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  • Writer's pictureRobbie Stewart

The 6 pitfalls in starting a hospitality business

Updated: Oct 2, 2020

In this article, I’m talking mainly to those who are either new to the business of hospitality or experienced managers who are new to running their own business. Having said that, there are none of us are perfect, so even if you see yourself as an old hand at such things, take a read, you might find something to make you think.

1. Not taking the right advice early enough

Especially if you’re new to this, getting advice is key, but not from anyone, from the right people.

The hospitality industry is well known in business as being quite risky. Wrongly assuming you know it all triples that risk for no good reason.

So, who do you ask. Well, to work that out look at different sources of information and what are their motivation.

There is the current owner of the business you are looking to take over. Well, it seems clear that no matter how nice they seem, they are looking to either sell the business to you, or to find their replacement to get out of a contract. They might not be the best person to trust.

There is the landlord or pub company. Better, as the big pub companies for example are regulated and as they’re trying to build a working relationship with you, it doesn’t benefit them to mislead you. Having said that, if tying someone into a rent contract is your aim. You can’t really be expected to also provide worthwhile advice.

Friends and family, if experienced in business can be of some help, at least you know that they are on your side. The problem comes from exaggerated experience and opinion often given precedence over actual knowledge.

Independent advice is best, even if you have to pay for it. Paying a little for the right advice could save you £1000’s in the long run.

Be careful though of ‘free’ consultation sessions that are actually sales visits, that push a company’s services instead of talking about you and your situation.

Roslyns are happy for a half hour chat for FREE and give you the benefit of our experience in a chat around your situation. If you then use us for your business services, great. You can also buy our ready to trade package for £199+VAT for a more rounded and complete business set up.

(for more info see here).

Wherever you get your advice from, avoid getting it from the bloke down the pub. He’ll claim that he ran a hotel or pub for years and knows everything there is to know. Well, if he was that great, why is he skint and drunk at noon?

Ask the experts who specialise in the hospitality field. Even if you don’t ask us, ask someone!

2. Not picking the appropriate trading entity

Put simply, you have three option. Sole trader, partnership or limited company and each have their benefits and downfalls.

In a nutshell, being a sole trader means that you are the business and the business is you. This means that any profit is yours personally, but any debts are also yours. A partnership is basically a sole trader where the profit and debts are shared.

A limited company offers limited liability as a benefit, you are an employee of the company that you create and many of the debts are the businesses. This can provide a buffer between you personally and a business entity. A limited company though also has regulatory responsibilities, not everyone can be a director and your some of your financial records are public.

Deciding the best trading entity for your needs is vital. Being a sole trader may be the easiest, but is it the best? Well, this comes down to taking the right advice!

3. Picking an agreement that doesn’t work for you.

Know your agreement and what is means for you. There are three main agreements you’ll find in hospitality businesses.

Freehold: You are buying the building outright. This is expensive but you have a property asset. As with a house though, the value of that asset can change, down as well as up.

Leasehold: You are taking on a lease which means you will temporarily take a form of ownership for a set period of time. If it is a successful business already, there may well be premium that you pay for the lease. Also though, if you turn a poor business into a great one and your lease is assignable, you can buy for a small or no premium and then sell at a higher premium. You should be aware though that some leases are part of full repairing which means you are also responsible for maintenance cost of the building.

Tenancy: This is usually a shorter term form of lease that is rarely assignable. A tenancy is common with pub companies and may come with a partial or even full tie to that company as drinks provider.

If you start with an agreement and then decide it isn’t working for you, it is too late.

You’re often then tied into a contract for a number of years that you simply cannot walk away from without a large financial penalty.

Prior preparation prevents … well, you know.

So, we get to a great way to prepare, your business plan.

4. Not producing a business plan.

If you are looking to take an agreement with a pub company they will require you to produce a business plan as part of their due diligence to ensure you are prepared and know what you are getting in to. Or, if you are looking for a bank loan to help pay for your new enterprise, the bank will also want to see a business.

