Is it worth buying an existing business just for the lease and equipment?

[hcadsvd]

Hi, I'm looking for some advice. My partner and I run a small food business which has been going for two years. At the moment we operate from markets, home delivery and supplying local cafes. We do everything from home and have quickly outgrown our space - we turn down a huge amount of business as we just don't have the capacity to make more than we're currently making.

We're fairly niche but in a town that has lots of demand for it. Thanks to social media there is a lot of buzz around our food and we usually sell out within an hour or two at every market we do. We already have a good customer base including lots of returning customers and with very few overheads are making good money as we are, although we miss out on a lot of opportunities due to our current space limitations.

We'd like to open a more permanent place with room for us to scale up production and open more days of the week. We've been looking for almost a year for a place to come up but there hasn't been anything suitable (even with us making lots of concessions budget/space wise). We've just been to look at a place that's currently being run as a restaurant. The premises are great, nicely decorated so we wouldn't need to do much to it in order for us to open, and with a lot of the equipment we'd need already in the kitchen. It's in a good spot, the rent is very reasonable for the location and there are no business rates payable. The majority of our business would be takeaway with ideally a few tables for customers to sit in and have coffee etc.

The problem is, they are selling the business for £80k. Although we know that we'd likely need to front some money to buy an existing lease, this is a lot more than we'd planned for. We've costed up all of the equipment included in the sale, and it comes to about £35k. There are only 6 years left on the lease but they have told us this is guaranteed to be renewed (we would obviously have a solicitor check this). What I want to know is - does it make business sense to buy an existing business for the lease, location and equipment? Obviously a lot of the cost of buying a business is for goodwill, but honestly I don't think we'd be taking on many of their customers and we'd be running a completely different business (still food, but daytime rather than evening and different products). Obviously we'll be putting in an offer that's lower than what they're asking, but I image they're only going to go so low.

Based on our current turnover/profit and very conservative projections, we'd have no problem paying off a loan over 5 years to cover the cost of buying the business, but is it wise? Should we hold out until we find a place we can rent with a new lease and no huge upfront cost? We'd still need to buy equipment and potentially spend lots of money on fixing up a not-ready to go place. Sorry that this is really long and thanks in advance for any advice!

 

[MOIC]

and it comes to about £35k.

honestly I don't think we'd be taking on many of their customers and we'd be running a completely different business

The above 2 sentences stick out for me.

You don't need to buy their business.

Offer them what you feel the equipment is worth, no more.

. . . . . . . and check the lease details!

 

[Mark T Jones]

Offer them what you feel the equipment is worth, no more.

. . . . . . . and check the lease details!

Net of liabilities - actual or potential (which does require some due diligence)

 

[NickGrogan]

The premises are great, nicely decorated so we wouldn't need to do much to it in order for us to open, and with a lot of the equipment we'd need already in the kitchen. It's in a good spot, the rent is very reasonable for the location and there are no business rates payable.

The problem is, they are selling the business for £80k

If the first part is correct, why are they selling? And why for only 80k if the equipment alone is worth £35k.

Something is missing from the information.

 

[hcadsvd]

The above 2 sentences stick out for me.

You don't need to buy their business.

Offer them what you feel the equipment is worth, no more.

. . . . . . . and check the lease details!

Thanks - that makes sense. My gut tells me it's not a good idea to spend £45k (or whatever we can negotiate it down to) on goodwill etc we have no used for, but we're getting really impatient waiting for the right premises to come along - and there is a shortage of places that would be suitable even if they were available, as we have quite specific needs for the kitchen. So we'd be willing to pay a bit over the odds not to lose out on this place, but that is a lot more.

 

[hcadsvd]

If the first part is correct, why are they selling? And why for only 80k if the equipment alone is worth £35k.

Something is missing from the information.

They have said they are ready to retire - they run the business with just the two of them and I think they are ready for a break. It does seem to be a genuine reason for sale although I'm sure they have struggled over the last few years with the pandemic etc as they haven't adapted much and don't do a lot of marketing.

 

[NickGrogan]

they have struggled over the last few years with the pandemic etc as they haven't adapted much and don't do a lot of marketing.

Which means that the goodwill isn't worth much.

 

[IanSuth]

If they are evening only - is there any chance of doing some kind of deal where you run in the day then them in the evening at least for the first bit of time ?

 

[fisicx]

Spend the money on extending your kitchen. Will cost you a lot less than buying a business and you won’t have the hassle of a lease, rents and all the associated caggage.

Or….

Why do you want to expand the business? Do you really want to work harder and for longer just to make a bit more money? If you are comfortable doing what you do right now why change things.

