Pub as investment - good or bad idea?

[Silvergirl]

My bro-in-law has a small ltd company along with 2 other business partners. Over the last 5 years trading, they have built up approx 250K cash in the company and are wondering what to do with the money rather than leave it sit there.

My sister is freaking out that her husband is going to loose a significant portion of his companies equity, as he is giving serious consideration to invest in a business / industry he and his partners have absolutely no experience in whatsoever.

One of them saw a pub in a small town on sale for approx 90k (asking price) and is hell bent on it - pub, lounge (reasonable condition), living space upstairs (in poor condition), beer garden etc. It closed in June and is vacant since. Was bought by a developer for 1.3M in 2005 with a view to being knocked and apartments rebuilt. He has since left the country, had it leased but the couple that had it opted out in June and it's empty since.

Anyway, the same guy who wants to buy it (the business partner), his sister and her husband have offered to run it for a wage (they are solid people, not much experience, he worked in a pub for a few years - a few years ago, but are asking in the region of 1k per week salary between them and want to live upstairs rent free, but they will help to do it up etc)

Maybe I'm a sceptic but it sounds like a risky 'investment' to me. Who pays the rates insurance, etc. How do you sell it in a year and make any money - and if you are lucky enough to sell do you turf a couple in their 50's out of their home?

What's the general concensus on investing in this type of business? Surely there has to be a better investment opportunity out there or I just being overly sceptial? Their idea is to buy it, get it up and running and sell it a year down the line making a profit of even 50K for their 100K (approx 10K to stock and get it painted out etc)

Would they not need to allow another 10 - 15k for insurance, rates etc? They seem to think they'd be done and dusted for 100K max investment. There are no books available to view which rings alarm bells, but the line the estate agent spins is it that the couple who had it ran it into the ground, but it has (of course) vast potential.

Any advice appreciated as at the minute there is a whole lot of stress going on over this! My sister has visions of my brother in law being forced to supplement this business further as they'll end up in for the 100k, if it doesn't turn over enough to cover wages, stock esb, water rates etc it'll just eat through their cash and may even jepordise their main business.

Sorry for the rambling post but it's a bit of a saga.

 

[Brendan Burgess]

I agree with you.

They have a successful business if they have built up €250k in cash.

If they get involved in another business, it's likely to take their mind off their existing business . Even if they buy it and sell it at a profit, the real cost will be the reduced profitability of the existing business.

They need to address the issue of why they allowed €250k in cash to build up in their business. They should bite the tax bullet and pay this out to the three partners, after taking professional tax advice.

Then if one of the partners wants to invest his cash in a separate business, he is free to do so.

If they are planning to flip this at a capital gain, they may be better off buying it in their own name than through the company. The capital gain would then be subject to one hit of CGT rather than CGT/CT in the company and then income tax/cgt in their own name when they take the profit out. Against that, if they lose money in the pub, they might be able to set the losses against the profit from the other business. Again, professional tax advice is required.

 

[johnpdolan]

First of all why is pub closed?? Why was it going to be knocked down for apartments? Why so cheap?

Fact is pubs are thing of past due to high costs, paye, prsi, rates, public liability, etc etc...

Also go to local supermarket or off license and see how busy they are. People no longer go to pub and if they do they are drunk going there from house and not spending.

My local does well but he is at it for a hell of long time and that only reason. There is not one pub in country that is not for sale and that to me tells the true story

 

[PaddyBloggit]

One word for this idea - Madness!

Buying the pub could eventually close the successful business.

Brendan's idea is a good one. Let the anxious partner head off on his own ... I'll bet he'll slow down the pace if he's faced with this scenario.

 

[Silvergirl]

Thanks for the replies. Brendan, very helpful advice as usual. The resaon that they have let the money build up is that they only ever take a wage out of the company and they were anxious to build up equity in the company, so they look stable to their customer base, who are mainly multi-nationals. They are 3 very busy technical people with little experience on investments and how to make their money work and seem to think that investment brokers / tax advisors are a waste of time. Guess with all the media attention around people loosing their shirts etc, and they had a (minor enough) bad experience with an accountant when they started out. I think they just don't know who to turn to for sound advice really. Must get them on AAM

Thanks again

 

[mercman]

Anyway, the same guy who wants to buy it (the business partner), his sister and her husband have offered to run it for a wage (they are solid people, not much experience, he worked in a pub for a few years - a few years ago, but are asking in the region of 1k per week salary between them and want to live upstairs rent free, but they will help to do it up etc)

Fair play to him. He'll work for 1k per week ?? Is this a wind up. His best hope should be a percentage of the takings of the business.

I think you should have a bit of a gamble. There are three now in a sucessful partnership with retained earnings. Betcha after 6 months there will only be two of them and the entire gone up in smoke.

 

[demoivre]

This [broken link removed] from 2011 is worth reading imo. Personally wouldn't touch a small town pub with a barge pole.

 

[delgirl]

Fair play to him. He'll work for 1k per week ?? Is this a wind up. His best hope should be a percentage of the takings of the business.

+ 1

A lot of pubs are struggling badly, even some of the ones based in Dublin. Friend of mine's family own 5 pubs in Dublin and they are in serious trouble.

Some of the more successful pubs have increased and improved the standard of their food business to survive as drink sales are down.

Unless there's enough trade in this small town to get a very good food business going in the pub, it's most certainly a loser. Chefs are also very expensive to employ, so if one of the managing couple is not able to cook, there will be high costs in setting up and staffing a kitchen.

 

[cremeegg]

Oh dear dear !

There are 2 issues here

1 The investment. Should they invest or not and

2 The structure. How should they structure the investment if they go ahead

To deal with the easy one, point 2 first. A new limited company should be formed (lets call it pubco) which the original company (firstco) should acquire, €2 by way of shares.

The money required for the pub should be loaned to pubco by firstco under a debenture with a fixed and floating charge. An amount should be agreed between the partners and drawn down as required.

Thus no more that the amount invested is ever at risk. Pubco's other creditors would have no call on the assets of firstco if the venture failed. And firstco would be able to sell the pub and get back the sale price in the event of a failure

There should be a pub owning company and a separate pub operating company but that is probably too much detail for this post.

All this saves about €120k tax over Brendan's advice.

Issue 1. Is it a good investment ?

It probably is. The premises would probably cost more to build than the €90k

If a trading history could be built up over a few years then the pub could probably be sold on as a going concern.

This pub would have an advantage over every other pub in town, its premises costs would be about €60 a week (3% of €90,000) whereas €800 would be more normal for a good country pub.

Obviously the details of the investment and the plan for what to do in the event of a success or a failure would need to be carefully thrashed out between the partners.

This would be my main concern, 3 people going into a new business together, they may not all want the same thing in a few years. But if they trust each other and have a clear understanding of what the plan is from the outset it could be made work.

Two more comments I wish to make. Any accountant or solicitor should be able to outline the structure over a cup of coffee at no charge. Why has this not been identified.

Secondly, the OPs brother-in-law started a business in the middle of the worst recession in 80 years, made a living, built up a business, accumulated some capital, and after all that his wife AND HER SISTER are second guessing him on an internet forum. Somebody should give that man a medal.

 

[jacal1]

Just to echo, any time a business is for sale for an excessively reasonable price you should be wary and know the truth behind why they are selling. With this pub you absolutely need to know the reason for the break in lease - anything short of a death/retirement, a default caused by investments unrelated to the pub, or a move to a bigger business in a new place, or something like that would make me nervous.