How does leasehold work?

[Deleted member 225778]

Hi everyone,

I'm a novice. Actually I'd like to start my own business. The best fish&chips shop in our town that I was always waiting for is advertised for leasehold.

"Traditional style fish and chip business, ...... Taking £4,000pw. Lease, unexpired term 20 years, rent £17,000pa. Price: £150,000 lease........ Inventory includes Florigo frying range, peeler, chipper, various fridges and freezers, cash registers, etc...... "

Now back to basics:
1. Should I pay the whole £150,000 upfront?
2. Should I also pay the first year's rent (£17,000) upfront?
3. What happens if I decided to close my business or move from the place in say after 10 years? Will I get back half of the lease back(i.e. half of £150,000)?
4. Is the £150,000 gone after 20 years, if I decide to not renew the lease contract?
5. Should I pay another £150,000, if I decided to renew the lease contract after 20 years?
6. Is it worth to go for this business at all?

Thanks for the help in advance.

 

[swankypants69]

If you've got 150k going spare, you could probably set up your own

Price up fitting out an empty property or even buying one (depends where abouts in the country you for property prices etc)

4k a week, 200k turnover, is that ex-vat?

 

[Billmccallum]

You are effectively buying a business not a property.

£150K is the asking price, you will have to pay £17K every year for rent + another £8K for rates.

at the end of the lease you could extend, but should not have to pay a premium for this.

 

[Deleted member 225778]

Thanks for your inputs.

I have not got 150k spare. That's gonna be a loan borrowed from the bank. I doubt if it is VAT exempt. It's very unlikely.

Obviously it is a business leasehold not a purchase.

To be honest I'm now more confused. Would you please correct me if I misunderstood you

After having the accounts, etc. fully checked, on the days that I sign a leasehold contract with the owner, I should pay £17K + £7.5K to get the keys. That is the first year's rent plus £150K divided by 20years.

 

[SugarCubeProductions]

The £150K should go to the owner of the chip shop, not the landlord, and paid up front.

Then you need to pay £17K to the landlord per year, properly £8.5K upfront for 3 months deposit and 3 months upfront rent. Then £8.5K a year to the council in rates, paid however the council let you.

If after 10 years you want to sell, then you can charge what you want for the leasehold, they buy it off you and then start to pay the landlord.

 

[kulture]

I suspect that the £150K is to buy the business. I would get it professionally valued. It may be worth a lot less. That part will be open to negotiation.

To be honest, you could set up a shop for a lot less than £150k

 

[Deleted member 225778]

The £150K should go to the owner of the chip shop, not the landlord, and paid up front.

Then you need to pay £17K to the landlord per year, properly £8.5K upfront for 3 months deposit and 3 months upfront rent. Then £8.5K a year to the council in rates, paid however the council let you.

If after 10 years you want to sell, then you can charge what you want for the leasehold, they buy it off you and then start to pay the landlord.

Thank you very much for the information. So the next steps for me would be:
1. I get accounts to check books for the previous years as well as taxes, etc. to determine the actual turnover, gross and net profit of the business.
2. I get some experts to valuate the business based on accounts' findings
3. I make an offer based on the expert's valuations to the owner of the business
4. If offer was accepted, I borrow £150k from the bank.
5. I pay £150k to the business owner
6. I pay £8.5K for rent deposit and rent of the place to the landlord
7. I pay council rate
8. I start my own business

Am I correct?

 

[SugarCubeProductions]

You'll need to borrow more then the that as you'll have to cover your account fee's, legal fee's, staff costs, buying the fish and chips...

 

[Chris Ashdown]

Banks will only lend if you can guarantee the whole amount or about 50% these days, you will be lucy to find one that offers better rates so if you put in say £75,000 they may lend you the other £75000 and charge you a high rate of interest on the loan

Do you have any savings or property you can use as collateral

 

[Deleted member 225778]

You'll need to borrow more then the that as you'll have to cover your account fee's, legal fee's, staff costs, buying the fish and chips...

Can you please give me an idea about the costs of account fees and legal fees?

