Ten steps to buying a hospitality business

02 November 2006
Ten steps to buying a hospitality business

Buying your own business may seem a daunting task, but if you get the right experts around you and follow these basic guidelines then the process could become relatively painless. Hugh Caven explores the purchase of property

Assuming that this is your first purchase and you need as much help as possible, the first thing to do is source your advisers.

Get a good solicitor

The expertise of your solicitor is paramount. You are not just buying a lump of bricks and mortar. Your target is alive with supplier and staff contracts, possible leasing arrangements, licensing, disability compliance, fire-audit compliance and a myriad of other quirks that a standard property conveyancing expert may not have encountered.

Make sure your solicitor has the expertise required to carry out this transaction.

Get the right lender

If you intend to deal with your own bank, bear in mind that their level of expertise may be questionable. Going to a bank is rather like visiting a factory shop. They can sell only what they make. In contrast, you have the option of visiting a supermarket through specialist finance brokers who will have access to the whole market, and will either tell you that you are going in the right direction, or will offer you some improved alternatives.

Get accountant's help

A business plan will be required for your broker/lender and, while the narrative is always more interesting when written by the borrower, you may need some help with your forecasts.

While the plan is necessary to obtain financial assistance, it has a very valuable use in the future. The forecasts will act as a barometer of how you are performing against your expectations. Keep the document after completion for reference purposes.

In addition, you should take your accountant's advice on the apportionment of the purchase price. Within the contract, the price will be split between the property value, goodwill and loose fixtures and fittings. The stamp duty you pay will be a percentage of the agreed property value.

Obtain your licence

The best place to start is the British Institute of Innkeepers (www.bii.org.uk). This site will direct you to the course which is nearest to you.

Get VAT-Registered

Contact HM Revenue & Customs for a VAT registration pack. Your own VAT number is essential for the establishment of merchant services. Obtaining registration and arranging the credit card facilities can take time and the excise office will not be rushed. As the VAT form is quite complex the application may be better handled by your accountant.

Make several visits

So far hopefully you have met a very amenable vendor. Now you are in contract this may well change. Most vendors will try to minimise your number of visits to the unit until you have exchanged contracts.

The main reason given is that if the staff find out they will become unsettled or leave, or it will affect trade if their customers find out the business is about to change hands. I have little sympathy for either argument. With the exception of a wedding venue, I cannot see why anyone would boycott an establishment because it is for sale.

Even so, it never ceases to amaze me how many purchasers commit hundreds of thousands of pounds to a business purchase based upon only a couple of short visits.

Obtain valuation report

The number of valuations you commission will depend on your own preferences and those of your lender. Be warned, however, that one report may lead to another.

In terms of the various values, most lenders require a mixture of the following:

  • Market Value 1 - its value today as a fully operational business with reliable accounts.
  • MV2 - what the business is worth if still trading but there are no accounts and there is a time limit on the sale process.
  • MV3 - again, a limited time to sell, but there are no accounts, the business is closed and the inventory has been removed.

The majority of reports we see run to between 25 and 30 pages, covering all aspects of the business, the location, the competition, the staff and most important, the historic trading of the business.

The reports will analyse and reconstruct the available accounting records, comment on the trade since the last set of accounts, and offer their own projection based upon your business plan and their experience of other similar establishments.

Get building survey

If the valuer notices any material property concern, it will be reported in the valuation with a recommendation to examine the problem in detail. I have to warn you that this could lead to yet another report if, say, the general structural surveyor feels that a structural engineer is required.

Another factor that always surprises me is the resistance by many purchasers to these reports, viewing them as a cost burden instead of accepting that it is better to spend and know rather than to be surprised later.

Health and safety audit

With so many issues now the responsibility of the owner, obtaining an early audit of every section of your business is invaluable. The audit will cover food hygiene, safety at work for your staff, and premises and grounds safety for your guests.

As of 2 October 2006 the premises owner must have carried out and maintained a fire risk assessment audit policy. From the date you complete, the buck will stop with you.

Now over to you

So there you are. Your lawyers have done their job, your business plan and business appraisal has achieved the funding, other surveys have given you the comfort that the building is sound and you have your health and safety audit booked.

Now it's over to you to run a successful business. Good luck.

Hugh Caven is a director of Walbrook Commercial Finance, finance specialists to the hospitality sector

01892 512800
www.hotelfinanceonline.com

Case study: Rectory hotel

Even after you've taken over a business and done everything by the book, there can be some hidden surprises in store.

Jonathan Barry bought the freehold of the 12-bedroom Rectory hotel, near Malmesbury, Wiltshire, as a going concern last year. Some of the building dates back to 1730 and includes a baptism pool in the garden.

He says: "We bought the business on a Wednesday and opened on Friday and carried on running the hotel for a couple of months. Then we closed for a complete refurbishment of the ground floor to be ready in time for a wedding.

"We had 27 days to refurbish the ground floor. The biggest headache was finding asbestos under the dining room floor late in the day.

"The Health & Safety Executive said we'd have to shut down for 10 days, which was impossible. In the space of 36 hours we had to fill in forms and get a waiver.

"Eventually, with half an hour to spare we were granted the waiver. They'd granted only two in the last three years - one in an old people's home and the other in a primary school. We felt very lucky

"We didn't let the bride know and had a marquee lined up in case the dining room wasn't ready.

"A specialist asbestos-removal team came in, built a tent over the asbestos and used a large vacuum to remove it. It took four days.

"Once they had gone we had a very short time to get the dining room finished. We were applying the final layer of varnish to the floor at 4am the night before the wedding.

"It was one of our best weddings because it was such a challenge to make it good.

"The bride had been visibly upset when she came in two days before and had seen all the carpets up. But we told her everything was going to be fine, and it was."

For more on dealing with asbestos click here >>

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