Example: Purchasing a Hotel / Pub, Plenty of Money Down

So despite what some of the moderators may think, some of us have interest or experience in this industry. I'm happy to take you through the process I went through buying a hotel/pub and what I steps I missed/messed up entirely - and you won't even have to PM me for the details.

So first step was I was in a position to buy a business to replace my PAYG income (this is commonly referred to as buying a job rather than investing). I scoured Real Commercial for a few months narrowing down some possible purchases based on purchase price and (alleged) annual profit, receiving memorandum's from a number of agents on potential businesses. This was handy as it helped in learning the lingo (leasehold = business, freehold = building etc) and you start to get an idea of what's normal for an industry for revenue, costs, profit etc. Eventually I narrowed the search to a particular pub and was ready to do some on the ground looking.

The target pub was centrally located in a regional city and had been operating for around 150 years by this stage, going bust once in the late 90's when it had become a bikie hangout. It was given a makeover and reopened the next year. Including an owners wage of $45k it was making a bit over $100k profit a year and was for sale with a 20 year lease for $300k.

Financials were provided which looked like financials to me, so box ticked! I passed these on to a large accountancy firm who agreed that they looked like financials and charged me like a wounded bull for the confirmation.

Now when buying a business, banks rarely, if ever, will lend on cash flow. This means you need enough equity or cash to pay 100% of the asking price. I had equity available and organised a business loan X-Coll against residential property.

We negotiated a purchase price of $275k and waited for settlement. On settlement day it turned out the seller did not have a 20 year lease to sell, only 15 years. This is a big deal in pubs - you need years on the lease as when it gets down to zero years you either buy more - re-buy the business effectively, or you get kicked out. Tense re-negotiations took place and we agreed on $265k as the new purchase price and settle.

The lease contains the standard first right of refusal clause should the building owners decide to sell and a lovely provision that required me to spend $50k on building maintenance within the next few years, whether they were needed or not.

The Numbers:
Business Revenue $1.5M p.a.
Purchase Price $265k ($35k below market value lol)
Rent $180k p.a.
Lease term of 15 years

Tip #1 - Request individual BAS & BAS statements to match to the financials
Tip #2 - Request bank statements to match deposits to BAS to financials
Tip #3 - Don’t skim read your lease or expect your lawyer to highlight pitfalls
Tip #4 - Plan your purchase structure i.e.Pty Ltd, Pty Ltd & Trust, Trust only. If things go bad, they can go bad in a big way so you want any other assets as protected as possible.
Tip #5 - Banks don’t lend on cashflow – you need 100% of purchase price in cash or equity
Tip #6 - Obtaining business finance is far slower than residential
Tip #7 - Consider how many years you are buying and how much extra years will cost providing the freehold owner will even sell them to you (they are not obligated after all)
Tip #8 - Have a real plan – what do you want to achieve, in how long, how will you exit
Tip #9 - Will the leasehold be sellable with less than 10 years left – how will it affect sell price
Tip #10 - You will be stolen from on a regular basis – free booze, free food, cash
Tip #11 – Its expensive to operate a pub. Costs are high - such as power for all those fridges and freezers, stock, wages, land tax, rates, rent etc.
Tip #12 – If things go bad how protected are you individually? Watch out for Director’s guarantees on everything as the business losses can become your personal losses
Tip #13 – Consider if you can avoid credit situations by using C.O.D. – it is easy to spiral out of control when you have staff ordering with no thought for your cashflow or bottom line. With COD every item that comes in is paid for (and inspected) on the spot giving you the chance to say no.

 

Very nice post

I'm not in commercial property at all (and have no idea on some of the abbreviations) it's nice to see the figures

So with approx $100K profit per year, you'd be break even in 3 years, and the rest is all profit? (or salary ...)
Do you think it worth it with all the efforts?

 

Let me know the abbreviations and I'll translate.

At the time, everything seemed to be for sale at 3 times annual profit - but annual profit is derived with a whole bunch of add-backs of expenses that may not be relevant to the next purchaser.
The current owners salary is included in profit along with a range of other interest and business expenses.

My tips 1 & 2 are things I didn't do and should have done. The business wasn't making a $100k profit on paper or anywhere else. It was treading water really and okay as long as nothing bad happened like a GFC ;-)

 

Hey mate

Thanks for the great write up.

How long have you had it now? Do the profit expectations match the financials you saw at the beginning? How much time involvement is there for you and mrs?

 

Don't worry, I can ask Mr. Goggles
It's BAS and COD - I'm assuming they're not name for fish.

How long the process took you, from finding the right business to settlement and have everything ready to run?

 

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thankyou for your thread

The forum benefits from people who are willing to share their story & help each other. And it is people like you who gain the respect of the other forumites.

