Nervous prospective new restaurant owners. Help!!!

Discussion in 'General Business Forum' started by Ceri Unwin-Springett, Jan 9, 2019.

  1. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    Hi :) my partner and I are looking at purchasing a restaurant. It’s a lifelong dream. My husband is a chef with over 15 years experience and I have run restaurants for over 10 years. We are very experienced and feel that this is the right step for us. We have found a restaurant that is up for leasehold and we have started going ahead with the sale, however we are finding the whole ‘heads of terms’ mind boggling as we are just not sure what we should be pushing for.


    Ok... so some information about this business!

    It is a 30 seater restaurant in a vibrant coastal town. It’s £90,000 to purchase the leasehold with an annual advertised rent of £8000. It’s currently number 1 in the area and they are making a net profit of £80,000. We are looking at continuing under the same branding doing very similar food and not overwhelmingly changing the consept when we first go in.

    As it will be a new lease the landlords terms are now:

    Lease term: 10 years with a 7 year break clause.

    Rent £8,400 per annum year one, increasing to £9,500 per annum thereafter

    Initial Rent payment 6 months in advance, 3 monthly thereafter.

    Repair Proportional full repairing, tenant’s fair contribution = 1/3

    Buildings Insurance Landlord to insure and reclaim proportion (1/3) from the tenant

    Rent review 3 yearly upward only to Market Value

    Legals Each party to bear their own, the vendors will pay for the landlords legal costs.


    The landlords have requested a deposit of 6 months, to be held for the duration of the lease.

    Does all this sound reasonable? We are slightly concerned about the initial rent increases in the first 2 years and then 3 yearly and also the 1/3 contribution to full repairs.

    What do you all think?

    Thanks in advance!
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
    #1
  2. Mr D

    Mr D UKBF Legend Free Member

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    Think you should have a commercial solicitor look over the lease. It will cost you. May cost you far less than not having it done.

    You know to check everything? Every figure, every claim. Multiple years books.
     
    Posted: Jan 9, 2019 By: Mr D Member since: Feb 12, 2017
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  3. Blaby Loyal

    Blaby Loyal UKBF Enthusiast Free Member

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    You need a property lawyer and a commercially-minded accountant.
     
    Posted: Jan 9, 2019 By: Blaby Loyal Member since: Jun 12, 2018
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  4. The Byre

    The Byre UKBF Ace Free Member

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    1. Read this lot - http://ukbusinessbrokers.com/

    2. Never fall in love with love, in this case, with the 'dream' of running your own restaurant.

    3. Running your own restaurant is definitely a dream, because you have to be asleep to believe it!

    4. Remember to subtract a decent wage for the owner(s) if they are working in the restaurant, when placing some sort of value on the business. If the net profit is £80k, but the proprietors are not paying themselves a wage, then work out how much it would cost to hire a chef and front-of-house, add the cost of holiday replacements and illnesses and subtract that from the so-called 'net profit' - the result is the real profit (or very often loss!)

    5. Get someone who understands the buying and selling of restaurants and/or similar micro-businesses to hold your hand on this one!

    6. There are plenty of mini-hotels (8-beds) up for sale with restaurants and bars. One sold in our area for £160k two years ago, after standing empty for three years. A couple sold their house for £300k+ and took it, used the difference to revamp the kitchen and turn the eight bedrooms into a nice apartment above the restaurant.

    So take your time to find the perfect property and buy the damn thing freehold. In the object of your fancy, my guess is that it ain't a business, but just a job. The landlord has a business!
     
    Posted: Jan 9, 2019 By: The Byre Member since: Aug 13, 2013
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  5. Mark T Jones

    Mark T Jones UKBF Enthusiast Free Member

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    You seem to have a head start on many wannbe restaurateurs, in that you understand the business and are asking concise, relevant questions.

    That said, it is important never to fall in love with a business for sale - there are always a lot of restaurants on the market and they only sell for one price - that is market price.

    On the question of whether the lease is reasonable or not, the real answer is 'it depends' - mostly it depends on what is normal in the area you are buying (which is usually a feature of supply & demand); and who the landlord is - a corporate giant or a local property owner?

    In addition to taking professional advice, I'd set out a personal list of priorities and look to negotiate based aroud your criteria rather than theirs.
     
