Purchasing a shop - goodwill accounting queries

[Pepper]

Hi All, I've searched through this site and found many helpful threads but am hoping for some (accounting) advice regarding taking over a shop I've had my offer accepted on.

Background: Shop is a small local grocery shop, 7 year leasehold with 3 years remaining, shop owner is a sole trader and someone we've known for a long time. I have been running a floral store at home (sole trader) and am making enough to expand into this local shop space. We've agreed on a price of about £20k for giving away the shop. Property freeholder currently giving me the lease (7 year, renews at the end, solicitors have begun proceedings). We are all neighbours in the area and the deal is friendly.

Grocery shop owner doesn't want to use a solicitor though as it is a small sale and we all trust each other which is fine with me. There are very minimal equipment, fixtures, fittings, stock (<£1000) that I'm taking on. Hence, most of the sale price will go down for "business goodwill" if I'm not mistaken? Shop owner doesn't have great english skills and is scared that he may still be liable for things if the business is sold to me and I get his business in trouble (which I've told him is nonsensical as I have a completely different business and it will have no association with him at all). Nevertheless he wants the £20k sale to be for the "transfer of the lease" which I've told him isn't how it's done. I don't mind how the sale happens, I just want to get my shop running but you can't buy a lease off of a leaseholder like the way he's wanting to do it right? Is there a way to do it in the direction that he wants? What are the options here if he's scared to sell it as a business sale? I will talk to him but just wanted some advice on the options to buy a (small) shop. I have residential property experience but not commercial spaces experience.

Side question - how do (big retail) companies buy shop spaces from each other? How does it get logged in the accounts and what is the name of the contract between them? E.g. If Asda wants to buy the shop space of a Hollister (assuming minimal stock, equipment, fitting exchange similarly to my situation). Or do they just let the lease finish?

Edit: I'm aware that if the purchase goes down as a business sale, it helps me if I eventually sell the business in terms of CGT.

Thank you very much for your help.

 

[fisicx]

Get a solicitor! Don’t agree, negotiate or do anything without a solicitor.

Commercial leases are a whole different animal to residential leases.

Just because the seller doesn’t want to use a solicitor doesn’t mean you shouldn’t. I’d put money on there being clauses in the lease that will give you grief at some point.

Forget friendship. This is business.

 

[Pepper]

Get a solicitor! Don’t agree, negotiate or do anything without a solicitor.

Commercial leases are a whole different animal to residential leases.

Just because the seller doesn’t want to use a solicitor doesn’t mean you shouldn’t. I’d put money on there being clauses in the lease that will give you grief at some point.

Forget friendship. This is business.

Thanks for your reply!

Yep - Already have a solicitor for the lease part (and so does the freehold owner) so that will all change as per usual. It's just the business shop sale part that I was trying to figure out and the accounting for it.

Main things are:
- Can you buy a "Transfer of lease"/the rest of the lease like the shop owner wants?
- Am I right in thinking that if there are no physical assets, the shop sale would mostly go down as "business goodwill" in the accounting books?
- Are there other options for how we can do the accounting for the shop sale? I'm essentially trying to give him £20k to take over the shop space but trying to figure out how to do the accounting given the scenario.

The commercial lease is changing without worry so the worst outcome is I pay more CGT later down the line? But avoiding this would be ideal.

 

[BusterBloodvessel]

Wait...what? Am I right that you are essentially buying a shop that you don't want, for £20k? To close it down as a grocery store, and re-open it as a florist?

You're paying someone £20k to allow them to get out of their lease early??

 

[BusterBloodvessel]

Also when you say you are buying his business, what is he, a sole trader or ltd company?

 

[Pepper]

He's a sole trader.

So he wasn't wanting to sell the shop and he would continue to renew his lease until his retirement in 10 or so years. I approached him as I wanted to open a floral shop on that road and expand my business.

Is this not common when people want to buy shops?

I asked a few other people on the road and some weren't willing to sell and some had higher prices.

 

[fisicx]

There is no goodwill. There is only the lease. This you will negotiate. There is nothing else you want or need (apart from some shelving).

You aren’t buying the business, what you are buying is 3 years of a lease.

People buying baked beans and milk aren’t the same as those buying flowers. So they have no value to you.

 

[Frank the Insurance guy]

You are not buying a shop or goodwill. You are paying him £20,000 to vacate the premises, buy some of his assets and let you take over the lease - there is nothing wrong with that.

I don't think you can put this in your accounts as "buying a business" as that's not what you are doing. It will be a business expense of some sort, but you need to speak to your accountant about how this should show in your accounts.

 

[Mark T Jones]

This will go round in circles, but the questions you need to ask yourself - and address in some depth are:

1. What are you actually buying for £20k?

2. How much do you have to sell just to recover that £20k

3. How will you turn local footfall into paying customers?

4. What are the actual running costs of the business (detailed cashflow analysis)

In answer to one of your questions, there was a time when High Street leaseholds attracted a premium. That pretty much died in the banking crash and is now rare. In some cases they will incentivise you to take a lease. You are putting yourself in a weak position by being a 'determined buyer'

Do your research and bide your time - there is no shortage of High Street property

 

[DontAsk]

There's no goodwill to buy/sell if you are opening a completely different business, unless you think you aer going to sell to all of his customers..

 

[IanSuth]

he is a sole trader so him and his business are the same thing

if he were a ltd you could buy that but as he isnt and you can't buy a person you are literally paying him £20k to vacate and leave some shelves for you.

Why he wants to do it is because currently he is on the hook personally (as not ltd) for the next 3 years of rent on that lease, he wants to ensure that liability passes to you and you are offering to pay him £20k for the privilege

 

[Paul Carmen]

I'd find an empty shop in another high street location and start from scratch with a new lease, possibly with incentives like 6 months free rent thrown in, and £20k in the bank.