{mods: deleted off topic stuff}

 

Business Activity Statement - This is something businesses do quarterly to tell the ATO how much GST they've received on things they've sold and how much GST they've paid on things they've bought. They then pay/receive difference.

COD - Cash On Delivery, as in inventory/stock gets delivered and pay for it then in order to control cashflow. Alternatively, most established businesses have an ongoing account with their suppliers that their purchases come from (which in some cases is allowed to go into negative).

 

I started looking online probably around the April of that year. I inspected the pub in the June and took over at the end of August. Not super rushed but I was such a noob who thought he knew everything that I missed a lot of things I'd be suspicious of now - that's where my tips at the end come from.

 

Let’s fast forward to the really expensive bit which was around 2.5 years later when the owners of the building decided they wished to sell. I had already decided this running a pub life wasn’t all it was cracked up to be so I wanted to own the freehold as an investment and sell the business.

The building owners wanted a touch over $2M. By this time rent had risen to $16k per month so rent and loan payments would be roughly the same. Seemed like a no brainer.

The actual loan process was incredibly long at around six months from first contact to settlement. The process involved meeting with the local banking people and getting the run around before they came back with 50% to 60% LVR’s which were unworkable. Funny story on reflection – a family friend announced he was worth $50M that he had $10M deposited at a particular local bank and we should go see them for finance as he had smoothed the way for us. Went along and met with the branch manager who had never heard of the guy and had no idea what we were talking about. Talk about made to feel like an idiot – the “family friend” disappeared from the scene around this time so I never got to ask what the hell they thought they were doing. Needless to say I’ve never shown my face inside that bank again!

Banks don’t love pubs as they can be a quite risky due to the high costs of entry and fixed cost base, particularly regional ones. Eventually I talked to a broker who found a bank that would do 70%. At 70% I needed to tip in roughly $650k in cash or equity. The application itself involved the usual reams of paperwork, previous tax returns, business plan and personal resume. It was a real drip process from my end – the bank would request some supporting paperwork and then two weeks later request another item, there was never just an upfront list of everything that was needed.

It took six months to get the freehold finance across the line plus $650k more in equity - gulp. Congratulations I was now roughly $3M in debt and could no longer sleep!

Tip #14 – Commercial finance can move like a glacier
Tip #15 – Consider your freehold purchase structure carefully – if you own the leasehold there will be GST considerations if you use a single structure for both, further asset protection considerations and you may want to be able to sell one without the other. I had the lease in one Pty/Trust group and the freehold in a separate Pty/Trust
Tip #16 – Do you want to be a publican or a commercial property investor – I wanted to be the latter so start planning how you move from one to another
Tip #17 – Being the landlord means you have to worry about the tenants finances in a big way unless you can endlessly stump up $16k per month in loan payments
Tip #18 – If you own the lease and the freehold you can rewrite the lease

 

Some good points @SonOfTrigger

There are plenty of pitfalls with purchasing a business (& many more/different ones in establishing a new one from scratch).

You'd engaged consultants for financial and legals (not that they added much other than to confirm 'yup, dems the lease/books) not so much validation of your decision - you shouldn't find out at the 11th hour that there’s 15 years left. Some of us make a living out of reading, interpreting and administering commercial leases.

It begs the question : "have you got a daughter?"

 

Tip #18 - if the lease and property are in the same entity the lease is void (you can't lease to the same entity as the ownership).

Being able to offer a new clean lease is a big advantage as the new lease will be on your terms.

 

It was certainly frustrating to pay professionals to do work I was incapable of doing only for them to do work I was capable of doing - if you catch my drift.

It makes a difficult transaction essentially a leap of faith and I'm too young for children ;-)

 

I will 2nd this - the lease is critical.

A guy I know of DID get a pub with no money down. As owner of the freehold he weighted the lease agreement heavily in his favour. eg The lessee got to pay all the owners legal fees regardless of any outcome. Maintenance was paid for by the lessee, but the owner could request it be performed promptly & to his standard. And if rent wasn't paid in full and on time then ownership of the lease would revert to the freehold owner.

So when the GFC hit & the main business in town reduced shifts, the pub takings plummeted. A couple of days late with the rent resulted in receiving a reminder letter from their solicitors (with an invoice for $1000 for the privilege). And a couple of months later the locks were changed & the $1.5M business changed hands for $0 down.

 

Pubs were the biggest victims of the GFC - its just that the public couldn't see what was happening. So many people went bust, and so many already wealthy pub groups managed to buy properties at 50% of value or less at mortgagee auctions after loans were called in - but I digress, that's covered later ;-)

 

Come on!

That was not off topic. Especially the part that said that you don't know what sort of Business we might want to buy. As I have a history of owning many businesses AND my parents ran Pubs, it IS feasible that we could want to buy a Pub.

 

I was in for a bit over five years in total. The financials were less than indicative of actual performance shall I say.

