how much for lease?

[Retiree]

Advice please? Cafe operating successfully for 11 years owner/occupier
Accounts show
Turnover last year £63k net profit average over 3 years £11k
Now for sale with exceptional good will. Around £11k FFE. Prime location only 40 covers. Great parking. Owner admits not revealing real turnover. Takes £2k per week minimum. 2 staff part time plus owner.
Selling business as going concern and 20 year lease. Asked me to make offer. Wants 80k for business plus 12k rent pa. how much should I expect the lease to be?

 

[ecommerce84]

Not worth anywhere near £80k in a month of Sunday’s. Especially as the figures are either:
- Accurate and he’s turning over £63k making 11k net profit for his troubles.
- completely inaccurate and he’s turning over in excess of £104k per annum (by your estimates) and completely fiddling the numbers, committing VAT fraud and hiding goodness knows what else from you.

I would be very wary about putting my name to a 20 year lease. The ‘cost’ of the lease would be however much it would cost to have it transferred to you or renegotiated with the exiting landlord (solicitors fees etc). I would expect the right to the lease (with the landlords permission) to be included in the price you pay for the business rather than paying extra for it as an asset.

Out of interest does the seller own the premises and will become your landlord and he’s offering you a 20 year lease? Or would you be taking on the remainder of his lease which has 20 years left?

He’s asked for offers, if you really want it, go in low. £11k I’d think would be a reasonable offer for the business. Others may say even that is too high on those numbers.

 

[Retiree]

Not worth anywhere near £80k in a month of Sunday’s. Especially as the figures are either:
- Accurate and he’s turning over £63k making 11k net profit for his troubles.
- completely inaccurate and he’s turning over in excess of £104k per annum (by your estimates) and completely fiddling the numbers, committing VAT fraud and hiding goodness knows what else from you.

I would be very wary about putting my name to a 20 year lease. The ‘cost’ of the lease would be however much it would cost to have it transferred to you or renegotiated with the exiting landlord (solicitors fees etc). I would expect the right to the lease (with the landlords permission) to be included in the price you pay for the business rather than paying extra for it as an asset.

Out of interest does the seller own the premises and will become your landlord and he’s offering you a 20 year lease? Or would you be taking on the remainder of his lease which has 20 years left?

He’s asked for offers, if you really want it, go in low. £11k I’d think would be a reasonable offer for the business. Others may say even that is too high on those numbers.

He’s the owner

 

[Retiree]

He owns the premises.

 

[Mr D]

The owner committing fraud means you'd be starting - at best - with different figures.
VAT will need to be paid. Out of your profits or you going to increase the relevant items prices by a percentage to cover?
Is buying a job worth it to you - when you don't know what your job will pay?
£11k average profit past few years in the books, subject to tax.

And can you trust any figures he shows you when he's reporting fake figures to others? Maybe he's really doing £63k and wants you to believe you could pocket an extra £40k tax free...?

Never seen exceptional goodwill that transferred before. For a café?

 

[Retiree]

Thanks for your advice

 

[obscure]

Business Rule #1 - never take advise from/believe the other party when negotiating a deal.

This person has zero obligation to you. They want the best deal for themselves and everything they tell you will be for that purpose. You need to hire an accountant to go through the books with a fine toothed comb to ascertain what is really happening.

 

[JpeeL]

Also if them figures are true then just walk away, I started a new business almost a year ago and we are currently getting similar figures as it grows. The only thing stopping me jacking it in is I know there is more to come, if this was it at its peak it’s totally not worth the time, effort and huge headache that comes with running a business.

You can earn £11k a year working in Tesco, no £80k loan to pay off, no headache and paid holidays free of worry.

 

[Socio South West]

As others have said, you must only go on what is recorded and verified: If he has been slipping every other fiver into his pocket instead of into the till, that's his fault in diminshing the value of the business: A prudent business owner would have planned this move and worked hard to build the figures over the preceding couple of years. Paying a bit more tax would give a payoff with value of the business at the end of the exit strategy period.

As far as you are concerned, its £11k net profit that you base your offer on... and he is asking £12k rent.... Say no more! (Assuming the Net Profit doesn't include a notional rent)

The phrase 'exceptional goodwill' also rings alarm bells - Is that to the business or the person? If they are the type of customer that the vendor considers friends, the fickle nature of such people will make them very susceptible to dissatisfaction with any changes you as the new owner might make, and that exceptional goodwill can very soon evaporate.

The value of the lease depends on the terms - break clauses, repairing etc: Taking on a lease from an Owner can be an expensive minefield if the terms are full repairing: Surveys and resurveys and accurate recording and scheduling are vital. Against that, you describe the location as prime position. Research with local agents and find out if the rent is fair.

Proceed with care!

 

[Financial-Modeller]

@Retiree what will the vendor do with the premises if you don't buy it?

Is there a queue forming of other people eager to pay him £80k for a business making £1k loss after rent?

If you particularly want to run his cafe for nothing, perhaps offer to take on the business for nothing, and split everything it takes over the current £63k with him!

 

[Mr D]

@Retiree what will the vendor do with the premises if you don't buy it?

Is there a queue forming of other people eager to pay him £80k for a business making £1k loss after rent?

If you particularly want to run his cafe for nothing, perhaps offer to take on the business for nothing, and split everything it takes over the current £63k with him!

Indeed - paying full price up front is one way of buying, there are others including payment out of the profits.

 

[Financial-Modeller]

Indeed - paying full price up front is one way of buying, there are others including payment out of the profits.

...and this way, the OP is only paying anything if the vendor's claim that turnover is higher than reported is true!