    Posted: Jan 9, 2019 By: Mark T Jones Member since: Nov 4, 2015
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  6. Root 66 Woodshop

    Root 66 Woodshop UKBF Big Shot Free Member

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    To be honest, if I were looking at owning a restaurant I would want it to be my vision, my menu and my branding...

    A coastal rental even at £9500 sounds extremely cheap, the business at £90,000 again for a coastal restaurant sounds extremely cheap... but then again... coastal doesn't always mean tourists I guess... :)

    Landlords can ask for whatever terms they want... perhaps they know something you don't... the terms sound over the top from the outside, perhaps there is a reason... I'd be looking into it much deeper TBH.

    If you're set out on the business venture together, but not happy with the terms... look away and find somewhere else to start up... there loss... not yours... or is it? ;)
     
    Posted: Jan 9, 2019 By: Root 66 Woodshop Member since: Nov 22, 2011
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  7. dotcomdude

    dotcomdude UKBF Regular Full Member

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    A 7 year break clause on a 10 year lease doesn't sound too attractive to me. I'd be trying to get it down to 3 years at the most. Even then it's a hell of a commitment if things don't work out as you hope.

    Hope you've got fanatical due diligence planned. This deal will probably make or break you!

    If they'll accept a limited company without any personal guarantees then I'd definitely go that way...
     
    Posted: Jan 9, 2019 By: dotcomdude Member since: Jul 27, 2018
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  8. The Byre

    The Byre UKBF Ace Free Member

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    I just did some very simple basic maths - £80k net profit is totally bogus on a tiny 30-covers restaurant.
    • Assuming that it is open 300 days a year
    • Assuming that food & drink costs are 1/3 of cover price (.'. ave. 50% mark-up after VAT)
    • Assuming fixed and variable costs of £20k (rent, rates, equipment, power, utilities, etc.)
    • Assuming just £50k total wage costs for both kitchen and FoH (remember payroll taxes, holidays, illnesses and NI etc.)
    That comes to gross turnover inc. VAT of over £600,000 p.a. or £2,000 per day. That comes to at least £60 per day for each and every chair in the front of house. Summer, Winter, rain and sun, Wednesdays and Saturdays, November and February, each and every chair is able to book at least £60 turnover.

    I suggest that the 80k figure is turnover and not net profit - at least not on Planet Earth!
     
    Posted: Jan 9, 2019 By: The Byre Member since: Aug 13, 2013
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  9. Chris Ashdown

    Chris Ashdown UKBF Legend Free Member

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    There can be a massive difference between what the landlord ask and what you agree, its up to your commercial solicitor who knows the area to advise you whats good and bad about the landlords contract and suggest changes to protect to and get you the best deal

    As mentioned a break after 7 years is near meaningless as it will be the first two years that will have the highest failure rate. as you know its normal for business leases to ask the person to sign a personal guarantee to pay in this case the whole rent and costs for the first 7 years even if they go bust in year one and this applies to most limited companies as well with the directors signing the PG
     
    Posted: Jan 9, 2019 By: Chris Ashdown Member since: Dec 7, 2003
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  10. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    We have a commercial solicitor who has said:


    ‘It’s all negotiable at this stage, so on rather general terms it’s best to just negotiate as best you can.’


    No one is providing advise or suggestions. How are we meant to know reasonable negotiation boundaries if noones really explaining.

    Madness!
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
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  11. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    The property

    The property consultant is asking us to agree heads of terms before anything has even gone to solicitors. We don’t want to agree to something that we can’t get out of if it’s wrong. The solicitors been of no help advise wise! Is this normal?
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
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  12. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    I have their last three years accounts. Am I allowed to post as long as I don’t show where the accounts are from?
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
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  13. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    We have a solicitor however they won’t look over anything until the terms of the lease are sent to them. We apparently agree heads of terms before the lawyers even get involved. How are we meant to know what we should be aiming for we’ve never done something like this before!
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
    #13
  14. ecommerce84

    ecommerce84 UKBF Regular Free Member

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    Yes, I would.

    When someone is selling a business their accounts are often prepared in a way to show the business off as best as possible. There are a lot of things that can be done to make a business appear more profitable than it is.

    With regards to leases, things are indeed negotiable - if you are unhappy with an aspect, go back and negotiate. If something makes you feel uncomfortable and the landlord won’t shift, then walk away.

    The break at 7 years would be a major concern for me. I would go back and try and get one at 3 years as well as 7.

