Generally speaking, which 'side' should earn more in a lease arrangement

Terry63

Does this question make sense?

For example, there is a business for sale leasehold. Lease is for 12 years, plus the rent. Business is reputable and should, in theory and touchwood, weather the current economic climate.

Lease is £50K, negotiated every 4 years.
Weekly rent works out at £3000
Person who takes on the lease expects to make, after expenses, £2000 per week.

Good deal for both, or only one of the sides.

EDIT: Should mention that it's a restaurant so long hours and 7 day weeks for those kind of profit margins. Business will take over life!

Terry63

No replies....

Is my question stupid?:o:o:o

Rolo_Tomasi

Are you saying that you have the opportunity to purchase an established business which makes £100kpa profit for only £50k or are you also paying for the goodwill/fixtures and fittings/equipment etc?

Terry63

Yes I am. There will be about £3k worth of stock in addition. Also, after discussions with the owner we agree that I would have to spend about an extra £50k out of my own pocket for modernisation work.

bingo_bango

So effectively you would be ~£3K down after 12 months, but only if you spend £50K on modernisations.

Perhaps you could look at spreading the modernisations over perhaps 3 years and mitigating the need to spend big in year one. That would perhaps give you profit of ~£75K for year one of the first 3 years, then increase that to ~£85K in years 2 & 3.

As you will be paying £3K rent per week(?), I would have expected that any works you will be carrying out are superficial only, and the landlord would be responsible for the structural integrity of the building? I would certainly want to look at negotiation on the rent if that's not the case.

As for whether or not it's a good deal for the other party...that is irrelevant. The only question is whether or not this is a good deal for you. 12 years is quite long for a restaurant lease in the current climate, but £50K does not seem to be an extravagant amount for the lease.
If you believe that the business can continue through the end of this recession and into better times, then perhaps it is worth pursuing. You will have to look at the ROI considering the amount of time you will put in though. Does £75K in a year make up for having no life (not that you'll have time for one hopefully!)?

It seems that you believe the business will work and continue to generate a profit. I get the feeling that you may want some more of that profit though. £3K rent is not cheap, and will be the main expense I'd have thought. Perhaps you can negotiate that figure to a more reasonable level?

Terry63

Bingo Bango, thank you for your response. I should have mentioned that the £50k modernisation does not have to be all in the first year, it is actually at my discretion throughout the lease.

The restaurant is doing brilliant at the moment, but the modernisation is necessary to keep up because it is a bit tired looking. Cosmetic and structural, it is all on me - I intend to spend the money on new furnishings, new bathrooms, paintjobs etc.

I take on board what you are saying about there being no hard and fast rules about who should benefit more from the lease. It is something to think about whether I can sacrifice the next decade of hard work and be rewarded for it.

Savvy_Sue

This isn't something I've got direct experience of from the business side, but noting what you say about modernisation and the need for new bathrooms and paintjobs etc ...

DH and I do lunch dates fairly often (it's sometimes the best way of seeing him!) and we have a couple of places we go to on a regular basis. However, we can be a bit fickle, so if one is unexpectedly shut, it will be a while before we bother trying it again, if at all. Especially if while it's closed, we find another place which is as good / cheap / tasty.

So forgive me if I'm stating the blindingly obvious to you, sitting on the other side of the kitchen as it were, BUT keep in mind that any closure periods may lose you custom which won't come back again, so keep them short and sharp, give as much notice as you can, and be ready to 'tempt' people back, maybe by giving out vouchers for a free dessert or glass of wine in the week or so before you close!

If you already have three separate sets of facilities for ladies, gentlemen and the disabled, you MIGHT get away with staying open while you do one at a time and directing ladies and gents to the disabled while theirs are closed, but that won't work well for the ladies if you're VERY busy. But if the work is very noisy (or smelly!) it would put me off, so closing might be better.

You would obviously pay a premium, but it might be possible to get some jobs done overnight - or on a day when you don't normally open if you're not a 7 day week operation!

I would definitely want to be in there myself to work out when the quietest times were under the 'new management' before scheduling any work.

Terry63

Hi Sue! Sound points but any modernisation won't involve closing the premises!

Rolo_Tomasi

Just a couple of issues you need to bear in mind:

People very rarely sell a business which is 'doing brilliant'. If the current owners are making £100kpa profit why would they sell for just £50k? You need to get your hands on copies of the most recent financial information (probably VAT Returns and wages summary) to make sure that the figures stack up. Also make sure that you turn up unannounced on different days and times to see how busy the restaurant is now.

Be careful not to accept a fully repairing lease as if you ever want to vacate the premises you will be stung with a very hefty dilapidations bill no matter how much you have spent on the property.

Terry63

Thanks Rolo.

- Excellent points, which I would like to address. The owners are emigrating to start off another restaurant in their native country. I sense from your post that I should be wary, and that possibly there is a catch somewhere. Strangely I find that encouraging, because I read that as this deal is favouring me! Though as you will read in my next paragraph, the owners aren't doing too badly either. Importantly, I have seen official paperwork and it does all add up. I have actually dined at the restaurant myself and I can see why it is successful. It's a good setup.

- You say "If the current owners are making £100kpa profit why would they sell for just £50k?"
They are getting £50k upfront, a deal where another £50k is spent on their business, plus a guaranteed £3k per week for the next 12 years! Increased every 4 years at that!
Anything can happen. Business relies heavily on tourists for example. A terrorism strike in London can decimate the business, and I'll be stuck with coughing up £3k per week however badly the business is going.

- Great point about whether it is a 'fully repairing lease'. I have not come across this potential issue, can you elaborate please?

Savvy_Sue

It's a lease where if a heap of damp patches appear on the walls / carpet, it's your problem, not the landlord's.

If the boiler packs up, it's your problem, not the landlord's.

If the pipes burst, it's your problem, not the landlord's.

And so on ...