Furthermore, can you please confirm if I got this right? That is "After 20 years of lease, I can sell my business for e.g. £150K, so the money that I have borrowed today is not lost"

Banks will only lend if you can guarantee the whole amount or about 50% these days, you will be lucy to find one that offers better rates so if you put in say £75,000 they may lend you the other £75000 and charge you a high rate of interest on the loan

Do you have any savings or property you can use as collateral

That's gonna be our home :-(

 

[SugarCubeProductions]

Can you please give me an idea about the costs of account fees and legal fees?

Furthermore, can you please confirm if I got this right? That is "After 20 years of lease, I can sell my business for e.g. £150K, so the money that I have borrowed today is not lost"

I have no idea about legal costs in your area. I'm in London but have a very good relationship with my solicitor so they will be very different from yours. You'll have to ask them.

And after 20 years, you can either:
A. Renew the lease with the landlord (Free or small legal fee)
B. Sell the business with no lease, it'll be worth about the cost of the equipment only as anyone moving in will have no guarantee they can stay, you might get back about £50K

A business like a fish & chip shop is kinda worthless if they can be kicked out with a months notice. So without a lease you'll get minimal value. If you do want to sell in 20 years, renew the lease first and then sell it with a new 25 year lease.

 

[Deleted member 225778]

thanks very helpful

 

[AnneLou]

It's good that you're doing your homework and asking questions!

I think you need to have a better understanding of what £150k is buying you. As another poster stated, it's buying the business and has nothing to do with rent. A "business" would normally consist of the lease, goodwill and fixtures and fittings (F&F). Any price can be put on a lease - I paid a £1 for my pub lease! I paid a lot for "goodwill" and it was easy to value the fixtures and fittings. That's what makes up the buying price. Over the years, I have added, updated and replaced my F&F and can sell that on. The "goodwill" is far more problematic - it's only ever worth what someone else will pay for it!

£150k is an awful lot of money for a fish and chip shop! I wouldn't pay that for a leasehold pub and if one was for sale at that amount, I would expect the turnover to be much higher. How long has the business been up for sale and why are the owners selling?

You should get lots of advice but the best one to follow is make sure that your head rules your heart when doing business and not the other way round! A business should always be profitable and that should be the over-ruling factor in every decision you make.

 

[SugarCubeProductions]

The biggest number you need to know, is how much of that £4K weekly takings is profit!

If it's £500, don't bother.

Remember whatever money you are borrowing for the business you need to pay back, and still live.

 

[Chris Ashdown]

There is no guarantee you will get a new lease after 20 years, and if you do the new rent may be far larger than you expect

With a new lease you will be expected to guarantee all the future payments, so if for instance you give up after a couple of years you are still responsible for the remaining years rent, and if you sub let and they stop paying the rent it still falls back on you

Most leases would appear to be for 10 years

Is the £4000 turnover or profit including owners takings or before

Good luck but you do need expert help, does your town hall have a business advisory department foe people thinking of going it alone, most do

 

[Deleted member 225778]

.... The "goodwill" is far more problematic - it's only ever worth what someone else will pay for it!

£150k is an awful lot of money for a fish and chip shop! ....... How long has the business been up for sale and why are the owners selling?

If the accounts match up and were clear, then my plan was to offer half of the asking price at first try and see the owner's response. Unless you say even £75K is too much for a fish&chip shop.
Is there any norm or formula to find out the best price to pay based on the net profit of a business? For example can we say for the net profit of £2000pw the reasonable asking price should be in £70K - £85K bracket?
The business has been put for sale 2-3 months ago. And I don't know why they are selling it. I've not talked to the owners yet.

The biggest number you need to know, is how much of that £4K weekly takings is profit!

Yes exactly. That's what I hope the accounts can figure out for me. I assume the owner can give a rough idea about that one, however you cannot rely on that.

There is no guarantee you will get a new lease after 20 years, and if you do the new rent may be far larger than you expect
.....
Good luck but you do need expert help, does your town hall have a business advisory department foe people thinking of going it alone, most do

You said "There is no guarantee you will get a new lease after 20 years" that makes it very risky, isn't it. I would be very uncomfortable with spending money on a business which would live only for 20 years. Can I somehow add some clauses to the contract to avoid this situation, like by putting "compensation" in case of no renewal or something like that?
At the moment I'm not sure if our town hall provide advisory services, but I will definitely ask about it. Thanks

 

[AnneLou]

When I bought my business, I remember my accountant telling me to look at the accounts of the business I was buying and look for the net profit figure - if I could see myself living off that then it was a viable business to me. Net profit on a set of business accounts is like the take home pay of an employee. I would say this is a very, very simplistic view but it can help you make a judgement. Just remember also to factor in loan repayments to anything you might make in the business - as you are having to borrow to buy the business.

