Valuing a shop lease/business

rach29

Hi all, hoping for some advice about a shop lease. Will copy this post in House Buying Forum as there are some knowledgeable people over there also.

We currently run a successful small business from home & are looking at taking over a small shop which is currently running the same kind of business as us. There are a couple of advantages for us not least the fact that the shop is currently our main competitor in the town.

It has been making little money for the last couple of years, mainly because the business owner is now doing something else and has been employing staff (he has now let all but one of them go)

The main difficulty we have is how to decide what value (if any) to put on the lease for the shop. It has 3 1/2 years to run at approx £475 per month so approx £21k over the 3+ years. Now we would really like to re-negotiate the lease with the landlord for a longer term & understand that this will most likely be possible however, the current business owner wants to agree a price with us to take over the business & we're not sure where to go from here.

The way we see it is that we have a price for the stock in mind and a sum for goodwill etc but how do we value the lease? The situation is that if we don't take it over the business owner will probably just close the shop & pay off the landlord (since he definitely doesn't want to continue) so in one sense we would simply be taking that liability off his hands wouldn't we

Hope this makes sense, I'm struggling to get my head around it. Please ask any questions you have & I'll do my best to answer them.

Any ideas?

a11waysindebt

I'd make all contact with the owner of the property and nothing with the current occupier. Once you have something on paper go from there.

The other point to bare in mind is your rates plus the extra amount you have to pay out each month. If he is the main competition and he is quiet how good are your takings.

rach29

Our current relationship is with the current occupier, however, and it is him who is asking us to take over his business effectively.

He has been breaking even for some months but was employing 3 people at that time. He now has only one employee and is therefore making a small profit, but hasn't done any advertising or made any effort towards the business in quite a while.

Our takings are good & have improved throughout the recent downturn. We are sure that having the main offering in the town & with proper advertising we can improve profits further. We intend keeping the current member of staff & at the same salary.

We have checked out the current rates although we are aware that these are likely to rise in the short term ( we have allowed for them to double in our forecasts)

We are just not sure of how to negotiate about the lease. We'd like to speak to the landlord & negotiate a minimum 5yr maximum 10yr lease (therefore ending the liability of the current tenant. So should we negotiate with the Tenant (to buy the business) assuming the lease has a value of nil? or minus £21K?

chickmug

rach29 wrote: »

It has been making little money for the last couple of years, mainly because the business owner is now doing something else and has been employing staff (he has now let all but one of them go)

But to value the valuer will look at the P&L Accounts and will recalculate the Net Profit as if potential new owners do not need staff. So if current owner spends XXXX PA, on staff, that would be extra NP if you didn't need them. This resultant new NP would be the basis from which to arrive at a goping concern valuation.

The main difficulty we have is how to decide what value (if any) to put on the lease for the shop. It has 3 1/2 years to run at approx £475 per month so approx £21k over the 3+ years. Now we would really like to re-negotiate the lease with the landlord for a longer term & understand that this will most likely be possible however, the current business owner wants to agree a price with us to take over the business & we're not sure where to go from here.

The way we see it is that we have a price for the stock in mind and a sum for goodwill etc but how do we value the lease? The situation is that if we don't take it over the business owner will probably just close the shop & pay off the landlord (since he definitely doesn't want to continue) so in one sense we would simply be taking that liability off his hands wouldn't we

All true and if current owner closed the shop they would usually be liable for the lease payments for the rest of the lease term.

Hope this makes sense, I'm struggling to get my head around it. Please ask any questions you have & I'll do my best to answer them.

Any ideas?

To give more help I would need to know so may things it is hard to know where to start. An empty shop in poor trading spots in poor areas could be easy to get into with lots of incentives. BUT on the other hand a desirable spot in a desirable area could attract a real premium. However by the sounds of the rental it doesn't sound like it is in a top spot?

So for the seller, or if advsing a buyer I would be studying the P&L but a major factor is what type of business is it?

rach29

Hi chickmug, thanks for your reply. Would it be Ok to PM you? I'm a bit worried about being identified in this situation

Savvy_Sue

rach29 wrote: »

We intend keeping the current member of staff & at the same salary.

And I think probably on the same terms and conditions, which you can attempt to renegotiate but you may have to make redundant if you can't agree.

So if the current member of staff now does Mon-Sat, 9 am - 5 pm, and you would like to introduce Sunday working and have her take a day off in the week, you couldn't just impose this.

Make sure you have checked this out, it's a TUPE situation I think.

rach29

Thanks Sue, Hadn't thought about this area at all will have a good look at the necessary legislation.

chickmug

rach29 wrote: »

Hi chickmug, thanks for your reply. Would it be Ok to PM you? I'm a bit worried about being identified in this situation

Yes no problems.

splicecom

Why not see an agent

Gallows

You may already have moved on with this however

Are you buying the business as a going concern, (which does make make it a tupe) or merely looking at taking over the premises?
If you are simply taking over the lease, in todays retail climate, there can be very little justification for paying a premium, as it is known, for taking over the responsibility of the lease.
For the person moving out it is a large liability ie £21k, they will imediately be that amount better off should you simply offer to take it on.
Don't forget the legal fees. The new tenant is often responsible for paying everyones legal fees, your own, the outgoing tenant and the landlord
Check the type of lease.
If it within the landlords act then the landlord must offer you a new one at the end. If not, you have no rights to stay in the property when the lease expires.
Is it a full or partial repair lease, ie are you, as lease holder, fully responsible for every internal and external repair required. If "full repair" the landlord can legally make you pay for everything when the lease comes to an end. The current tenant would also have that as a current liability.
Also for many leases you carry a liability for the life of the lease. eg you take out a new 10 year lease, but decide to move on after 4. you pass the lease on to someone new who goes out of business after a year. In this type of lease the landlord will come to you for payment of the rent.

We recently looked at a lease with 2 years to run, no premium, where the tenant was willing to pay our first 3 months rent. It was full repairing and looked as though the current tenant was looking to get out before being hit with a big repair bill at the end. We wallked away even though it was a great shop.
On the other hand we did take a shop that had been standing empty for a long while on a monthly agreement at half the advertised rent with no repair liability. It has allowed us to see if the location worked for us before agreeing to a new lease

I have dealt with a number of shop leases over the past few years so if I can be of any help just say so.
Having a shop or shops can be great fun and rewarding, being aware of some of the pitfalls before hand can help take some of the stress out it all.