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Trade assessment

TRADE ASSESSMENT, PROFIT MARGINS & BUSINESS PLANS

• - GENERAL OVERVIEW -
• - PREPARING A BUSINESS PLAN -
• - PART 1 - THE BUSINESS PLAN -
• - PART 2 - TRADING AND PROFIT & LOSS ASSESSMENT -
• - PART 3 - THE PROFIT AND LOSS ACCOUNT -
• - PART 4 - CASH FLOW ANALYSIS -
• - PART 5 - START UP COSTS -

GENERAL OVERVIEW

The styles of business operating in the Licensed trade/leisure sector vary very widely, from the basic local pub operating on low prices and very low profit margins (because it is tied for beer supplies) where the gross profit might be around 40% through to the smart cafe bar or night club operating in a prime location with premium prices and large free trade discounts whereby the gross profit can be over 70%. The vast majority of purchasers need to arrange a loan to purchase their "dream" pub, and understanding and knowledge of the accounts of businesses, their profit margins and overheads is essential.

A typical leasehold, where the tenant is tied to for main wet sales supplies, the gross profit can generally be between 48% and 53%. Freehouses with discounts of over £100 per barrel can achieve gross margins of well over 60%.

Dependent upon the terms of the lease, lessees might achieve a "bottom line" trading profit (after staff wages and rent but before any payment to themselves) of 10%-15% of the VAT exclusive sales. Freehouses can achieve net profits of 30%-35% of sales, before finance charges, but the actual profit achievable for both styles of business is very dependant upon the size and layout of the property, staffing requirements, patterns and levels of trade.

Sustainable rents are generally in the range of 10%-15% of sales. 20% is unsustainable, unless these are special circumstances (such as where there is a very high proportion of accommodation and food, or the business is very clearly trading below its realistic potential).

PREPARING A BUSINESS PLAN

Firstly you need to convince yourself that the business is viable and then you need to convince a lender (or in the case of a lease the Pub Co landlord) that you can trade successfully at the unit and meet your commitments in terms of loan repayments or rent. A well researched and thought out Business Plan will provide all your answers.

In order to prepare the plan you will need to obtain as much information as possible about the business, and we cover these points below. The question most often asked is "What is it taking a week?" or "How many barrels is it selling?" Given that a licensed busniess will only ever be as good as those running it, the answer to these questions is a starting point - not a finishing point. The Pub is only trading at its current level because of the skills and efforts (or otherwise!) of the people currently running it. Whilst current trade levels may act as a very rough guide, the question you must ask is "What will it do with me running it?" One of the most important areas for you to look at critically is that of your own capabilities.

The first source of information will probably be the details on the business provided by the selling agents. These might be quite comprehensive, and accounts should also be available for freehold or leasehold businesses.

The remainder of this guide is intended primarily to cover the new lease sector, where only bulk supply information (beer barrelage etc.) is available. There are five parts:

Part 1 The Business Plan

Part 2 Trading and Profit & Loss Assessment

Part 3 The Profit and Loss Account

Part 4 Cash Flow Analysis

Part 5 Start-up Costs

Abbreviations or Acronyms you might encounter:-

G.A.T.T. = Good Average Tenants Trade. (i.e. Brewers assessment of the trade which a good average tenant should be capable of achieving in a particular house). M.A.T. - Moving Annual Total. (i.e. A projection for a full year based on the trade for part of a year). A.W.P.M = Amusement With Prizes Machine. R.V. - Rateable Value.

PART 1 - THE BUSINESS PLAN

With the property details, and your own observations and research, you can set about your Business Plan. The format that you follow is entirely up to you, but we suggest the following points should be included.

INTRODUCTION

A few notes about yourselves - general background, family, licensed trade experience, etc.

Why you wish to enter the trade and in particular why you wish to be proprietors of the selected business.

A full CV of you and your partner should be included by way of an appendix at the end of the plan. Reference to its inclusion should be made here.