 

[hcadsvd]

Which means that the goodwill isn't worth much.

I agree! But I guess they've valued it at what they feel they've put in over the years and want to get that back. My partner is worried about losing the opportunity to secure a premises that works for us and thinks we should compromise on what they're asking but I'm not sure it's a good idea.

If they are evening only - is there any chance of doing some kind of deal where you run in the day then them in the evening at least for the first bit of time ?

They do a lot of their prep during the day so probably wouldn't work - also we'd need to make some changes to the layout as we'd be displaying more products than serving sit-in customers.

Spend the money on extending your kitchen. Will cost you a lot less than buying a business and you won’t have the hassle of a lease, rents and all the associated caggage.

Or….

Why do you want to expand the business? Do you really want to work harder and for longer just to make a bit more money? If you are comfortable doing what you do right now why change things.

The problem with doing things from home is 1) we can't hire staff (just feels weird asking people to work in our house) so we can never have time off without closing the business and 2) we don't have a suitable location for people to collect their orders from. They are collecting from our house at the moment on one day a week but again, I'd rather have that happen at a separate location, not our home. We also offer local delivery on that day but some people aren't local and so need to collect. Having a premises in town would allow us to drastically increase our turnover, open more days and eventually train up staff so we can take time off while the business is still running.

 

[NickGrogan]

There are plenty of locations available everywhere. The high street is dying faster than ever.

Why not look at the dark kitchen route? You can get an industrial unit on the edge of most towns for a lot less than a shop - more space, easier access and if you're mainly delivering no one knows or cares where you are anyway.

 

[fisicx]

So this location used to be a restaurant. Which means lots of floor space you wouldn't use. Unless you are offering dine-in. Which means waiters and drinks and all that faff.

And you can have time off. You just close for a couple of weeks and have every Monday off. A place we get food from is only open 4 days a week. Don't let the business rule your life.

Build a separate kitchen in your garden if you don't want staff in your house. Or convert the garage and have a delivery hatch where the door used to be.

 

[hcadsvd]

There are plenty of locations available everywhere. The high street is dying faster than ever.

Why not look at the dark kitchen route? You can get an industrial unit on the edge of most towns for a lot less than a shop - more space, easier access and if you're mainly delivering no one knows or cares where you are anyway.

We did consider that, and lots of people in other towns/cities who make the same stuff as us go for this option as it means you get lots of space - but surprisingly there are few industrial units and the couple we've seen come up have been ~£2/2.5k a month rent, plus we'd need to fit out a kitchen.

We'd do well having a shop in town because it's the sort of thing people will pick up and buy a box of rather than having them delivered, although delivery works for us just now (think pastries rather than takeaway). Selling this way is much easier and less stressful, because fulfilling delivery orders means you have to make a certain amount of each kind, whereas when people walk in and buy they're just buying what's there.

We have looked at a few places on the definitely dying high street but high rent combined with business rates mean the monthly costs are just scary and I'd rather not have that commitment from the get-go. We've been looking for almost a year and there just seems to be a shortage of places suitable, which is why we're even considering this option - I've even gone through town and listed all of the places with a kitchen that would work, and there aren't many.

 

[hcadsvd]

So this location used to be a restaurant. Which means lots of floor space you wouldn't use. Unless you are offering dine-in. Which means waiters and drinks and all that faff.

And you can have time off. You just close for a couple of weeks and have every Monday off. A place we get food from is only open 4 days a week. Don't let the business rule your life.

Build a separate kitchen in your garden if you don't want staff in your house. Or convert the garage and have a delivery hatch where the door used to be.

We'd use the floor space to extend the counter for display counters, like a bakery. We looked at a much smaller kitchen but it had barely any space for display, and our products are very visual - they're much more effective when they're all laid out.

Should have mentioned, we don't own our house (we're renting) so building a kitchen out there is probably off the cards (it's also pretty small and we don't have a garage).

 

[Mark T Jones]

Their perception of what goodwill is worth is of no relevance to you.


On the face of it, you are looking to pay more than 100% premium for some kit - that's before you go digging into potential liabilities (dilapidation springs to mind)

Have you costed this through fully? We all know that energy costs are sky high. There is also a real chance that your core ingredients will be sky rocketing in the near future.

You may of course have this all covered, but I do get the disturbing sense that you are selling this idea to yourself a little too hard

 

[NickGrogan]

We did consider that, and lots of people in other towns/cities who make the same stuff as us go for this option as it means you get lots of space - but surprisingly there are few industrial units and the couple we've seen come up have been ~£2/2.5k a month rent, plus we'd need to fit out a kitchen.