Outside of these times, if it is a private agreement, a freehold for example, or you need no help as you’ve plenty of savings to invest, no-one will insist on a business plan.

Do one anyway!

A good business plan will comprise two elements: Narrative and financial.

The narrative part is where you will look at the current trade from that business location, the local area, competition, and what you intend to do differently to make the business a success. You’ll also look at things such as the current/desired customer base and put together a marketing plan. You’ll also do a SWOT analysis (Strengths Weaknesses Opportunities Threats).

The financial part is where you crunch the numbers. It is this part that will show you the viability, or otherwise, of your proposed venture. You’ll look at your income, what you’ll sell and what profits you’ll make. You’ll analyse your costs and your cashflow. You’ll compare your costs with benchmarks for similar businesses or with figures from a pub company or audited accounts provided by the seller. Another vital part is the projections, looking to the first 3 to 5 years. Lastly you’ll want to produce a sensitivity analysis, this will show you the effects if trade is better/worse than expected or if costs rise/fall.

At the end of it all, you’ll have a document you can refer to regularly to keep you on track. Obviously Roslyns being the market leaders in such things can support you with a business plan, whether you need our help with the narrative, the financials or both. You can learn more here. We will then use the year one financial forecast and put it into a report in your monthly management accounts to help you keep track.

5. Choosing the wrong business partner

(there is no space for a Bez)

We have seen relationships and friendships breakdown over business. An idea that seemed ideal over the kitchen table at the planning stage quickly turns sour when the reality kicks in, bills seem endless, the hours worked seem unequal and instead of dividing up profits, you’re looking at investing yet more savings.

I advise partners in any business venture to have clearly defined roles from the start. If one partner is to be silent, how silent? Is there any contingency money available if needed, and if so, where will it come from? Are all parties to get the same share of the profits? Is there a prior agreement on minimum/maximum working hours?

In the 90’s, the band ‘Happy Mondays’ had a member called Bez. He didn’t play and instrument, write songs or sing. He danced. Badly. His role was ‘vibes’ Now in a drug addled 90’s band, the role of ‘Bez’ seemed to make sense. In business, there is no place for a ‘Bez’. What I mean about this is when you have one business partner who will tend bar, cook lunches, do the ordering, plan events and the other partner plans to ‘look after the paperwork’, we have ourselves a ‘Bez’. The role of ‘looking after the paperwork’ is simply not a role on its own. Any accountants worth their salt will make this meaningless. Roslyns are even paperless so that suppliers send invoices right to us.

So be careful when you go into business with other people that you are all pulling your weight equally, or if not, then it is known ahead of time and recompense reflects any workload unfairness.

6. Never having done it before

Now, as I said earlier, this article is aimed at those new to the industry, however, I’d strongly recommend a bit of hands-on experience as a necessity.

If you’re new to running a business in hospitality but have been a successful manager then make sure you have a good adviser (such as Roslyns, obviously) looking after you.

If you’ve experience in business but not in hospitality, I advise you to get some experience.

If you’re intending to be hands on, speak to a friendly local pub, restaurant, hotel. Ask if they’ll let you help out for a few days as a general dogsbody. Many people in this industry are only too happy to help and share their experiences, good and bad.

Even if your intention is to hire a full staff team to run the business, with no hands-on experience, you’ll always be totally reliant on those who do. It will be too easy to think all is well when it is actually falling apart at the seams.

From a customer’s angle, the hospitality industry can look very appealing. Chatting with customers, making drinks, taking delicious food to happy diners. In reality, it is a tough business, in my experience incredibly rewarding, but tough.

At the end of a gruelling busy night with seemingly endless challenges, if you sit back and smile at the fun you just had … give us a call, you’re ready!

So, really the main thing I'd ask you to take away from what you've ready is the part about advice. Getting the right advice, early, is key. We're not the only license trade specialists. We're the best, but not the only ones. So even if it isn't from us, please take your advice from someone qualified to advise you.
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