THE PREMISES, IT'S LOCATION AND ENVIRONMENT

A brief physical description of the building - large, small, old, new, detached, terraced, in good state of repair or derelict!

Is the Business situated in a residential area, close to shops, on a main road in a village, etc.

Is the local housing and/or potential customer catchment downmarket and mostly unemployed, up market housing on high mortgages leaving little disposable income to spend or possibly, middle class housing with predominance of 55+ age group with high disposable income.

OUTSIDE

What is your initial impression - would it encourage you to stop for a drink and a meal. Is it well sign posted and attractive to catch passing trade? Does it tell the customer what facilities it offers - food, beer garden, etc.

How would you improve its appearance and facilities?

INSIDE

Is it warm and inviting? Is it clean and tidy? Is it well laid out? Could the trade area be better used? Is the service good? Is the general decor in good order? Are the toilets good? If not, how would you improve - how much would it cost - can you afford it?

Are the support facilities in good order and workable, i.e. central servery or separate serveries, beer cellar, trade kitchen, etc.? Private accommodation - is this adequate for your family's needs?

What types of customers visit the business - age range - average spend, etc. and where do they come from? Which are the busiest trading periods - lunchtime business and/or evening/weekends? Could you improve?

Are sales higher for beer or for wines and spirits and why? Does the service meet demand?

Does the business offer other attractions - promotions, pub games, etc.?

COMPETITION

What other pubs or attractions are nearby. Remember, if you are offering food you are not only in competition with other licensed premises but also cafes, garages, newsagents, fast food chains and supermarkets - they all sell food! Are your sandwiches as good as Marks & Spencers? Identify and assess briefly the perceived competitors.

Are the competitors busier than this business and, if so, why? What are they offering that this business does not? Can you do better - if so how?

FUTURE TRADE

Your brief marketing plan for the future with an indication of your pricing policy/price structure and main ideas for developing or maintaining trade, in the short, medium and long term.

Where are you going to draw additional trade from? Is there a source of trade in the area which is not being catered for by anyone else? Can you provide this service? How are you going to achieve this - what are you going to offer to attract this extra custom. Will you advertise - rely on word of mouth etc.?

Scope for extended opening. Dependent on location - what about breakfasts and afternoon teas?

Is the space best utilised. What about a family room - extra eating area? How much will any alterations cost - can you justify the capital outlay against the additional trade you would hopefully attract?

IMPORTANT: Do not undertake any works without the necessary consent of the Planning Authorities and Licensing Authorities - and in the case of a lease of the Pub Company. Also ascertain from the Pub Company (in writing) the impact there will be on the rent if the Pub Company are funding an alteration. If you propose to fund alterations yourself obtain (in writing) from the Pub Company confirmation that the alterations will be excluded from rent reviews. When funding alterations consider how quickly your investment will be recovered.

What about the large garden at the rear - scope for barbecues, etc.?

CATERING

An increasingly important part of the trade is the catering operation you can offer. You are selling a whole experience, not just beer.

Consider very carefully the style of catering you intend to offer. Is the kitchen big enough? Will it be capable of operating in the require manner without breaking any food safety laws? Are you capable, and is the kitchen equipment capable of preparing food to the right standard and at the right speed? How much capital will you need to invest to provide the right facilities for your operation? Outline the operation you intend to run and possibly include a sample menu as an appendix.

TIP - Consider fully the implications of buying equipment on lease. You cannot sell on any leased items until you have cleared the debt which, if this happens before the full course of the agreement is run, can incur a penalty and prove very expensive.

SWOT ANALYSIS

Prepare a brief analysis of the main strengths (actual or potential), weaknesses, opportunities for development and threats (actual or potential) to the business.

CONCLUSION

How do you see the future of the business? Be positive but realistic. Try to convey that you have a ‘feel' and a commitment for the business.

PROFIT AND LOSS ACCOUNTS

An estimated breakdown of the businesses present trade and expenses (see below) - assuming that no actual trading and profit and loss accounts are available.