The time involvement was phenomenal. I was totally unprepared. Our opening hours were something like 11am until around 10pm during the week and until around 3am on Friday and Saturday. I hate working at night so never did a massive amount of nights but my day started at around 8am each day. Every day. As in all seven days. :-( We actually went over two years without a day off at one stage.

I'll write up a little more on day to day pub life and post it shortly and then the exit.

 

So the basics of this business was bar trade and restaurant trade, initially 7 days a week. When I took over I had 3 qualified chefs, two apprentices and some casual dish pigs in the kitchen. There was a bar manager and a bunch of casual bar workers and another bunch of casuals for the restaurant. I also had casual cleaners who came in at around 5am ahead of the next day.

Most of the casual staff were uni students so we needed a roster of around 15 to 20 at any one time to cover the unavailability’s. Not to mention that little bonus of not having to pay super if they earned under $400 for a month!

The staff numbers ebbed and flowed a bit over time and Sunday’s were an extremely unprofitable day so I decided to close entirely that day. We ended up with 2 full time (F/T) chef’s, some casual dish pigs, F/T bar manager, F/T restaurant manager, and the assorted casual crew. Net wages bill was around $6k per week (not including me – well actually $6k a week including me). I guess $8.5k-$9k gross a week.

We had some trust issues with some cleaners – padding hours, early morning boozing and lacklustre actual cleaning. We weren’t swimming in money (despite those dreams of $100k profit) so we took it in house. 8am every day we’d be mopping the bar and toilets. Let me just say there is nothing glamourous about cleaning toilets after a big night. People are disgusting.

We sold our sedan and bought a ute. Alcohol suppliers had stopped doing their own delivery and required a freight company to deliver to you, which you had to pay for. So we picked our booze up to save a few extra bucks. Kegs are heavy, cartons are heavy. I loathed booze pickup days.

So on top of cleaning we also worked the bar/restaurant from 11am till 3pm, the 6 days a week we were open as it allowed us to pull back on the wages bill a little. We also tended to do stints from 3pm to 5pm in the bar to cover shortages.

Money was so tight we had to be there every day to juggle takings with the change we needed for the tills and to pay the COD stock that would be delivered but we felt that we needed to refresh the place a bit – it had been nearly 10 years since it had been touched and we had always hated the name. We decided to have a makeover and had a big relaunch – we refinanced the business loan to get the extra dollars at this stage (bit of a mistake as I found out later). We redid the floors, the bar, new lights, new paint, whole new restaurant, new branding and it came out really well. Great bang for buck as we only spent $40k all up.

But there was a little speed hump ahead – the GFC hurt our industry pretty badly from a fear perspective. Eating out or boozing is a discretionary spend and that’s the first place that belts get tightened in a panic. Our revenue literally fell off a cliff – down two thirds overnight it seemed at the time.

Our weekly break even was something close to $25k and we had a month where we took something like $40k – a $60k hole in just one bad month!

 

When your expenses exceed your income, bills pile up. Who would have thought! It took a couple of months to get the idea that business wasn’t going to return to its mediocre levels without some form of action being taken. We were in a pretty big hole now. All our loans were in arrears and we had suppliers chasing us for money and refusing to supply us until we were back in trading terms.

We changed our menu to more of a classic comfort style of food figuring that in times of stress people want things that remind them of a better time, nostalgia and all that. We did this but used top notch ingredients so that it was classic and good at the same time. We also introduced some really sharp pricing for lunch time figuring the more we could make early, the less pressure there was later in the day. And for the first time in years, an idea worked! We actually did record numbers of covers (meals). We were in deep trouble with our loans but we had our heads back above water and had some excess cash to start outstanding accounts down each week.

We’d copped the power being turned off at home for an unpaid bill (buried under the other bills somewhere) and a letter of demand for the PPOR for not paying the mortgage for a couple of months. Tough times indeed! We got the power back on and the mortgage back on track and took the stress levels down slightly.

We prioritised the suppliers. (Rookie mistake). We paid them out one by one and stayed on Cash On Delivery – we’d been hurt by chef’s ordering massive amounts previously so this goes back to one of my tips – we never had that problem again when we went to COD.

I wanted to offload the business but small issue was that it probably wasn’t worth a whole heap, I had no job prospects to keep the loan payments up, and it’s bloody hard to get finance for a pub business unless you really don’t need finance.

We’d copped about $20k in legals from our lender (letters of demand) and had whittled our arrears down by about one third – circa $25k – like I said, it was a big hole – 3 months plus legals = $70k. We were optimistic for the first time that we’d turned the place around a bit and once we got everyone squared away we might actually get a wage or at least a day off.

Man plans and banks laugh apparently.

Our lenders, despite us whittling our arrears down, lost complete patience and we had Receivers arrive on our doorsteps one morning.