw in all of this says Jack… “You haven’t got £400k to buy the Freehouse. Well, not unless you can borrow around £360k - go try and borrow it!”.

F & M return a few days later after seeing six bank managers and have discovered they could get easy loans to run the llama breeding centre in the Himalayas but naff all to buy a pub! “So it looks like the pub co deal for us?”, “I think so” says Jack “But we have heard so many bad stories and bad press articles about pub cos, what do we actually get from them compared to that if we really could have afforded that Freehouse?”. Well let me give you a list of the differences, you get the following from your pub co but not if you could have afforded the Freehouse (which you cant):

You get a low cost entry into running your own business which fulfils the dream you have always had
You get an induction course to give you every piece of information you need to run a successful pub
You get a dedicated Business management development manager free to support you.
You get promotional activity on an on-going way
You get invitations to company exhibitions and seminars
You get access to on-going training courses
You will get help with repayment of your trading account if you fall behind (if you were a Freehouse the suppliers will simply cut off goods if you do not pay on time)

And remember this, a pub co can only succeed if you succeed, they have a total interest in seeing you succeed, without you, they do not have a business”.

F & M go on to get the Pub co deal and live happily ever after.

The freehouse sold and went bankrupt 2 years later.