Base calculations on the barrelage figures given on the details, if provided, and your own observations of the trade made when visiting the Pub. Does the present trade offer an adequate income for your family? If not, do you have sufficient reserve capital to bridge the gap whilst ‘trading up'?

PROJECTED PROFIT AND LOSS ACCOUNT

A breakdown of the income and expenses of the business after your first year of trading. Do not be over optimistic but realistic.

CASH FLOW FORECAST

It may be a good idea to accompany your projected Profit and Loss Account with a Cash Flow forecast for the first twelve months. Simply show the income and expenditure figures on a monthly basis, with income gradually improving until you reach your annual total. Since income will be low in the first few months and costs will be high this will demonstrate to you where you may experience a shortfall in cash - i.e. where your costs for the month are higher that the income. Should this be the case you will need to have extra cash capital to see you through these early days.

APPLICATION/OFFER

Confirm (briefly) your reason for wishing to take the lease. If offers for rent were invited - make your offer here.

FINALLY

A word of thanks for the opportunity of being considered and hopefully being appointed to the business.

TIP - For a more professional presentation have you Business Plan word processed. Present it attractively with your name and address, address of the pub and possibly a colour photo of the property on the front cover. Take a spare copy of your plan to the Brewery/Pub Co interview so that both you and the interviewer can refer to it.

PART 2 - TRADING AND PROFIT & LOSS ASSESSMENT

First: the basic calculations and formulae

VAT

To calculate the VAT included in a retail price (RP) or just to deduct the VAT from a retail price to arrive at selling price (ex VAT) (SP)

Calculations are for VAT at 17.5%, where the VAT is 7/47 of the retail price.

Formalae

To calculate the VAT element of a retail price

VAT = RP x 7

47

Example: For a pint selling at £2.75

VAT - £2.75 x 7 = £0.41

47

To calculate the selling price (SP) from the retail price (RP)

SP = RP_ : Example £2.75 = £2.34

1.175 1.175

"GROSS PROFIT" AND "MARK UP" - AN EXPLANATION

Many people confuse GROSS PROFIT % with MARK UP %. Gross profit is measured relative to SELLING PRICE whereas mark up is measured relative to COST PRICE. Purchase invoices always show EX VAT cost prices - SO ALWAYS adjust your selling price for VAT (We assume all licensed premises are registered for VAT!)

Formula Key

(A) Retail Price (inc VAT) RP Selling Price (ex VAT) SP

Cost Price (ex VAT) CP Gross Profit GP

Mark Up MU Gross Profit Percentage GP%

Mark Up Percentage MU%

To find GROSS PROFIT % you start with two prices i.e. retail price inc. VAT and cost price ex VAT.

(ii) Barrel (36 Gallons) of lager cost £340 (÷ 280) - £1.21 per pint ("CP") (see formulae section)

(iii) Gross profit = £2.38 - £1.21 = £1.17 ("GP") (This is also the "mark up" amount)

(B) Formula Examples from sample figures above

GP% = GP x 100 GP% = 1.17 x 100 = 49.7%

SP 2.38

MU% = GP x 100 MU% = 1.17 x 100 = 96.7%

CP 1.21

i.e. Add 96.7% mark up on cost to achieve a 49.7% GP then add VAT to reach your selling price - adjusted/rounded to suit your pricing policy.

A table of Gross Profit and equivalent Mark Up % follows

Add VAT to the result to arrive at your retail price

Mark up for GP % Mark up for GP %

% on cost on sale % on cost on sale 67% 40% 100% 50%

82% 45% 122% 55%

90% 47% 150% 60%

Retail Price example - working from Cost Price.

Required GP = 45% therefore mark up = 82%

Formula to find RP Example

Stage 1: Find Selling Price (ex VAT) 1.21 + (1.21 x 82%)

CP + (CP x 82%) = SP = 1.04 + 0.85 = 1.89

Stage 2: Add VAT to find Retail Price

SP + (SP x 17.5%) = RP 2.06 x 17.5% .36

2.42

These calculations help with your price strategy but don't forget that, in a "price sensitive" district, you might lose a lot of regular trade if you charge excessively.

