starting new business and risks-part2

samboston

Hi

Just like to thank everyone for reading and especially to those who have replied to my previous post (it is at the bottom for reference). Not sure if i have replied correctly, so apologies in advance.

Any help or comments would be very appreciated, as my knowledge and experience of business is very basic, and some of my questions/observations may appear to be stupid.

It seems the weekly rent to the landlord for the full term of the lease is the biggest commitment.
What’s the best deal I could realistically hope to negotiate with the landlord?
Ideally, I would want the rent to be tied to any profits that we make. This way the landlord shares some of the risk. For example, if I am not making a profit then my rent drops to zero (as I say this would be an ideal scenario).
Is it possible to have a 3 year lease, and then one could renew the lease after 3 years on the same terms. Is this normal.
What happens when the lease runs out. Is the landlord obliged to renew the lease or not? What normally happens in these situations?

I would prefer to trade as a sole trader as most people in this type of business do this, so I guess they know something I don’t. Or are they just wrong and don’t know any better?
The limited company has the attraction of limited liability but it is more expensive in terms of accountant fees and I think there are more stringent legal requirements with the paper work and accountants, etc.
Also, can you start as a limited company and then change to a sole trader later on?

What are the advantages and disadvantages of being vat registered? Most people seem to imply that being vat registered is a bad a thing. Again don’t know why. Can anyone help? I would expect annual sales to be about £65,000 (that's working 7 days a week and about 11 hours every day). Like MacDonald’s, customers would only be paying in cash.

Exit strategy.
As I say I have never run a business before, but having watched the Dragon’s Den one point I picked up was that before going into business one should have some sort of exit strategy. If the business is making a profit then there are no problems, as I can just sell the lease as an on going concern. This should be ok.
If however, we are struggling to break even, or a competitor opens a retail outlet nearby then it gets a bit tricky (and a lot of pubs are being advised to focus on food sales as the smoking ban next year is likely to hit their drinks business – so competition is very fierce).

In the worst case scenario, I would want to ensure that our house is not put at risk.
Could I transfer the house to my wife? And what would be the best way to go about that.
Someone said the new insolvency laws imply that they can still come after your assets for a period of 5 years even thou you have transferred them to your wife. I guess this also applies to the mortgage of tenancy in common that MalcolmCooper mentioned.
Also, can my wife lend me the money at commercial interest rates to run and setup the business and then I still owe her the money. So in the worst case situation, I would still owe her money. Could this in effect be payment for transferring my share of the house to her name? and would this provide protection for our house?

Thanks again.
Sam

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This my previous post for reference. Thanks to everyone for replying.

I am new to all this and have never run a business before, so any help would be appreciated

I am thinking of buying an existing business from someone. I will be the new leaseholder. It is a fast food retail outlet. The lease is for 10 years and the rent is £160 per week. I believe the rent has to be paid to the landlord for the term of the lease. The current leaseholder is trading as a sole trader.

- I would like to carry on running it as a sole trader as I believe this is easier . However, is it possible to change it to a Limited company after 6 or 7 months of trading to achieve limited liability?

- Also, if everything went horribly wrong what would be the best way to protect my existing assests (ie my house). For example, if the business stopped trading then I would still have to pay the landlord his rent and bills etc. for 10 years, could the landlord come after our house to get his money? My wife and I own a house and have a £31,000 mortgage. There would be no charge on the house to raise money for the business

Thanks for reading.
Sam

richt71

Ok. I'd be very surprised if you can get a landlord to rent to you on a per profits basis. I own some commercial property with long term tennants and would not accept such a proposal as I may never take any rent if your business isn't great for 3 years! But hey I guess you can ask.
In relation to your other questions I'm affraid I'd suggest you get professional advise - many accountants will give you an intial consultation free and they'll answer your questions.
In relation to VAT - you are required by law to be VAT registered once you hit £50k turnover (I think that's the figure).

samboston

Thanks fot that richt71, i appreciate your quick & candid reply.
Just like to say I'd be happy to pay the rent if the business is profitable, no problems there. Obviously, non of us want to be in bsiness to make a loss, but it happens in real life, and we have to deal with it when those cards are dealt to us.

You say u have some commercial property. I've never been a landlord (and don't know any either), and don't expect to be one anytime soon, so good to hear from an experienced landlord. May i ask, Is that in the fast food business?
Have u ever had a tennant that has not paid the rent, and how did you cope with it?

