Buying a freehold pub

What you are actually buying

A freehold pub is a trading business attached to a building. When you buy one outright you are buying the right to run the pub, the goodwill of an established trade, the fixtures and fittings, and the bricks and mortar, with no landlord and no rent above you. That is the appeal of a freehouse: you own the asset, you keep the upside if you build the trade, and you are free of tie, so you can buy your beer, wine and spirits wherever you choose. It is also why a lender looks first at how the pub trades, through its turnover, its wet and dry split and its barrelage, rather than at the building alone.

This guide is about buying a pub as a business. It is not about a night out. If you are buying, refinancing, converting or developing a pub, read on. A small pub with living accommodation bought as your only or main home can be a regulated case, which we refer to an authorised firm.

The distinction from ordinary commercial property lending matters. A shop or a warehouse earns rent from a tenant, and a lender looks largely at the lease and the building. A pub earns its income directly from thousands of individual sales a week, so its value rises and falls with how well it is run. That trading dimension is why pub finance is a specialism, and why a generalist bank often hesitates where a lender that understands the licensed trade is comfortable.

The buying process, step by step

1. Set your strategy and budget. Decide whether you want a wet-led local, a food-led dining pub or an inn with rooms, and confirm how much equity you can put in and what you need to borrow.
2. Find a pub. Specialist agents such as Christie and Co, Fleurets, Savills and Sidney Phillips list freehold pubs, both trading and closed. A closed or tired pub is a repositioning opportunity but carries more risk.
3. Agree heads of terms. These set the price, what is included, whether you are buying the property and goodwill as an asset purchase or the shares of the owning company, and an exclusivity period.
4. Commission a specialist valuation. A licensed-trade valuer assesses the pub on a going-concern basis using its fair maintainable trade, which underpins both your price and the lender's offer.
5. Carry out due diligence. Review three years of accounts, the wet and dry split, barrelage, the premises licence, any leases, the building condition and any local dependence.
6. Arrange finance. We approach the lenders that understand pubs, agree indicative terms, then move to a full credit application and a lender valuation.
7. Exchange and complete. Funds draw down, the freehold and goodwill transfer, the premises licence is transferred or a new designated premises supervisor is named, and you take over the trade.

How much you can borrow

Borrowing on a pub is driven by two limits, and the lower one wins. The first is loan to value, the loan as a percentage of the going-concern value. On a well-trading freehouse a lender commonly advances up to around 60 to 70% loan to value, so the deposit is roughly 30 to 40%. Pubs often sit a little below other trading property on leverage because the trade can be more local and more weather-dependent. The second limit is affordability: the lender checks that the pub's fair maintainable operating profit covers the repayments with headroom, and reduces the loan if it does not.

On top of the deposit you need arrangement fees of around 1 to 2% of the loan, a specialist valuation, legal fees, stamp duty land tax on the property element and working capital for the early months. We size all of this before you commit so there are no surprises at completion.

How a lender reads a pub

• Trading record: turnover, the wet and dry split, barrelage and the three-year trend
• Fair maintainable operating profit and how comfortably it covers the proposed loan
• The going-concern valuation and the gap to bricks-and-mortar value
• The operator's experience in the licensed trade and the team behind the pub
• Whether the pub is free of tie, freehold, and how it earns its income across the week
• Location, passing trade, local demographics and the outlook for the area

An experienced operator buying a well-located, well-traded freehouse will secure higher leverage and keener pricing than a first-time buyer taking on a closed, run-down pub. We position both to the lenders that suit them. A strong management team, a clear business plan and clean management accounts often do as much for the terms as the building itself.

Who lends on freehold pubs

Pub finance comes from a mix of high-street banks for the strongest covenants, challenger and specialist banks that are comfortable with the licensed trade, and short-term lenders for closed or repositioning purchases. Lenders that understand pubs price for the trading nature of the asset rather than backing away from it. Because appetite shifts and the market is fragmented, using an arranger who knows which lender is active on a given profile saves time and usually improves the terms.

As an arranger we sit between you and that market. We package the trading story, the valuation evidence and your experience into a credit case, then take it to the lenders most likely to back it on the best terms, rather than to whichever bank you happen to use. Because we see many pub deals, we know which lender is currently lending on, say, a wet-led community local, a food-led country dining pub or an inn with letting rooms, and we steer the case there.

A note on regulation

Buying a pub as a trading business is funded with unregulated commercial lending outside the Financial Conduct Authority mortgage perimeter. Where the purchase is a regulated owner-occupier case, for example a small pub with living quarters bought as the borrower's only home, we refer it to an authorised firm. We act as an arranger and introducer and do not lend. All figures here are indicative and never an offer of credit.