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

Terry63

Ok then yes, that's the kind of lease I would be signing. Anything gets broken and it's out of my pocket.

stephenni1971

Just a couple of thoughts...

The current owner is on a no lose situation here - if you mess up and fail he can take the lease back with newly refurbished premises, and if you succeed he gets a pretty heavy rent for the term with reviews.

What if you do a fantastic job and he gets greedy and bumps the rent up massively in 4 years?

Is the £3k pw figure for rent of premises AND renting the business?

If the owner doesn't do well abroad are there any conditions under which he could take the business back?

Or are you taking over the lease and buying business outright? In which case what is the business worth?


Have you much experience of running a restaurant?

Remember every penny you spend on refurbishment is gone for good, the chairs you pay £100 each for today will be worth a fiver at auction if you fail.

How much working capital will you have?

For a business with a large t/o, the £3k stock figure seems very low...

Restaurants have probably the highest failure rate of any business. There can be any one of a number of factors,

New competition can open up close by
National pressures can reduce consumer spending
Your 'niche' ( Italian, Greek, steaks ) can fall out of fashion.
Hell, if the council decide to lay a new bypass close to you trade could be affected.


Of course you think you are getting a bargain, that's what sellers do, talk up the business, the prospects and the profits. I could make the figures for a poor business look great with a little creative accounting - you need to check suppliers are up to date, go often to check customer levels and work there a little to get a feel before committing.

Terry63

stephenni1971 wrote: »

Just a couple of thoughts...

The current owner is on a no lose situation here - if you mess up and fail he can take the lease back with newly refurbished premises, and if you succeed he gets a pretty heavy rent for the term with reviews.

Yes that's how I see it too, which is why I'm struggling to form an opinion whether I'm hetting a good deal or getting shafted.

What if you do a fantastic job and he gets greedy and bumps the rent up massively in 4 years?

Another fear. "We'll cross that bridge when we come to it" is the best discussion we've had on it.

Is the £3k pw figure for rent of premises AND renting the business?

Yes. Though just in case I've misunderstood your question, it does not include business rates.

If the owner doesn't do well abroad are there any conditions under which he could take the business back?

No. Other than coming back in 4 years' time for the review and hiking rent ridiculously to force me out.

Or are you taking over the lease and buying business outright? In which case what is the business worth?

Sorry don't get this question. I'm just looking at leasing this place for 12 years.

Have you much experience of running a restaurant?

Yes both my wife and I are qualified chefs and we used to run a good restaurant many years ago.

Remember every penny you spend on refurbishment is gone for good, the chairs you pay £100 each for today will be worth a fiver at auction if you fail.

True!...

How much working capital will you have?

Business has good cashflow

For a business with a large t/o, the £3k stock figure seems very low...

Give or take!

Restaurants have probably the highest failure rate of any business. There can be any one of a number of factors,

New competition can open up close by
National pressures can reduce consumer spending
Your 'niche' ( Italian, Greek, steaks ) can fall out of fashion.
Hell, if the council decide to lay a new bypass close to you trade could be affected.

Exactly! My biggest fear! I will be trapped in a £3k per week hellhole!

Of course you think you are getting a bargain, that's what sellers do, talk up the business, the prospects and the profits. I could make the figures for a poor business look great with a little creative accounting - you need to check suppliers are up to date, go often to check customer levels and work there a little to get a feel before committing.

Great comments, thank you so much.

dharm999

I apologise if these appear stupid questions but I am confused. As I read it, you are going to pay £50k to the current leaseholders of a building used as a restaurant, to take over the lease. You will then pay another £3k/week to rent the restaurant from the current leaseholders. Can the leaseholders in effect sub let to you? Why pay twice? Looking at the rent can you not put something in the lease that restricts the increase you would pay in 4 tears time, say by referring the increase to an index, say RPI. The leases we sign can increase, but the increase is linked to RPI & the local market.

How sure are you about the £2k/week profit? What is it based on? All I have read on restaurants is that one third of what you charge is for overheads, one third for food/drink cost, and one third for profit, but this simple rule doesnt seem to make sense in the case, as you are going to pay £3k rent, but only make £2k profit? What profit margin are you basing the £2k on? Have you looked at your figures and worked out what your breakeven point is, in terms of meals/week, and is that achievable? Is the £2k after you and your partner have taken a salary or will the £2k be used to pay you? In which case you will have to think about tax, and therefore your real take home will be less

Looking at the overall deal you are going to make £100k a year and the current restaurant owners will make £150k for, in my view, nothing at all. Or will they use the £150k to pay the rent, or are they making some money on this, and the rent is actually less than £150k?

Can you post some more info, so we can work out if you are getting a good deal or not.

Regards
dharm999

Terry63

Dear dharm99/amyone else,

Based on your comments, I would like you to make some assumptions; that all the quoted and potential figures are correct. And then see what you think.

Arrangement for 12 years:
- £50K premium
- £3K per week, reviewed every 4 years
- I'm commited to spend £50K to modernise the business
- Anything goes wrong with the place eg packed boiler, roof leak etc... my responsibility
- My wife and I expect to make after all expenses (business rates, utilities, staff) on average £100K (before tax).

Fair deal or not? I wish I could start a poll!

Rolo_Tomasi

I think is not a bad deal but I would want some changes to the lease:

1. I would want a clause that restricts any rent increase to RPI or something similar.
2. I would want at least 1 and preferably 2 break clauses where you can get out of the lease and not be liable for the remaining term - possibly after 4 and 8 years in line with rent review.
3. I would only want to be liable for cosmetic repairs - definitely nothing structural or the roof.

If the seller is not willing to budge at all then, although at present it seems like a good deal I do not think I would go through with it as you would have no security and would be landed with significant losses should anything untoward happen.

Terry63

Rolo_Tomasi wrote: »

I think is not a bad deal but I would want some changes to the lease:

<snip>I would want at least 1 and preferably 2 break clauses where you can get out of the lease and not be liable for the remaining term - possibly after 4 and 8 years in line with rent review.. <snip>

I assume that I would have to write off the £50K premium?

Rolo_Tomasi

Yes you would lose the £50k but the alternative could be if you wanted to leave after 4 years you could be charged for the remaining 8 years on the lease (8 x £150k = £1.2m)