Buying a pub or restaurant in the UK: what to check

A pub or restaurant is a trading business wrapped in three regulated layers: the property it trades from, the licences that let it trade, and the people who make it work. A buyer who checks the accounts carefully and the other three casually has checked the smallest part of the risk.

This guide covers what is specific to hospitality. The general process is in our guide to buying a business, and you can browse current pubs and bars and restaurants for sale.

Leasehold or freehold

Most pubs and restaurants that change hands are sold leasehold. You buy the business and take over, or are granted, a lease of the premises from a landlord. Some are sold freehold, where the building comes with the business.

| | Leasehold | Freehold | | --- | --- | --- | | What you buy | The business, its goodwill and fixtures, and the right to occupy under a lease | The business and the building | | Upfront cost | Lower | Considerably higher | | Ongoing cost | Rent, plus repair obligations the lease puts on you | No rent; you carry the whole building | | Security | Depends on the unexpired term and the lease terms | You own it | | Financing | Harder: few tangible assets to lend against | Easier: the property is security | | What decides the price | Trading profit and the lease | Trading profit and the property value |

Leasehold is the more common route in, and it is also where the traps are. A leasehold restaurant is worth what the lease lets you earn from it, so the lease has to be read as closely as the accounts. The financing guide covers why lenders treat the two so differently.

The lease: what to read for

• Unexpired term. A short term limits how long you can earn back what you pay and what you can sell for later.
• Rent and rent review. The current rent, when it next reviews, and on what basis.
• Repairing obligations. A full repairing lease can leave you responsible for the whole building, and dilapidations at the end of the term can be a substantial sum.
• Assignment. Whether the landlord's consent is needed to transfer the lease to you, and on what conditions. That consent is outside both buyer's and seller's control and often sets the timetable.
• Use clause. Whether the permitted use covers what you intend to do, including late opening, takeaway or a change of cuisine.
• Security of tenure. Covered below.

The due diligence checklist sets out the full property enquiries.

Tied or free of tie

This is the question to ask first about any pub.

A free house buys its beer and other drinks from whoever it chooses. A tied pub is let by a pub-owning company on terms that require the tenant to buy some or all of its drinks from, or through, the landlord. The tie is reflected in the deal on both sides: in the rent, and in what the tenant pays for tied products compared with buying them on the open market.

A tie is not good or bad in itself. It changes the arithmetic. When you read a tied pub's accounts, the gross margin on drinks reflects the tie, and a buyer comparing it with a free house on the same street is comparing different businesses.

The Pubs Code

The Pubs Code regulates the relationship between pub companies owning 500 or more tied pubs in England and Wales and their tied tenants. It was made under the Small Business, Enterprise and Employment Act 2015, is set out in the Pubs Code etc. Regulations 2016, and is enforced by the Pubs Code Adjudicator.

Its two principles are fair and lawful dealing by the pub-owning business, and that a tied tenant should be no worse off than they would be if they were free of tie. When this was written, the Adjudicator listed six pub-owning businesses as covered: Admiral, Greene King, Marston's, Punch Pubs, Star Pubs and Stonegate.

The Code gives tied tenants rights that a free house tenant does not have, including:

• Market Rent Only (MRO). The right, at certain trigger points, to ask to occupy the pub under a free of tie tenancy at a market rent. The triggers include a rent assessment proposal, a renewal of the tenancy, a significant increase in the price of tied products or services, and other defined trigger events.
• Information before you commit. The pub company must provide set information about the tenancy, the tie and repair obligations.
• Pubs entry training. The company must advise a new tenant to complete pubs entry training, unless they already run a tied pub for the company, have at least three years of relevant business management experience, or have previously held a tenancy or licence from it.

If you are buying a tied lease from an outgoing tenant, the Code applies to the assignment too. Where the pub company's agreement is needed, before giving it the company must make sure you have received the information given to the tenant, have been advised to complete pubs entry training (subject to the same exemptions), and have been advised to take independent advice, including from a qualified surveyor. If there is an investment agreement, you must be told about it and given a copy.

The Code does not apply to a pub company with fewer than 500 tied pubs, to free houses, or outside England and Wales. A tied tenancy with a smaller company is governed by the lease and nothing more, so read it accordingly.

The premises licence and the designated premises supervisor

In England and Wales, selling alcohol from premises requires a premises licence under the Licensing Act 2003. Buying the business does not move the licence to you. Two separate steps are needed, and both have to be done before you sell a drink.

1. Transfer the premises licence. The new holder applies to the licensing authority to transfer it. The application can ask for the transfer to have immediate effect. Where it does and the requirements are met, the licence has effect as if transferred from the moment the authority receives the application, until it is granted, rejected or withdrawn. The current holder's consent is normally required, so build it into the purchase agreement and have the signed consent ready for completion day.

2. Name the designated premises supervisor. Every premises licence authorising alcohol sales must name a designated premises supervisor (DPS), who must hold a personal licence. The Act is blunt: no alcohol may be supplied at a time when there is no DPS, or when the DPS does not hold a personal licence or it is suspended, and every supply must be made or authorised by a personal licence holder. If the seller has been the DPS, you apply to vary the licence to name the new one, and the application can request immediate effect.