I bought one of my businesses on the remainder of a 20 year lease which expired over 2 years ago. My lease is protected under some Act and I have a right to renew it. My lease has a clause in about renewing at "market rent". I've spent 2 years arguing "market rent" with my landlord! You will definitely need a good commercial solicitor to assist with the lease purchase. I've spent far more on legal costs for renewing than I did on purchase.

 

[Deleted member 225778]

.... My lease is protected under some Act and I have a right to renew it. My lease has a clause in about renewing at "market rent". ....

Thanks for the information. Is the Act you're talking about applicable for all Leasehold(s)?

....£150k is an awful lot of money for a fish and chip shop! ..... I would expect the turnover to be much higher. .....

As I don't have a clear idea of the turnover for this business. Can you please advise how much turnover would justify £150K?

 

[AnneLou]

Have a look at businessesforsale.com website to look at other fish and chip businesses to see what they are selling for. I live in quite an affluent, busy village and my local chippy is for sale at £125k - dropped recently from £150k - on a turnover of £5500 per week. It has a 3 bedroom flat above which the owner rents out for an additional income.

In regards to the lease, I'm not entirely sure if all commercial leases are protected - I think it's called the Landlord and Tenant Act. Try posting the question in the legal forum.

 

[Deleted member 225778]

Thanks AnneLou. Do you think if the asking price (£125K) for the fish&chip shop in your village is a fair price (considering its turnover of £5.5Kpw)?
If that's a reasonable value to pay, then in my case the owner is not rocketing high, if he makes the same turnover per week, I would say. Isn't it?

Thank you for the info with regards with the protection laws. I will certainly google and find a legal forum to get help from experts in there.

 

[businessfunding]

OP - good that you are asking, and useful information given, but before making serious moves you MUST take professional advice specific to you and this purchase

A lawyer who specialises in leasehold and an accountant who understands this sector would be a good starting point (don't assume that any old accountant will know what they are talking about)

As has been pointed out, you are effectively buying the right to use the premises for 20 years; there may well be clauses within the lease that further define those rights.

If you funded the purchase on a standard 5 year loan your outgoings on that would be £3,000 per month

Turnover isn't a great business indicator. What is the profit? How much are the owners taking out? What are the trends?

 

[AnneLou]

Mmmm - fair is really what it is worth to you! The key is trying to work out exactly how much of that turnover is profit - remember the saying "turnover is vanity, profit is sanity". The profit in that business has to pay for the loan and give you a living.
I'm in the pub industry and I have 2 sites - neither of which could give a good living on their own to equate for the hard work put in. My business is viable precisely because I have 2 sites - they are not under the same strain. I have tried to adapt to a challenging market.
Personally, if I was looking at a pub with that level of turnover and asking price, I would be looking to seriously negotiate down. I think it is way too high. Did you say that you had seen the accounts? How long since they were produced?

 

[Deleted member 225778]

No I haven't seen the account and I haven't talk to the owner yet to find out what the current profit is on that business.
Although I cannot say for sure (until I see the books and accounts) but it seems that the asking price is too high for this business from what I've heard in this forum and from my firends.

 

[Chris Ashdown]

Are your friends and forum advisers accountants, Estate Agents or lawyers, if not then base your judgments on people who are experts in their field, Forums can answer some general questions but people answering do not know most of the facts

Details investigation of similar companies in a area will help you see what others think is the normal, and attending a business for starters course in your local area will give you a good background on what you need to be a business owner, also plenty of books in WH smith on start-ups.

 

[Deleted member 225778]

attending a business for starters course in your local area will give you a good background on what you need to be a business owner, also plenty of books in WH smith on start-ups.

Thanks sounds very useful.

 

[SrS1]

I've also been to view a Fish and Chip shop recently as some may have read in another thread and the only thing I can add here is that the one I viewed had a turnover of just under £4K per week on average and it was going for £75K and which the only offer on was £40K.

As a few have said we don't know how much of that turnover is profit but if it similar to what I deicovered after seeing some figures of the business I looked at I think it is valued much too high.