Work out of a pub/restaurant/hotel in East Anglia
Background
Following contact between the Bank and Licensed Solutions (LS), Paul Whitford and Tony Tilden visited the business to meet with the Directors, to assess its existing operations and to learn about plans for future expansion in order to provide the bank with a full set of recommendations as to its future potential.
The operation was food-led (Bar Dining: 60 covers Small Restaurant: 20 covers. 2 AA Rosettes 2004-5) and menus were of a very good “Gastro-pub” standard. The three bedrooms were of a very high quality (AA 4 Diamonds) for a business of that style.
Overall, the business relied heavily on the tourist market. During these periods it averaged 70 Lunches and 100 evening meals. In the winter, business, apart from the limited tourist trade, came predominantly from a local 15-mile radius.
Key Financial Issues :
Although the property was well-maintained and the owners cared deeply about the business, the operation was clearly in need of both restructuring and the provision of clear, professional guidance. The financial background was as follows:
- A fair trading performance in 2003 meant that the business made a small loss.
- The initial signs in 2004 were good with an increase in turnover of 15%. However, significantly lower profitability together with higher operating and finance costs meant that a -£26k loss was recorded.
- Turnover for 2005 dropped by –9% (although accommodation income improved) with high recruitment costs contributing to an estimated operating loss of -£14k and higher finance charges producing an overall trading deficit of in excess of -£60k.
In addition to a mortgage and overdraft of over £600k, other liabilities were close to £100k including £60k of trade creditors and in excess of £30k due on VAT (two quarters) and PAYE (six months). HMRC was becoming increasingly aggressive in its pursuit of these amounts and several suppliers had imposed strict cash with order conditions.
Operational Assessment :
The owners admitted that their relative inexperience together with various personal problems probably did not help the development of the business. However, they were absolutely determined to put things right and had committed to work with their bank to that end.
A new Head Chef had been appointed six months previously and had built a good reputation for the restaurant with both the standard of food and the overall level of service improving. However, the wage cost had risen dramatically as a consequence and was running at 44% of turnover.
Margins were generally acceptable, with the gross profit on food (60%+) particularly encouraging. However, wet margins were inconsistent (55-60%), suggesting that the implementation of a “single supplier” strategy could dramatically improve profitability in this area.
There was very limited advertising and promotion being carried out. A clear strategy needed to be established with both owners and staff developing a clear understanding of the products and services that were offered. From that, they would be able to establish a full marketing plan focusing on the hotel and restaurant elements of the business and utilising both national and regional advertising and promotional opportunities.
With some front-of-house restructuring, the implementation of effective cost controls (particularly in the area of staffing) and an increase in advertising and promotion, it was clear that the business could be returned to the 2004 turnover level of £450k+ and a situation whereby it could at least break even. However, to increase turnover under the existing infrastructure to beyond £500k and a point where it could make reasonable profits would be very difficult.
Consequently LS concluded that a combination of the limited scope for profitability and the present loan structure did not make the business a viable operation in its present form.
Options and Recommendations:
LS presented the bank and the owners with four options:
- To reduce liabilities, develop an exit strategy (and sell the property)
- To develop the accommodation side of the business by adding seven bedrooms (making a total of ten) at a cost of £500k
- To increase the scope of the food operation by developing the kitchen and bar/dining areas at a cost of £150k
- To undertake both b) and c) with an additional contingency budget of £100k.
The owners initially indicated that they did not wish to sell the business and were seriously looking at developing the infrastructure of the building using planning permission that had already been granted. To secure the necessary additional funding from Barclays Bank, they were prepared to use family property assets as security.
Prior to any long term decision being taken, LS recommended an immediate improvement of the short term operation of the business via a review of wage costs, margins, creditors, front of house structure and marketing strategy. Only when this review had taken place, action had been taken to reduce the risks posed by aggressive creditors and controls put in place to stem losses could a long term development strategy be negotiated.
Action Plan:
LS immediately established the following action plan and worked with the owners to implement it:
- Negotiations with HMRC to eliminate VAT and PAYE arrears. The VAT authority revealed that it was on the point of issuing winding up proceedings against the business so significant work was required to reverse this decision and convince HMRC that payments would be forthcoming.
- Review of kitchen staffing levels. The head chef was unwilling to implement the changes that LS devised to reduce staff costs and decided to resign. The sous-chef was promoted and the kitchen reorganised with the result that the required cost savings were found without any detrimental effect on the standard of the food.
- Restructuring of front of house arrangements. Target wage percentages were established within which staff cost had to remain. While the structure of the property made this difficult, these costs were ultimately cut by some 10 percentage points.
- Re-negotiation of wet trade pricing. LS introduced a national wine and spirits supplier who, by challenging the existing product portfolio and price list, enabled the owners to improve wet margins by 3-5 percentage points.
- Establishment of marketing plans. The owners were encouraged to leverage every opportunity to drive turnover via the use of their database. The business registered good increases in bar turnover and restaurant covers and through weekly promotions (quiz nights etc) and annual events such as Burns Night, Valentines’ day and Mothers’ Day events where suppliers were encouraged to provide appropriate support
- Monthly reporting. LS took over accounting duties and oversaw the payroll function, the calculation and payment of VAT and PAYE monies and the production of monthly P&L’s and cash flow forecasts. For the first time, the owners had a clear set of management information that allowed them to make informed decisions regarding the running of their business. In addition, the bank had a full set of monthly reports upon which they could base their own financial decision making.
Result:
Once some immediate fire fighting had taken place and the business was no longer prey to aggressive creditors, the improvement in both cash flow and overall profitability allowed the business to slowly but surely improve its overall trading position. However, the gruelling and sustained work that was required simply to return the business to a break even level convinced the owners that taking on further debt, providing more of their personal assets as security and having even greater operational responsibilities was not something that they wanted to do after all.
With the HMRC debt paid off within eighteen weeks, suppliers offering normal credit terms and cash flow returning the extended overdraft to a reasonable level, the bank’s position returned to a point where the sale of the property would ensure a successful outcome. Private buyers were found and the asking price obtained which allowed all lenders and creditors to be settled and the owners to retain close to £100k in profit on the overall project.
With the financial part of the equation fully satisfied, LS were delighted to learn that during the period that they were involved in operations, the property was named AA Pub of the year!