Personal licences. GOV.UK states that an applicant must be 18 or over and in almost all cases hold a relevant licensing qualification. You do not have to hold one yourself to own a pub, but somebody you trust does, and the DPS is the person the licensing authority and the police will look to.

Restaurants that serve alcohol need exactly the same: a premises licence, a DPS and personal licence cover. A licence also carries conditions, such as hours, door staff or CCTV, which bind you once it transfers. Read the licence and its plan, not only the summary.

In Scotland the system is different. Licensing there runs under the Licensing (Scotland) Act 2005, and the role equivalent to the DPS is the premises manager named on the licence. Take Scottish advice on the transfer rather than applying the English process.

Food registration and hygiene ratings

Register the food business. GOV.UK is explicit that when you start a new food business, or take over an existing one, you must register with the local authority at least 28 days before you start trading. Registration is free and cannot be refused. That applies in England, Wales and Northern Ireland. Build the 28 days into your completion timetable.

The hygiene rating. Under the Food Hygiene Rating Scheme in England, Wales and Northern Ireland, local authority officers rate a business from 5 (very good) to 0 (urgent improvement is necessary). They look at how hygienically food is handled, the physical condition of the premises, and how food safety is managed through processes, training and systems.

Displaying the rating is a legal requirement in Wales and Northern Ireland and encouraged but voluntary in England. Scotland runs a separate Food Hygiene Information Scheme, which gives a result of Pass or Improvement Required.

A rating is a snapshot of one inspection, so treat it as evidence about the premises and the systems you are inheriting, not as something you are buying. Ask for the last inspection report as well as the score. A low rating tells you what the officer found wrong. A good rating with an old date tells you less than it appears to. If the kitchen needs work to hold or recover a good rating, that is capital expenditure to price in.

Security of tenure: the Landlord and Tenant Act 1954

In England and Wales, a business tenant whose lease is protected by Part II of the Landlord and Tenant Act 1954 has a statutory right to a new lease when the current one ends, which the landlord can oppose only on specified grounds. That right is often a large part of what a leasehold hospitality business is worth, because it is what lets the trade continue past the end of the term.

The parties can agree to exclude it, which is called contracting out. Under section 38A the exclusion is only valid if the landlord served the prescribed notice before the lease was granted and the procedural requirements were followed. So check two things:

• Is the lease inside or outside the Act? A contracted-out lease ends at the end of its term with no right to renew. With a short term left, that can make the business unfinanceable.
• If it is contracted out, was it done properly? Ask to see the notice and the tenant's declaration. A defective procedure can leave the lease protected after all, which is a point for your solicitor.

The 1954 Act applies in England and Wales only. Scotland has no equivalent statute, and what happens at the end of a commercial lease there works on different principles, so take Scottish advice on the lease rather than applying the English position.

For a tied pub, a renewal under the 1954 Act is one of the Market Rent Only trigger points, which gives the security of tenure question a second dimension.

How hospitality is valued

Pubs and restaurants tend to sit towards the lower end of the range of profit multiples paid for owner-managed businesses. The reasons are structural rather than a judgement on the sector: trade that depends heavily on the owner being present, short and uncertain leases, high fixed costs, exposure to local competition, and a customer base with no contract that brings it back.

Within that, the spread is wide. A leasehold restaurant with a long protected lease, a manager who runs it without the owner, and three years of steady trading is a different asset from one with two years left on a contracted-out lease and an owner who cooks every service. Freehold changes the picture again, because the property carries its own value alongside the trade.

Our guide to sale multiples by sector explains why published ranges mislead and what moves a business within its range, and how UK businesses are valued covers the method. Test every add-back in the seller's adjusted profit, particularly the owner's own hours, against the add-backs guide.

Staff and TUPE

Hospitality is labour-intensive, and the team is much of what you are buying. When you buy the business as a going concern, the employees transfer to you under TUPE on their existing terms, with their continuity of service and most of the seller's employment liabilities.

Check the things that go wrong most often in this sector:

• Holiday pay for staff on irregular hours and variable pay.
• Tips and service charges. How they are collected, recorded and distributed.
• National minimum wage compliance, including deductions for uniforms, meals or accommodation.
• Right to work records for every employee.
• Live accommodation. Staff living on the premises, on what terms, and what that means for the property.

The seller must give you employee liability information before the transfer, and you have duties of your own to the staff before completion. Our TUPE guide covers both, and what to put in the purchase agreement.

A short list before you make an offer

1. Is it leasehold or freehold, and how long is left on the lease?
2. Is the lease protected by the 1954 Act, or contracted out?
3. Is the pub tied, to whom, and is that company covered by the Pubs Code?
4. Will the current licence holder consent to a transfer with immediate effect, and who will be your DPS?
5. Have you allowed 28 days to register the food business before you trade?
6. What did the last hygiene inspection find?
7. Who are the staff, and who actually runs the place when the owner is not there?

A pub or restaurant with good answers to all seven is rarer than the listings suggest, and worth moving quickly on when you find one.