An extensive review of Merchant Inns for its bankers warned that its financial forecasts were "simplistic" and its financial control "weak", more than three months before it went into administration.
The boutique pubs-with-rooms operator, owned by property magnate Sir John Ritblat, called in administrators Deloitte in October last year, following the sacking of its chairman, Robert Breare, in August.
The moves came following the production of a report by Baker Tilly in July of that year, dubbed "Project Venice", which investigated the state of the business.
It recommended a full review of the business after it found that only three of its seven units (the Talbot, the Lambert and the Carnarvon) generated most of its revenue and almost all of its site EBITDA.
A copy of the report, seen by Caterersearch.com, also revealed that the company had been hampered by senior staff changes such as two operations directors in the two years leading up to the report, and five GMs at the Carnarvon over the same period.
Baker Tilly found that the group was over-leveraged and "technically insolvent on a balance sheet test basis as at 26 April with liabilities of c.£31.3m vs assets of £26m".
It also warned that financial forecasts were "simplistic in their creation with inherent limitations within the forecasting model".
And it recommended the immediate appointment of an external finance director after it concluded that financial control was weak, despite assurances from the management that it had improved.
Merchant Inns was established in 2000 to invest in freehold pubs, with an initial investment of £2m. Robert Breare was appointed non-executive chairman and later chief executive thanks to his experience in hospitality, including firms such as Malmaison Hotels, Noble House Leisure and Arcadian.
Investors in Merchant Inns are understood to be close to appointing an operator to run the business.
Merchant Inns goes into administration >>
Robert Breare sacked as chairman of Merchant Inns >>
By Neil Gerrard
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