We'd do well having a shop in town because it's the sort of thing people will pick up and buy a box of rather than having them delivered, although delivery works for us just now (think pastries rather than takeaway). Selling this way is much easier and less stressful, because fulfilling delivery orders means you have to make a certain amount of each kind, whereas when people walk in and buy they're just buying what's there.

We have looked at a few places on the definitely dying high street but high rent combined with business rates mean the monthly costs are just scary and I'd rather not have that commitment from the get-go. We've been looking for almost a year and there just seems to be a shortage of places suitable, which is why we're even considering this option - I've even gone through town and listed all of the places with a kitchen that would work, and there aren't many.

So get a unit out of town to make the "pastries" and deliver from there, if you want to deliver.

Then get a smaller shop/pop-up in town for retail only. It makes little sense to pay a premium to cook in town.

Or a van - that can work well and much lower costs.

 

[WaveJumper]

Back in the day I remember working on a scheme with our letting agents to put container (kitchen) type units on the service decks of our shopping centres - just a thought for you.

On a slightly different note hope your landlord and insurance covers you for running a business from current location

 

[hcadsvd]

Their perception of what goodwill is worth is of no relevance to you.

On the face of it, you are looking to pay more than 100% premium for some kit - that's before you go digging into potential liabilities (dilapidation springs to mind)

That's what was making me hesitate (even if we were to give them a lower offer) and I guess I was hoping the overwhelming response would be one or the other, which it seems it is! I'm also thinking if we needed to expand in a year or two and move premises, we'd never get that money back as no one would pay that just for a 3/4 year lease.

At the moment we're very weather dependent as we make the majority of our money at markets, and we've missed a few in a row now because of wind/weather - this happens every winter. We've probably lost out on ~£5k because of that in 2022 alone. So that's making me impatient to get somewhere more permanent sorted, but I don't want to rush into a bad deal just for that.

I guess we need to be prepared to either make a very low offer that's basically just for the equipment (less any liabilities etc) or keep our eyes open for another opportunity.

 

[hcadsvd]

So get a unit out of town to make the "pastries" and deliver from there, if you want to deliver.

Then get a smaller shop/pop-up in town for retail only. It makes little sense to pay a premium to cook in town.

Or a van - that can work well and much lower costs.

We've definitely considered it - it's just that the rent on this place is cheaper than the industrial units we've seen come up in the last year.

Van could be an option - we would struggle to open every day as we'd need a pitch but we could definitely do the busy days of the week, which might be a better use of our time anyway.

 

[hcadsvd]

Back in the day I remember working on a scheme with our letting agents to put container (kitchen) type units on the service decks of our shopping centres - just a thought for you.

On a slightly different note hope your landlord and insurance covers you for running a business from current location

We've no shopping centres around here but container could work if we could find a spot for it.. I'll ask around.

Insurance and council registry etc all sorted.

 

[Fooddrinkicecream]

Often a well established business for sale has a lease within the LTA 1954 act.

This holds some value as it is renewable, reassignable and generally better protected.

If you were to find an empty unit, a landlord is likely to only offer a lease opting out of this act for their own flexibility.

 

[KeithGreen]

I sell businesses for clients and try to maximise the price wherever possible. However, despite my best efforts we sometimes cannot achieve what I, or my client, believes the business is worth. Restaurants are difficult to value because the goodwill of an Italian restaurant means nothing to someone who wants to turn it into a Chinese restaurant or whatever. The advice here seems to be - make them an offer of what the business is worth to you. They may decline, or come back with a counter-offer which you're willing to compromise on. But you won't know until you try.

 

[TeaRoomLady]

My sister and I have spent over a year trying to find premises for our tea room, so I feel your pain. We have now decided on taking over a restaurant. We did look at several shop premises, both of which involved setting up a kitchen from scratch and one also installing a dumb waiter. There are lots of vacant premises, but most restaurants want a high premium predicated on pre-covid sales figures. So put in an offer, as someone else suggested. We feel this is the right place for us; hopefully the right place will turn up for you, or most likely, you will find it through persistence.

 

[Gyumri]

Why do you want to expand the business? Do you really want to work harder and for longer just to make a bit more money? If you are comfortable doing what you do right now why change things.

That's a good point. It may be that they are planning for the future and want to make hay while the sun is shining.

 

[Gyumri]

To be on the safe side I wouldn't think of buying the business as opposed to taking on the lease in your own company name subject to looking at the terms and paying something for the equipment. The goodwill element seems negligible.