When the rent increases (presummably, after 3 years) how much does it increase by? Is it related to profits? How is the rent increase determined?

Thanks again.

richt71 wrote:

Ok. I'd be very surprised if you can get a landlord to rent to you on a per profits basis. I own some commercial property with long term tennants and would not accept such a proposal as I may never take any rent if your business isn't great for 3 years! But hey I guess you can ask.
In relation to your other questions I'm affraid I'd suggest you get professional advise - many accountants will give you an intial consultation free and they'll answer your questions.
In relation to VAT - you are required by law to be VAT registered once you hit £50k turnover (I think that's the figure).

richt71

samboston wrote:

Thanks fot that richt71, i appreciate your quick & candid reply.
Just like to say I'd be happy to pay the rent if the business is profitable, no problems there. Obviously, non of us want to be in bsiness to make a loss, but it happens in real life, and we have to deal with it when those cards are dealt to us.

You say u have some commercial property. I've never been a landlord (and don't know any either), and don't expect to be one anytime soon, so good to hear from an experienced landlord. May i ask, Is that in the fast food business?
Have u ever had a tennant that has not paid the rent, and how did you cope with it?

When the rent increases (presummably, after 3 years) how much does it increase by? Is it related to profits? How is the rent increase determined?

Thanks again.

Ok Sam..I'll try and help you. I inherited my commercial property and it's 2 shops that rent from me. Rent reviews happen every 1-2 years. Increase is what the market is going for. It's never anything to do with profits of the shops as that's none of my business TBH. Any increase is by negiotation between my property management company and the rentors.
3 years is very short lease by the way. Both mine are on 10 year leases. Apparently 20 year leases aren't unusual in commercial property.

Encantador

I can see why a landlord would not want to go for such a deal. I do sometimes wonder why they sometimes leave shops/premises empty for months.

I live on a housing estate with a small parade of shops, often over the years one, sometimes more have been empty for up to 6/9 months, they bring down the whole precinct.

I am sure someone trying to start a small business would welcome the opportunity to have one lets say FREE for 3 months, if they make a go of it, they start paying, maybe paying a little extra until they have effectively paid for the free period. If during the 3 months (or whatever time span) the business fails, they walk away owing a lot less than they would have done.

The benefits to the business owner are obvious.

The benefits to the shop owner are.....
1) The place will almost certainly get decorated.
2) They could gain a loyal long term tenant.
3) If they own the whole precinct, the place looks better which ia better for all of their other tenants too.

Most of these places are owned by companies and they don`t care, but if I owned an empty shop and history told me could take months to re-let, I would probably want to give it a go.

If you don`t ask, you don`t get.....

Slinky

richt71 wrote:

In relation to VAT - you are required by law to be VAT registered once you hit £50k turnover (I think that's the figure).

VAT threshold is £61K, since you are estimating sales of £65K, you might be better trying to keep your sales below £61K and avoid the need to register.

However, there are benefits of voluntarily registration below the VAT threshold in terms of being able to claim back VAT on your purchases. An accountant would give best advice on what would suit your business type.

samboston

Thanks to everyone for replying, it's much appreciated.

Does anyone know much, or have experience about tenant only break clauses?
In today’s competitive commercial property market tenants are looking to introduce as much flexibility as possible into their leases in order to protect their future business interests. This will often include a break clause which gives the tenant the right to bring the lease to an end part way through the agreed term. This is a useful option particularly in circumstances where a business changes significantly over a short period.

Also, if you were going into such a venture, how would go about protecting the house you live in?

Thanks
Sam

richt71

samboston wrote:

Thanks to everyone for replying, it's much appreciated.

Does anyone know much, or have experience about tenant only break clauses?
In today’s competitive commercial property market tenants are looking to introduce as much flexibility as possible into their leases in order to protect their future business interests. This will often include a break clause which gives the tenant the right to bring the lease to an end part way through the agreed term. This is a useful option particularly in circumstances where a business changes significantly over a short period.

Also, if you were going into such a venture, how would go about protecting the house you live in?

Thanks
Sam

Hi Sam,
A tenant break can be included if the landlord agrees. It usually means a penalty fee of a % of the lease remaining or a set amount (£). It's something that needs negiotating.
In terms of your house the only way I can think that will help protect your personal assets is to set-up a LTD company. A ltd company has limited liabilities. Of course you will incur more costs in doing this.
I'd suggest you have a free consultation with a business advisor (local government business advise offices in most towns) or an intial appointment with an accountant.