UK Pub Industry – Time Please

Increased competition from supermarkets, heavy taxes on alcohol, stinging business rates, Brexit and a lack of finance are just some of the reasons the UK’s pub industry is suffering. According to a recent report by AlixPartners and CGA Peach, traditional pubs are closing at a rate of more than four a day. Despite this, the sector remains innovative and entrepreneurial with many pubs continuing to be very good businesses but for those without the resources to make those businesses flourish, now might be the time for owners to consider a sale of some/all of their pub portfolio.

Before selling, there are however a number of issues to consider to maximise the sale value and to ensure that the sale proceeds as smoothly possible. Here we explore some of those key issues:

Property affairs

It is often not just the bricks and mortar being sold and consideration needs to be given to the other business assets and their market value. It is advisable to identify the saleable elements of the existing pub business at the outset (for example, a number of items may be leased from third parties) and to also consider a mechanism for valuing stock at completion.

The seller should review the commercial property standard enquiries at an early stage and prepare draft responses with their solicitors. Relevant ancillary documentation should be collated (including premises licences, gaming machine licences, insurance policies, asbestos reports, fire risk assessments, energy performance certificates, gas and electricity certificates etc.) and a comprehensive sales pack be prepared.

The title should be checked for any restrictive covenants or third party consents that will be required and any potential issues that are identified should be dealt with as a priority and incorporated in to the transaction time-frame. For leasehold properties (tied and free of tie) it is essential to understand the alienation provisions in the lease prior to an application for consent to the assignment being made to the landlord. To avoid delays in obtaining consent the seller should engage with the buyer and ensure that complete and comprehensive information is provided to the landlord. Consideration should be given to the buyer’s covenant strength, the likelihood that a rent deposit or guarantee will be required by the landlord and the buyer’s level of experience.

Corporate matters

The sale process will involve due diligence (both legal and financial) and the extent of due diligence undertaken on behalf of a buyer will typically vary according to the type of transaction i.e. a share sale or an asset sale.

The due diligence process is critical to a buyer and can often lead to buyer’s seeking price reductions or retentions for prospective liabilities identified or anything else that could adversely effect the business e.g. unsigned contracts. For this reason, on larger transactions, a seller should consider undertaking a pre-transaction due diligence exercise, to make sure its “house is in order”. Examples of some of the issues to be considered, which will vary depending on the nature of the sale, include:

• Checking that all contracts are fully effective and that there are no provisions for termination on a change of control of the business. Also, that there are no provisions which prohibit assignment.
• Identifying any current or potential disputes, making sure that advice has been taken in respect of them and understanding the quantum of any possible liabilities.
• Making sure that all corporate documentation including statutory registers and minute books are up to date and that there are no missing documents/records.
• Checking that all charges registered against any of the company’s assets have, where appropriate, been removed from the charges register.

Identifying potential issues prior to the sale can enable a seller to resist extensive contractual protection in the sale documentation in the form of warranties and indemnities. This can help to give the seller greater certainty that the price received by it is ultimately what it will retain.

Employees

Invariably many employees will transfer as part of the business and it is important that they are dealt with correctly. The key issues to consider include:

• Making sure the employment records are up to date – The TUPE legislation (under which employment contracts automatically transfer to the buyer), provides that certain information must be provided to the buyer about transferring employees not less than 28 days before the transfer. Failure to do this can result in fines starting at £500 per employee.
• Checking that the business has complied with its employment obligations and that you have the necessary documentation to support this. In particular, sellers should check: that all the employees have the right to work in the UK; that they all comply with working time/national minimum and living wage regulations; that all required to be enrolled for auto-enrolment have been and that holiday pay has been calculated correctly.
• Informing (and consulting) affected employees about the sale through elected employee representatives.
• Dealing with live-in employees – Sellers must make sure they know what rights live-in employees have. It is important to identify whether such employees occupy the premises under a genuine service occupancy or a simple tenancy arrangement and whether these agreements are up to date.
• Reviewing arrangements with contractors who work for the business e.g. security people and cleaners to make sure that none inadvertently transfer to the buyer. These people may be able to claim they transfer with the business and a well advised buyer is likely to require an indemnity to cover any liability incurred by it in respect of those people transferred to it that are not on the list of transferring employees.

Where not all of the business is being sold, a seller should consider whether it wants to retain any key employees. If so, these employees should be reassigned in the remaining business on the earliest occasion prior to the sale.

Be wary of agreeing with the buyer to offload employees before the sale. A seller cannot rely on the buyer’s reasons to justify the termination of employees and may face unfair dismissal claims.

Intellectual Property

It is important the seller owns the intellectual property (IP) assets that it is selling. Key assets might be a trade mark in respect of the venue name, marketing materials and the website (both the domain name and content). As a general rule, if an employee has created any IP during the course of their employment then the employer will own it. If a consultant or freelancer has created the IP, the seller should check it has a contract in place with them and whether it contains an express assignment of the IP to the business. If there is no contract or no express assignment, the contractor will own the IP. This will need to be resolved prior to the sale.

The seller must check whose name the IP is registered in.  It is a common mistake that IP such as trade marks and domain names get registered in the name of the employee or director that carries out the registration.

Knowing what IP the seller owns will also ensure the seller does not agree to give any warranties regarding ownership of IP that it does not own.

Tax

It is important that the various tax issues are considered at the beginning of the sale process.

The key issues to consider include:-

• VAT on the sale – The seller will need to determine whether the sale is a transfer of a going concern (TOGC) or whether it needs to account to HMRC for VAT on the sale price. The buyer will want the sale to be a TOGC to avoid any VAT cashflow costs and to reduce its stamp duty land tax liability. This issue can be complicated particularly where opco-propco structures have been used by the seller.
• Capital allowances – The seller should decide what allowances, if any, it wants to retain. Often such allowances are simply given away without any value being obtained for them. This should not happen, as the recent changes to the capital allowances rules put sellers in the driving seat in respect of such allowances.
• Tax records – The seller should ensure that all tax records can be located and are up to date and materially complete.

Plan efficiently

There is clearly a lot to consider on a pub portfolio sale but none of the issues should be insurmountable. Early planning and good advice can smooth the sale process and reduce both the timeframe to completion and perhaps more importantly, professional fees.

This article was written by tax partner Alex Barnes, real estate partner David O’Dwyer, corporate senior associate Krishen Patel and employment senior associate Sarah Martin.