Is buying a pub too risky? BANK ON DAVE replies

I recently inherited some money that can be used for a down payment on a property. I’ve always been interested in running my own pub but I know it’s very hard to do at the moment.

I have experience in the industry so I know I could do it well, but it’s a huge risk and I’m not sure the best way to go about it. I know I could put down the money for the property, but it’s the startup costs that concern me.

I toyed with the idea of ​​buying a rental instead, because that would be more passive. But I have no experience and I am concerned about the market.

What should I do?

Dave Fishwick, This Is Money’s company doctor, replies: The hospitality industry is going through a tough time right now.

Rising energy and stock prices are forcing the licensed trade to raise their prices at a time when the public is pulling on the wallet and has seen its finances strained for similar reasons.

Financial pressures and the increasing use of social media to keep in touch have led many of us to choose to drink at home or with friends and family.

For years the number of pubs has been declining as fewer of us spend our time and money in the local tavern. More than 2,500 pubs have closed in the past five years, with 400 closing in 2022 alone.

I really regret the decline of the local pub. They were once the heart of the community in cities and towns across the country and still are in many places.

To maintain strong communities, people need a place where they can all come together. Otherwise, we could become increasingly isolated as our communities become more and more fragmented.

If you go ahead and start your pub I think you should try to limit the risks. The only thing you don’t want is to lose the money you inherited and a big chunk of your time. When starting a business, rule number one is never lose money.

It is nice that you have previous experience in the industry, because then you get a good insight into what is involved.

Unless you can afford to take over a thriving pub in a busy location, you have to buck the trend and succeed where others have failed.

Maybe you should try offering something different and see what the best performing pubs and bars are doing.

Case in point, a village pub here in Lancashire hires a chef from Kashmiri on alternate Tuesdays to host a curry night, which is popular and keeps customers coming back for what could otherwise be a quiet night.

There are several ways to run a pub, and you can either rent a pub or buy it outright if you can afford it.

I like the idea of ​​buying bricks and mortar because you have an appreciative asset, and over time that will become worth more money and give you a tangible asset to borrow against in the future if you want to expand.

You can also approach a pub business with a portfolio of pubs to see if running one of their pubs could be right for you.

A good friend of mine used to operate a number of pubs owned by a large pub management company. Generally, they had previously closed or employed temporary managers, and that business required minimal initial costs to take on a pub.

While this entailed a low total start-up cost, you are often contracted to purchase your alcoholic beverages through them at prices higher than wholesale prices, reducing your profit margin. This is called being vassal bound.

Also, these pubs are probably the ones that have struggled to make a decent profit or are problematic to operate.

It’s worth visiting potential venues on different days and at different times of the day and night to get a feel for the area and what you’re signing up for, take lots of notes on what food and beer is best is sold in the busiest pubs, what entertainment they have, what works and what doesn’t.

This saves you time and money by not making the same mistakes. Don’t try to reinvent the wheel; It goes around brilliantly; just borrow the best ideas and replicate them yourself.

In addition to the initial cost, consider the length of any leases and leases you will sign and remember that they are legally binding.

Before you take the plunge, build a full business plan with all expected costs and expected revenues and build a healthy margin of error.

To start a business with fixed overheads, you need a decent cash buffer to get you through the early days in case there are quiet times when you trade at a loss. Most companies have quiet periods from time to time, especially new start-ups.

Cash flow problems are the number one killer of new businesses.

Cash flow is like oxygen – you don’t think about it until it’s not there, and then that’s all you can think about, so a cash buffer is essential.

As for your other idea, a rental property can be an excellent investment.

I myself have a portfolio of commercial real estate, including factories, shops and land, which I rent out and it provides a solid and secure return on investment and presents me with few problems.

While commercial real estate and home prices may fall in the short term, they always rise in the long run because inflation erodes the value of your money at a much higher rate than the interest rates offered by most banks, so you should can protect against inflation and provide you with rental income.

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The main difference between investing in a house and a pub is, as you said, you have to work in the pub or employ staff, whereas a rental property is more or less a passive investment that generates income without you having to work .

I would say the rental is a safer option.

Other options you might consider are to use the money to pay off loans or your home mortgage (depending on your current interest rate) or possibly invest it in a low-cost stock market tracking fund.

This should provide good returns year over year, but can be volatile in the short term. We are currently seeing record highs in the UK stock market, so it’s up to you to decide when is the best time to enter the market.

>> Read our guide to choosing the best investment platform for some help getting started

I can’t guarantee which choice is best for you, but I hope I’ve given you some food for thought and I wish you all the best on whatever path you choose.

Good luck!