FORMULAE FOR WORKING OUT SALES

WET SALES

BEER

Note: Beer wastage - normally calculated at approximately 1 gallon per barrel, therefore a net 280 saleable pints per barrel

Formula: Barrels x 280 x average price per pint

CIDER

Expressed as Barrels - Use Beer Formula

Expressed as Gallons = Gallons x 8

Formula: 8 x average price per pint

SPIRITS

Dispensed via optic - Gin, Brandy, Whisky, Vodka, etc.

Expressed as gallons - 1 gallon - 4.54 litres = 6 - 75 cl bottles = 180 measures/tots of 2.5 cl (sometimes expressed as cases. 1 case = 12 standard bottles = 2 gallons)

Formula: Gallons x 180 x average price per measure

FORTIFIED WINES

(Ports, Sherries, Vermouth etc.)

Expressed as gallons - 1 gallon = 90 measures of 5 cl (twice spirit measure)

TABLE WINES

Expressed as gallons - 1 Gallon = 36 x 125 ml glasses

Formula: Gallons x 36 x average price per glass.

(re-calculate as appropriate if the measure is 175 ml or 250 ml)

If no wines and spirits information is provided you will need to make allowance for this element of the trade using your experience/judgement. The following may provide a guide although you will find regional variations: There is no substitution for your own experience and judgement in this area.

Mainly Public Bar Trade - Wines & Spirits Gallonage approx. 30 - 50% of Beer Barrelage and split approximately 2/3 rd spirits to 1/3 rd wines.

Mainly Lounge Bar Trade - Wines & Spirits Gallonage approx. 50 - 70% of Beer Barrelage and split approximately 50% spirits - 50% wines.

Lounge Bar/Restaurant Trade (inc. Table Wines) - Wines & Spirits Gallonage approx. 70 - 120% of Beer Barrelage and 1/3 rd spirits - 2/3 rd wines.

You will have to use your own judgement to estimate the ratio of Fortified Wines (Ports, Sherries, Vermouths etc.) to Table Wine.

A NOTE RE: "COMPOSITE BARRELAGE"

A method of expressing total wet trade including beers, cider, wines and spirits. Beers and ciders remain as 36 gallon barrels. Wines and spirits are ‘converted' to barrelage equivalent by counting three gallons of wines and spirits as one composite barrel.

E.G.: 200 brls beer + 360 gallons cider (i.e. 10 brls cider) + 210 gallons wines & spirits (i.e. 70 converted barrels) = 280 total composite barrels.

MINERALS

Dependent on style of trade but often between 25% - 45% of the FORTIFIED WINES & SPIRITS sales.

SUNDRY SALES

CIGARETTES & TOBACCO

Sold via Vending Machines: average 2% profit share for the Tenant - on this basis a rough guide might be an extra 50p profit achieved per barrel sold - to be added on under the ‘Machine Income' Section.

Sold over the Counter have an average gross profit of 5%. If you include cigarette sales in the takings - remember that your overall gross profit % will drop because of the low margin on cigarettes. It is now rare for cigarettes to be sold over the counter.

CRISPS & SUNDRIES

Average sales equivalent to 2% - 4% on the combined takings of beers + total wines + spirits with average Gross Profit of 25%

CATERING

Entirely dependent on individual house and tenant. Average gross profit 55 - 60%.

LETTING INCOME

Where relevant - typically 100% gross profit on room element, 60% GP on catering element.

MACHINE INCOME

Gaming + Amusement Machines. Income normally apportioned between Landlord and Tenant.

Tenant's share of Machine Income can vary quite widely, but probably within the range of 1½ to 4% of net bar sales.

OUTSIDE BARS?

Enquire about or note evidence of outside bars trade which might move on with the outgoing lessee.

PART 3 - THE PROFIT AND LOSS ACCOUNT

Two accounts should be prepared, one to show the level of trade that you think the Pub is currently operating at, and one to show the level of trade that you project for your first year in the Pub. Keep in mind the fact that any plans you have for the Pub may take some time to take effect, this should be reflected in your projected figures.

