Pub finance

Pubs are one of the harder trades to finance and one of the most commonly misjudged. The deal usually fails on one of three things, and all three can be checked before you speak to a lender.

Work these out first

• Can the trade carry the debt?Adjusted net profit against the annual debt service, tested at a stressed rate rather than the rate you are quoted.
• What is the SDLT?On a new lease this is charged on the premium and on the net present value of the rent, as two separate charges. It catches people out.

The three things that decide it

1. The lease term caps the loan term

Lenders want the lease to outlast the loan by a margin — typically several years of unexpired term still running at the end of the facility. That works backwards into the loan term, and the loan term is what sets the monthly payment. A pub with a short lease does not get a long loan, and a short loan means a bigger annual debt service against the same profit. It is the single most common reason a deal that looks affordable on paper is not.

Check the unexpired term before anything else, and check whether the lease is inside the security of tenure provisions of Part II of the Landlord and Tenant Act 1954 — an unprotected lease has no automatic right of renewal.

2. Adjusted net profit, not the profit in the accounts

A lender does not lend against the profit line as filed. It adds back the owner’s remuneration, depreciation and genuine one-offs, then deducts a market-rate salary for whoever actually runs the place. On an owner-operated pub those two adjustments frequently move the figure by more than the profit itself.

If the seller is working sixty hours behind the bar and taking a modest drawing, the business does not make what the accounts suggest — it makes that, less what it would cost to employ someone to do the job.

3. Tied or free of tie changes the numbers, not just the beer

A tied lease constrains purchase prices and therefore gross margin, and that flows straight through to the profit a lender is assessing. Two pubs with identical turnover and rent can produce materially different serviceable profit depending on the tie. Establish which you are looking at before benchmarking the accounts against anything.

What lenders ask for

Two to three years of accounts plus current management figures; the lease and the landlord’s position on assignment; evidence of your contribution and where it came from; and relevant experience, which for licensed trade is taken seriously rather than treated as a formality. Adverse credit is not automatically a bar but it prices the deal.

Where this comes from

Written from twenty years of arranging finance at the small end of the licensed and retail trade, where the deals were tens of thousands rather than millions and the accounts were the whole story. The calculators linked above show their working and cite their sources; this page is experience, not a source, and it is not advice.