Finding a property
Over the past few years the commercial property market has been incredibly buoyant, fuelled by historically low interest rates and skyrocketing residential values. Unfortunately for buyers, this has led to a shortage of properties on the market, especially freehold sites, as many owners adopted a "wait and see" attitude to maximise returns, which in turn helped to keep prices at very high levels. Moreover, spiralling rental values on the high street have forced a lot of existing operators out to the suburbs and provided a barrier to entry for new ones.
But in recent months agents have reported that rents are becoming more reasonable and, with interest rates rising, there are signs that the supply situation is starting to ease. Following the appalling summer, agents are noticing a flurry of valuation activity as operators heavily reliant on tourism prepare to put their property on the market at the end of the season while they can still market the property using sales figures from the previous year. So now is as good a time as any to purchase new business property, but not before a few crucial steps…
Be prepared
Before starting your search for the right property you should have got your financing in place and determined what price point you should be looking at.
You should have also asked yourself some tough questions. While many people harbour a dream of running a pub, hotel or restaurant, not everyone is up to it.
Be honest with yourself. Are you sociable or garrulous enough to develop an atmosphere and pull in the punters? Do you have the temperament to keep calm while dealing with difficult customers? Are you hard-working enough to make a go of it, especially during those all-important first few months? Get staff in to do the job for you and you'll notice a heavy dip in your profit margins. Consider getting some experience if you haven't already, even if it's just unpaid bar work - it could stop you from making a terrible mistake.
Gordon Mair, a director at Edinburgh-based property agent Bruce & Co, advises anyone thinking of starting out on their own to go on a basic training course to give them an insight into the trade and dispel any rose-tinted images they may have. He also points out that one or two licensing boards are starting to view this as a prerequisite for granting a licence.
Another option, advocated by Graham Allman, corporate director at licensed property agent Guy Simmonds, is to get a mentor, and most agents will know of one. "It's money well spent, especially in the early days," he says.
If you're still unsure about striking out on your own, then running a franchise operation for a big chain is an option, says Paul Newman, property director at Osborn Securities. This will provide you with valuable operational support while getting a taste for running a business.
Choose your business carefully Having decided to run your own hospitality business, you'll need to choose what kind of business you want to buy. Do you intend to cut costs by living on site? Are you after a pub, a restaurant or an accommodation business? And if you're after a pub, for example, do you dream of retiring to a country pub with roses round the door, or are you after a lively city-centre operation? An option taken by some operators who aren't sure is to opt for a small hotel or B&B which offers the chance to run an accommodation business, a bar and a restaurant all in one.
If you're looking for premises to start a business such as a contract catering enterprise, you'll obviously need to find a place with good access that's convenient for distributing your goods to your customers.
The type of business you buy will naturally be influenced heavily by your reasons for striking out on your own in the first place. Some fledgling operators are merely looking for a way of working with their family. Others are looking for a lifestyle business and are attracted by the social side of the industry. Others are in it purely for the money, whether for the profit margins of the business or the bricks and mortar investment, or both.
Where to look When it comes to finding a property, there are several approaches. A number of print publications and their online equivalents carry classified advertisements for hospitality businesses and property - magazines such as Daltons Weekly, the Publican, Caterer & Hotelkeeper and Estates Gazette. The internet is an extremely valuable tool to get a feel for an area: get an idea of what's on the market and likely price points by regularly checking the websites of property agents.
A good option is to sign up with reputable property agents - a directory is printed in the back of Caterer each week - with experience in your desired sector and geographical area. This is especially important in areas where supply exceeds demand and good properties never make it on to the open market.
And don't be afraid of being pushy. Allman tells buyers that, if they're really anxious to buy a property, they should call him every Friday to find out what new instructions the company has just taken on and what will be coming on to the market over the next few weeks. "That shows they're committed, and they're not just ‘tyre kickers', and they get preferred client status as a result," Allman says. "If I know someone is really interested in buying a property in an area, I'll prospect that area for them."
Most agents will advise you to not settle on the first property you see. Better to study the sale particulars and visit as many properties of the style you intend to buy as possible. It also pays to have a level of emotional detachment. Don't fall into the trap of buying a property just because you fall in love with the area or the owner's accommodation. As Colin Powell, a senior partner at licensed property agent Border Commercial, which covers the whole of Wales, puts it: "Think with your head, not your heart."
Location, location, location Doing your homework on the area and the local market really pays off, so do as much as you can. Find out if there are any developments in the area which could affect your business, such as roadworks, parking changes or increased competition. Powell recommends visiting the competition to find out what they're doing and what kind of clientele they're attracting, and to help identify any niches in the market.
You also need to find out where your customers are going to come from, especially if in a rural location where people will need to travel to reach you. Powell also advises operators to look at local businesses and business sectors. If you're reliant on one area or business, there's always the possibility that it could relocate, leaving a big gap in your customer base.
Once you've settled on an area or town there's often no substitute for good old-fashioned shoe leather and pounding the streets. Simon Woodroffe, founder of Yo! Sushi and Yo! Everythingelse, is a great believer in this approach, although in his case he uses a scooter.
Woodroffe is also outspoken on the issue of what makes a good site. While the traditional mantra of the property agent is "location, location, location", Woodroffe argues that you don't necessarily have to be in an A-grade site with high visibility and footfall (and high rents as a result), because if what you're doing is good enough, then word will get around and the punters will duly turn up. This view is increasingly held by the agents themselves.
"I don't think that location is the be-all and end-all, but it does affect values," says Mair. "If you go to any location you'll find good and bad businesses." And don't be afraid to ask questions. "The one word that's overused by all agents, including us, is potential - you need to find out what the potential of the business is," Mair adds.
Have you got the cash? Having found a property, and instructed a finance broker to ascertain the costs of the purchase, the key thing is to make sure you're prepared for the worst by having a cash reserve, such as an overdraft facility. Funding also needs to be available for capital expenditure (capex) on the property down the line to keep it up to date and competitive. In the case of hotels, for example, the general rule of thumb is you should spend 4-5% of your annual turnover on capex.
A recent poll by chartered surveyor Fleurets showed that the biggest reason for people leaving the licensed trade was insufficient money, with 29% of respondents citing this as the reason for selling up. So be prepared. Lastly, have some belief in yourself and don't be afraid to take risks.
Planning permission
Business law firm Eversheds offers this advice:
If you're considering changing the use of the property, as long as you stick to the same-use category - such as changing a pub into a restaurant, which are both classified as A3 use - you don't need planning permission.
If you do require planning permission, consult the planning office as early as possible for a pre-application discussion to help identify any potential pitfalls.
Consult the local authority's Unitary Development Plan to see if it contains anything that would bar your plans, like a block on granting new licences.
Study the history of your site and find out whether planning permission has been refused in the past.
Where planning permission has been granted but has since lapsed, don't assume it will automatically be granted again.
Find out whether the property is listed. Is it within a conservation area, or subject to an enforcement notice, placing restrictions on what you can do? In the case of the latter, you should seek professional advice or consider cutting your losses and looking for a new property.
In summary - Get your finance in place before you start looking for a property.
- Identify suitable locations and the type of property you want to buy, using classified advertisements in magazines, the internet, "gut instinct" and shoe leather.
- Don't settle on the first property you see; study the sale particulars and visit as many properties of the style you intend to buy as possible.
- Use your head, not your heart.
- Research the area thoroughly and look for any future developments which could adversely affect your business.
- Sign up with reputable property agents, and if using accountants and chartered surveyors, choose ones familiar with the industry.
- Don't scrimp on surveys, especially on old properties.
- Be prepared for unforeseen circumstances: have a fall-back plan and a cash buffer, such as an overdraft facility, for slack times and periods like January when a lot of bills arrive.
Leisure property specialist Davis Coffer Lyons offers advice on buying a property: - Outline particular locations where you believe your concept would be best placed to reach your target market. Do you want to be positioned in town or out of town; on the high street; in a shopping mall; in the suburbs; in a leisure park? Be precise.
Do you need freehold or leasehold? A freehold provides an asset, but the purchase can be a drain on capital which could be more effectively employed in growing the business.
If you take a lease, make sure it's on acceptable terms. Is the rent affordable? Who's responsible for repairs? Does the user clause permit your proposed style of use? Can you freely sublet or sell it on?
Think about taking existing units which are at least partially fitted. Such sites generally also have planning consent and licences in place, which saves time, effort and cash. Budget carefully for your fit-out, and don't allow yourself to exceed that figure.
Do you intend to roll out? If so, how many sites do you require? Make sure that your first sites are in strong locations. One underperforming site will have a major effect on cash-flow, particularly when you're small.
Finding the right property
Stephen Page, a director at property agent Colliers Robert Barry, offers some advice.
The best start is to contact a specialist agent. If your own property is sold, this puts you in a powerful position, as most vendors are keener to deal with purchasers who can proceed without a chain.
Ask if there are any new businesses coming on to the market. A good agent will be seeing new properties every week. There's plenty of competition between agents for your custom, so the one who gives you excellent service as a buyer is likely to be the one who will sell the property for you some years later.
Speaking regularly to an agent will help them understand your requirements and find what you're looking for, but it's probably as well to have an open mind on both style and location.
Are you looking for a lifestyle business where profits are not such a priority, or a business and property which can be developed over a number of years? If you're looking to attract a young clientele with a lively bar and disco, a remote location is unlikely to be of interest, but if you want to attract the semi-retired or City high fliers, they may well want a quiet location to de-stress away from the bright lights.
Prospective new owners would do well to book themselves on one of the several day courses available. In particular, a licensing course is essential in order to take over a licensed property.
An independent finance broker can advise on buying costs, to include your personal financial needs, and then you will be able to reassure both the agent and the vendor that your finance would, at least in principle, be forthcoming. But it cannot be stressed strongly enough that, for impartial advice, it's essential that the broker is truly independent.
www.colliersrobertbarry.co.uk
Freehold v Leasehold
Freehold premises cost considerably more than leasehold premises but give the buyer more control over the look and feel of the property, and there's the opportunity to benefit from increases in property values and any improvements you make.
However, in city centres most of the available properties will be leasehold, so you may have no choice.
In the case of a leasehold restaurant, Richard Negus, of chartered surveyor Fleurets, advises that the landlord may ask for up to six months' rent deposit, as well as details of your business plan, trade and financial references, and a personal guarantee.
Ideally, you should look for a lease with more than five years remaining, a fixed rent until the next rent review, and a lease which is renewable, Negus advises. And be wary if the service charge amounts to more than 20% of the rent payable.
Robert Chess, divisional director of Fleurets' London offices, advises operators of leasehold businesses that as well as obtaining the landlord's consent for any alterations or enhancements to the property, they should also have them recorded as properly licensed improvements. If this is not done, there's a danger that the improvements could be considered at the next rent review and result in the tenant paying a hefty rise.
www.fleurets.com
Case Study: Margaret Dunford Over the past 27 years entrepreneur Margaret Dunford has made the practice of turning around failing hospitality businesses before selling them on for a healthy profit into something of an art form.
Now 63, Dunford got her first property at the age of 36 when she bought the lease of a pub with her then partner. Since then she has undertaken a great number of projects throughout the UK, including B&Bs, restaurants and pubs, and a motel business in the USA - usually selling them on within four years at a healthy profit.
She has made a habit of using other people's money to make money, using a pub she has had for the past 25 years as collateral. Her latest venture is the Woodlands Cheese & Cider Barn & Tea Rooms, situated at the foot of Cheddar Gorge in Somerset.
She offers the following practical advice on setting up on your own:
Borrow as much money as possible and use as little of yours as you can.
Go to a market that no one else is doing. There are still niches everywhere, and if you know the market, there aren't any pitfalls. As long as you know your market well enough you can reap the benefits.
People say "location, location, location", but I don't believe in that - if you're good at what you do, then people will find you.
Buy a business that's run-down but has potential. Potential is a gut feeling you get after doing it for many years. Most businesses that come on to the market are being run incorrectly, leaving plenty of scope for improvement.
Don't go in and spend big money straight away. Start gradually changing the property when you get money coming in.
Build up your credit rating with your financial backers - that credit will follow you.
Get out before the business hits its peak, so there's something left for the buyer to grow.
Don't be afraid to take risks.
Believe in yourself.