(I) ESTIMATED INCOME/TURNOVER - YOUR CHOSEN BUSINESS

For this example we assume the following trade supply information has been provided:

Beer & Lager: 280 barrels

Cider: 540 gallons

Bearing in mind the style of trade, the estimate for wines and spirits is :

Spirits: 100 gallons

Wines: 100 gallons

Overall Gross Profit % = (107,097 ÷ 202,553) x 100 = 52.87%

*If you have access to cost prices, you can calculate the cost of sales on each category (allowing similar GP% on minerals to wines & spirits) to arrive at a fairly accurate GP % as opposed to an estimate.

HAVING ESTABLISHED THE INCOME FOR YOUR BUSINESS YOU NOW NEED TO ASSESS THE OVERHEADS

In the following illustration overheads have been expressed as a % of turnover. These estimated percentages (which are only a guide) have been extracted from Sidney Phillips Statistics Analysis for typical small/medium pubs, all reasonably compact where turnover excluded cigarettes. Where possible assess overheads by direct enquiry, i.e. Local Authority for ascertaining current Business/Water Rates, etc.

(II) ESTIMATED OVERHEADS - YOUR CHOSEN BUSINESS

(estimated as a percentage of the Total Net Turnover) Total net/Turnover: £202,553

Items to take into account

The larger and more rambling the house - the more expensive to run - could exceed the above figures especially where any full time employees necessary, although overall increase may be mitigated by reduced rent requirement by the Brewers. System of heating. Central Bar Servery or Separate Serveries. Repairs, renewals and depreciation higher where major refurnishing planned. Wages DO NOT include proprietor and wife. Allow for higher rent on predominantly Lounge Bar/Catering house. E.g. (where cigarettes excluded) total overheads might be:

Compact easy -to-run pub 30%

Larger more rambling starters house 35%

Attractive small Lounge Bar pub 35%

Busy ‘promotion' house with Lounge/Catering/Letting 45%

(III) PROFITABILITY:

* Having run your home and car but before tax.

*Check the current prices charged in the Pub you are assessing.

NOW DO THE SUMS AGAIN FOR YOUR PROJECTED TRADE

NOTE: The figures shown are given to illustrate the WORKING METHODS for assessment NOT FOR ACTUAL USE. Always work from first principles by reference to the relevant retail prices for THE PARTICULAR HOUSE in which you are interested.

THE FINAL WORKING EXAMPLE

Overheads Est % Amount

Wages (NOT incl. tenant/wife) 10% 20,255

Business/Water Rates etc. 2% 4,051

Heat & Light 5% 10,127

Telephone, Post, Stationary etc. 1% 2,025

Motor Expenses (a modest car) 2% 4,051

Repairs & Renewals 1.5% 3,038

Insurance & Accountancy Fees 1% 2,025

Cleaning & Sundry Expenses 1% 2,025

Depreciation 2.5% 5,063

Rent 11% 22,280

TOTAL OVERHEADS 74,940

NET PROFIT 32,157

Add: Machine income £3000 to £200 3,200

Inc. est cigarette machine

TOTAL INCOME (before tax) £35,357

PART 4 - CASHFLOW ANALYSIS

Even though you may show a profit on your first year of trading, the ebb and flow of cash during the year may push you into the red, especially when you spend money on developments or improvements before trade picks up. 

Prepare a month by month analysis of your cash flow, to work out when you are likely to be in deficit, and by how much.  Then make sure you have an adequate bank overdraft facility if necessary, or adjust your plan as necessary (not by increasing your projected sales, but by controlling and trimming costs/expenditure!) 

Note:  The Total column will bear some similarity to your profit and loss account, but these figures include VAT where charged, and some expenditure will be reallocated to drawings.

PART 5 - START - UP COSTS                                                                                             

DO NOT UNDERESTIMATE THE COSTS OF GOING INTO BUSINESS

Make a summary of the start-up costs: