Hotel and Pub Buyer Beware!
Key steps to buying a hotel or licensed business by David Terms CA

You have spotted the ideal hotel to buy... idyllic surroundings, good occupancy rates, fantastic chef and so on. Time to get the cheque book out right? Wrong!

Before jumping in with both feet stop and think. Have you taken professional advice? Some clients wish to discuss the viability of their purchase and borrowing requirements before deciding to proceed with the purchase. Others will leave it until the deed is done, the business has been acquired and the finance is in place. They will then consult their accountants on setting up a bookkeeping system and registering the business plus all the usual tax and VAT requirements.

However, most of the time we are approached once a business has been targeted, the client wishes to make an offer but subject to the appropriate funding being raised. This is where a business plan is required.

Even before you make an offer, ask yourself why the current owner is selling. Many people think they can make a success of any business venture, particularly in the hospitality trade. It's not that easy! Naturally, the vendor will tell you that business is great, they may inflate the turnover figures, tell you that they work with a minimum of staff, they don't need to declare all the income - there's a good skim!!. Moreover, they will claim that the business still has huge potential and it is relatively untapped!

The owner can come up any number of excuses why they are selling up. Take these with a large dose of salt. Often the business is a failure and you should not touch it with a barge pole. Check the viability of the business before proceeding any further. Ask for the last three years accounts if you can. Often the owner has not been trading that long or there are no up to date accounts - always a worrying sign.

If you do have the latest accounts you can quickly prepare a profit and loss forecast. You need to calculate your break-even point - what sales do you need to cover the personal drawings you require for yourself and your family to live. Do you feel comfortable with this break-even target? If the margin feels too tight it is sometimes better to walk away from the deal. It is probably not what you want to hear if you have your heart set on the hotel or pub, but it will save time, money and frustration in the long run.

If you want to succeed in the hotel or licensed business there are certain qualities you will need.

Commitment
You will need to commit to the enterprise for at least five years. There is no such thing as a "get rich quick" scheme.

Long Term aims
Although it is hard to judge at the outset it is important to have an idea of what you want to achieve long-term. It is best to break this down into bite-sized targets which can be constantly reviewed and you will have a sense of achievement when these are reached.

Niche market
Spotting a gap in the market which is not currently filled can be difficult but not impossible. However, in recent times, most new niche markets have generally been in the service sector. Can you offer something which no one else does? What can you do better than your direct competitors? Is there a specific market segment you could appeal to? If possible try to become really good, well-known and highly regarded in a particular customer segment. It might be that your business can become known for being family-friendly or for being especially inviting for single people.

Flexibility
You will have to be able to adapt to market forces and trends. Nothing ever stays the same. But if you can anticipate change and not be caught on the back foot the better your chances of success and staying ahead of your competitors.

Wages
When putting together a forecast for your business plan your largest expense will be wages. Do not underestimate this figure. You will generally need more staff than you originally thought. Most other expenses can be projected fairly accurately from the previous accounts although look out for any anomalies such as unusually large purchases. Be aware that the net profit figure is prior to the owners taking any private drawings for themselves. This is often misunderstood by those going into self-employment for the first time.

Cash Flow
A cash flow forecast is probably the most important part of your business plan. This indicates what funding will be required and when the cash flow is likely to come under seasonal pressures. Once an overdraft has been agreed with the bank it is important to trade within the limits so it is vital you estimate your requirements as accurately as possible. It looks bad if you have to go back to your bank manager a few months down the line for more funds because your forecasts were inaccurate. The golden rule is always to ask for a bit more than you think you will need and you will be covered. However, if you do anticipate problems let the bank know in advance, the bank manager doesn't like surprises! Also watch out for bank covenants before signing any agreements. Many banks will now charge a penalty if you breach agreed ratios. Check any agreements with your accountant before signing.

Preparation
It helps if prior to the meeting with the accountant that you have done some homework on the areas to be covered. This should take the form of a rough draft plan together with some supporting narrative on how you have arrived at your figures and assumptions.

Prior to commencement of trading Your funding is in place and your offer accepted, great! However there a few things to sort out before trading: Depending on the barrelage of draught beer sold you should be discussing terms with a few breweries to see what offers might be available. If you already have a "soft" loan from a brewery any discounts offered will be affected. You may be able to negotiate an advance of discount which is written off future discount earned. This can be a very welcome injection of capital. Ask your accountant for advice on the above. Register for VAT. Keep proper bookkeeping records for VAT purposes. Complete quarterly returns on time - there are strict penalties for late or inaccurate returns. Elect for cash accounting if your turnover is under £660,000 as you will not have to pay out the VAT until you are paid. Register as an employer for PAYE/NI purposes. Register the owners with HM Revenue & Customs. Set up a suitable bookkeeping system, whether it be manual or computerised. Put proper insurance in place. Make sure employees are issued with proper written contracts. Get casual employees to sign P46 forms. Put proper controls in place for cash and stock. Carry out regular stock takes. Closely monitor the percentage gross profit and investigate any surpluses/deficits. Employ your spouse if allowances are not fully used up. Seek advice on availability of grants. A good business plan will provide you with direction and help you make the right decisions. It will help you spot issues that could stand in the way of success and will ensure key performance indicators can be measured.

Waiting for the annual accounts to be prepared is too late to make key decisions. Regular management accounts, ideally prepared monthly, will help keep the business on track. You should use these to compare with the figures for the same period the previous year. However, it is no good just producing figures, you have to interpret them and know what action is required. Your accountant should be able to help with analysis and review. It is also useful to try and obtain information on the performance of similar businesses and compare yourself with them.

The Exit Route
Don't leave it too late to plan your exit route or you may find certain options may be closed to you. Do you pass the business on to the family? Can the employees be involved? Will you be able to sell to a third party? Or will you simply wind up the business and realise the assets. Whichever route you take there will be financial, pension and taxation considerations to be taken into account.

Hopefully through careful planning and taking professional guidance you will have a successful hotel or licensed premises which will not only be profitable but provides an enjoyable way of making a living!