    If you feel you’re solicitor isn’t giving you good advice, find another one. You need a good one.

    Have you investigated what it would cost to set up your own restaurant? The appeal of buying an existing business is that you have a customer base ready to go and should be making a profit from day 1 (if the accounts are true). But you are then running someone else’s restaurant and someone else’s idea.
     
    Posted: Jan 9, 2019 By: ecommerce84 Member since: Feb 24, 2007
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  15. Chawton

    Chawton UKBF Contributor Free Member

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    Ceri speaking in generalities the heads of terms aren't legally binding provided you make it clear you have no intention of being bound at this stage. They serve to narrow the issues/focus attention and get agreement on the main obligations (both ways) before it gets punted on to solicitors, because obviously it's costly to have solicitors involved before even the basic rudiments have been agreed. That's not to say you can't ask your solicitors to advise you on the heads of terms-you absolutely can do so and it's perfectly proper-however:
    1. Obviously you can expect to pay for this; and
    2. They will only advise you on the legal implications of what's being proposed. They can't for instance say whether this or that clause is a 'good deal' for you in a commercial sense. You simply won't get that level of comfort, it would be professionally negligent of them.

    If your solicitor won't advise you on the heads of terms (in the limited manner described above), it's worth exploring whether/how expert they are in the field and whether better representation is available elsewhere. Make sure you're assessing this fairly though-ie is it that they're just not giving you the advice you want for free or are they just not giving you the advice you want to hear (i.e. commercial advice).

    Within this thread alone you have had numerous (really very instructive) examples of negotiating points which could achieve a better commercial deal for you, if presented well. It's like anything else though, you'll have to find out how flexible the landlord is. And decide how you flexible you are too.

    The distinction between commercial/legal advice has to be understood and appreciated otherwise things tend to get really confused and people's expectations (of the advice) are usually awry.

    Good luck with it either way.
     
    Posted: Jan 9, 2019 By: Chawton Member since: Mar 21, 2018
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  16. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    Thanks I’ll post the figures once I figure out how?!

    I agree. We will ask for another break at 3 years.

    I’m going to ring a few locally based solicitors tomorrow and try and find one a bit more forthcoming on what I should be expecting.

    We just don’t have the money to buy a restaurant out right. We’re a (reasonably) young couple with young children. The business has a very loyal following and it’s the type of beautiful fine not overly pompous food that my husband loves to cook. We want to win the towns people over first before we shove in their faces the massive change that will be happening to their favourite restaurant.

    We do want to rebrand and make it our own eventually but just not immediately.

    It will be a job to us and that’s just fine because we love what we do, we just want to be in charge.

    As long as we are taking a decent wage out of the takings and there is some profit to reinvest back into the business each year, should this not be enough for us?
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
    #16
  17. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    Thank you for your advice!

    The property consultant is making it sound like once we’ve agreed heads of terms it’s just the finalities to sort out. Glad to know it’s just just a broad overview.

    I have no problem paying for the legal/business advice straight off the bat if it means I know what I’m doing I just haven’t been getting any advice at all until this thread!
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
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  18. Ceri Unwin-Springett

    Ceri Unwin-Springett UKBF Newcomer Free Member

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    Is it normal to pay a contribution to full repair of the building if the building is shared? I’ve always thought it was the landlords responsibility.
     
    Posted: Jan 9, 2019 By: Ceri Unwin-Springett Member since: Jan 9, 2019
    #18
  19. Chawton

    Chawton UKBF Contributor Free Member

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    It's better to read that in view of what your solicitor said about everything being "open to negotiation". This is precisely the time when you negotiate. Equally the property consultant isn't wrong in saying its only the finalities after that because almost certainly he/she won't want to entertain any major departure from the heads of terms afterwards. It certainly won't aid the formation of a leasehold agreement in any event!

    It goes without saying the 'finalities' are still very important of course, just as all of the clauses are. Get chapter and verse on the legal implications (worst case scenario) of each term and decide whether you can live with that level of risk. You dont sound blasé at least, which is a very good thing!:)
     
    Posted: Jan 9, 2019 By: Chawton Member since: Mar 21, 2018
    #19
  20. ethical PR

    ethical PR UKBF Legend Free Member

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    no it is normal
     
    Posted: Jan 9, 2019 By: ethical PR Member since: Apr 19, 2009
    #20