There are many factors to consider before purchasing a going concern such as an operating pub. Depending on where it is located, pubs form lucrative businesses for budding entrepreneurs, and buying an existing one takes away the challenges associated with building a business from scratch. However, this is not to mean you don't have work to do before signing that final dotted line. The following are the most important parts to cover when doing due diligence prior to acquisition:
1. Verify income
Ask your seller to show you their income tax returns which will help you verify the sales figures. These figures may be understated, so if the pub has a point-of-sale system, get a computerized report which will give a clearer picture. You should go as far back as possible, but two years is the absolute minimum if the business has been operational that long. The seller may or may not be open to revealing this information, but be persistent, as it's important to establish how much the business is really making before buying it. Do not buy the business if the seller adamantly refuses to give these reports or they have mysteriously vanished.
2. Contact suppliers
Talk to the seller to connect you with his/her suppliers as early as possible once you're certain you want to proceed with the purchase. Depending on your location, there will be about five suppliers: three for beer and two for hard liquor. Talk to them and ask them to give you a report of what was supplied to that pub, with details of the previous year's supply and the year to date. This amount gives you the sales volume of supply.
Find out from the staff or owner how the bar is run: are there low price days and happy hour offers or are drinks priced normally? This will help you understand the cost of sales and how to change the sales volume to actual sales. Use this information to verify the reported sales, cost of sales and gross income. Get your net income by factoring in all other expenses reported in the financial statements.
3. Find out licensing conditions
Right at the start, you should know the license terms to avoid surprises in future. Do the operating conditions sound favourable? Look out for conditions which restrict your operations, as these can significantly impact your income. Remember you are bound by existing conditions once you take up the bar until the license period runs out.
4. Examine the expenses and financial statements
Ensure that rent, salaries and other recurrent expenses aren't too high vis-à-vis monthly sales. Look at the low income periods to see whether the business still makes enough to support these expenses. High recurrent expenditure can kill your business relatively fast.
If you have no training in bookkeeping, hire someone who can help you interpret the financial statements, which is a critical part of due diligence. These statements should be verified against source documents (receipts, ledgers, bank statements, invoices etc.) – like an informal audit of sorts.
Based on their advice, prepare a questionnaire to present to the seller, who should be willing to provide all his/her answers in writing. He/she should also help you to investigate the organizational structure, employee history and records, employee, supplier and customer contracts, liabilities, assets and regulatory adherence by the business. Use this information to make an informed decision about the purchase.