What to Look for When Purchasing a Hospitality Venue

What to Look for When Purchasing a Hospitality Venue

Purchasing a hospitality venue is an exciting venture, but it comes with significant financial and operational considerations. Whether it’s a pub, bar, or restaurant, understanding the key factors to evaluate before making a decision can mean the difference between a thriving business and a financial burden. This guide outlines the critical areas to consider when purchasing a venue, with an emphasis on sales vs. rent and using the profitability matrix to assess potential acquisitions.

1. Sales vs. Rent: The Primary Factor

The first and most critical consideration when evaluating a venue is the relationship between sales and rent.

• Rent as a Percentage of Sales: Ideally, rent should not exceed 8%-10% of revenue. Venues with higher rent percentages often struggle to maintain profitability, as fixed costs take up too large a share of income.
• Sales Growth Potential: Consider whether the current sales are sufficient to support rent or if there’s room to grow revenue through better marketing, menu optimization, or events.

While other costs such as wages and COGS can often be improved through better processes and systems, rent is a fixed cost that’s much harder to reduce. Ensuring that sales adequately cover rent is the foundation of a profitable venue.

2. Applying the Profitability Matrix to New Acquisitions

The profitability matrix is a powerful tool for evaluating potential purchases and comparing them to other venues. It allows you to assess the financial health of a venue by examining:

1. Revenue (Sales): The total income generated by the venue.
2. COGS: The cost of producing food and beverages, expressed as a percentage of revenue.
3. Wages: Labor costs relative to sales.
4. Variable Overheads: Fluctuating costs like utilities and marketing.
5. Rent: Fixed occupancy costs as a percentage of revenue.
6. Operating Profit: The remaining revenue after all expenses.

By applying the profitability matrix, you can:

• Understand What You’re Buying: Gain a clear picture of the venue’s strengths and weaknesses.
• Compare to Other Venues: Benchmark potential acquisitions against your current venues or industry standards.
• Identify Opportunities: Highlight areas where improvements can lead to significant gains in profitability post-purchase.

This systematic approach ensures you make data-driven decisions and avoid surprises after acquiring a venue.

3. Financial Performance

Beyond sales and rent, reviewing the venue’s overall financial performance is essential. Key aspects include:

• Revenue Trends: Look at year-on-year sales to identify seasonality, growth, or decline.
• Profit Margins: Analyze operating profit and understand what drives it.
• Debts and Liabilities: Check for any outstanding loans, unpaid taxes, or other obligations.

Ask for at least three years of financial records to get a complete picture.

4. Lease Terms and Fixed Costs

The lease agreement often defines the financial viability of a venue. Key factors include:

• Lease Length and Renewal Terms: Ensure the lease provides long-term security and favorable renewal options.
• Additional Costs: Review outgoings such as insurance, utilities, and maintenance.
• Transferability: Verify that the lease can be transferred to you without restrictions.

High fixed costs, such as rent, should be manageable based on the venue’s current and projected sales.

5. Operational Foundation

A venue with strong operational systems is easier to manage and improve. Key factors to review include:

• Staffing: Are there key staff members who will stay on after the purchase?
• Processes and Systems: Evaluate POS, inventory management, and scheduling systems.
• Equipment and Inventory: Review the condition of equipment and stock levels included in the sale.
• Menu and Concept: Ensure the menu or concept aligns with current trends and your vision.

Solid operational foundations reduce the risks associated with transitioning ownership.

6. Growth Potential and Improvement Opportunities

A venue’s value isn’t just in its current performance—it’s in its potential for growth. Look for:

• Revenue Drivers: Are there opportunities to increase sales through events, extended hours, or menu optimization?
• Marketing Improvements: Can the venue benefit from a stronger online presence or targeted promotions?
• Underserved Markets: Are there customer segments that the venue isn’t currently reaching?

The profitability matrix can be used post-acquisition to track these improvements and measure their impact.

Case Study: Identifying Opportunity in a Potential Acquisition

I’m currently in the process of acquiring a venue with significant room for improvement. While the bistro, bar, and beer garden are performing well, an unused upstairs function space capable of hosting 100 people represents a huge untapped opportunity.

The rent is only 7.5% of sales based on the previous financial year, which is well within a sustainable range. However, sales have dropped significantly in recent years due to conflict among owners and the loss of key staff. These challenges caused the current owners to stop focusing on growing the venue, but they also created an opportunity to step in and revitalize the business.

By focusing on reactivating the function space, improving the customer experience, and building a strong team, this venue has the potential to deliver significantly higher sales and profitability.

This example highlights how identifying opportunities for growth—like underutilized spaces—can make a venue an excellent investment, even when its current performance is below its potential.

7. Reason for Sale

Understand why the current owner is selling the venue. Common reasons include:

• Retirement or personal circumstances.
• Financial struggles or declining performance.
• Market saturation or increased competition.

If the reason for sale is tied to operational or financial challenges, ensure you have a clear plan to address these issues after the purchase.

8. Due Diligence

Thorough due diligence minimizes risks and ensures you’re making an informed decision. Key steps include:

• Legal Review: Have contracts, leases, and licenses reviewed by a lawyer.
• Financial Audit: Hire an accountant to verify the accuracy of financial records.
• Operational Assessment: Visit the venue during peak hours to observe its operations and customer flow.

Taking the time to conduct due diligence provides peace of mind and clarity about what you’re buying.

Making the Right Purchase Decision

When purchasing a hospitality venue, focusing on sales vs. rent is the most important step to ensure financial sustainability. The profitability matrix adds another layer of insight, helping you evaluate the venue’s financial health, compare it to other venues, and identify areas for improvement.

While many operational and cost-related challenges can be addressed post-purchase, sales and rent define the foundation of a successful venue. By identifying opportunities—such as unused spaces or untapped markets—you can unlock the full potential of your new venue and set it up for long-term success.