Raising Finance to Buy a Leasehold Business

[onoffon]

Hi all,

I'm new to the forum and have spent hours reading through lots of old posts to make sure I can't find the answers myself; but now hoping someone could help me!

I want to buy a sandwich bar/cafe and am looking at businesses that are already running; so I will be paying a certain amount upfront for goodwill, equipment etc. I am looking at businesses around the £50-100k mark.

My question is with regards to financing such a purchase. If I set out my own financial circumstances, could anyone suggest the best finance option for me?

There is one particular business I am going to view on Saturday that is the higher end of my limit; perhaps I could use this as an example. It is currently listed at £95k.

I don't have any money to use as capital, but have a property worth £270k with a £190k mortgage - so could effectively release £80k from this (but would only really want to take a maximum of £50k).

Could I get a loan for the full £95k secured against my property and the business, or would I have to remortgage to release £50k and then get a loan secured against the business?

Or am I completely mad thinking I can get a loan in the current climate anyway?

All advice gratefully received!

Thx

 

[mrhubby]

PM me with your contact details may have some options for you

Good luck

Richard

 

[Drpepper]

Not being flippant, but sell the house, downsize, and use the equity. That way you are not risking your home should things go queer.

 

Sorry to be a killjoy, but you are unlikely to raise more than 75% LTV on your property. Bearing in mind that vitually every one over values their own property by about 10%, this is unlikely to be a goer. (BTW, if you are going to pursue the remortgage angle, best do it when you are in employment!)

You might be able to raise an element of bank funding against the business purchase if it is well priced; think 50% max - with good luck & a following wind.

The starting point, as ever, really needs to be 3 Fs.

 

[bizloanservices]

Both your options are valid ways forward.

Option 1 will be better for the lender as they will be fully secured and so more inclined to look favourably. However, once they discount the value of the property on a 'forced sale' basis there will still be a security gap to fill.

Raising a portion of the purchase price helps spread your risk by limiting the amount you have against the house, so this makes sense. However, the bank will then have a larger security gap to plug and with the business only being leasehold there is nothing for them to look to there.

As regards whether you can get a loan, simply put, yes. However, you will need a robust Business Plan which clearly demonstrates the level of risk you are expecting the bank to take. The strength here is that you are taking on an existing business. There is a track record (presumably a profitable one) so this will work in your favour.

The key point the bank will look at is your business experience/ability to run a business such as this. The existing operation may be profitable but if you lack the necessary skills it can quickly go downhill putting the bank's money at risk.

Good luck.

 

[onoffon]

Thanks so much to you all for taking the time to respond. Think I might have to think further about this.

Do you think I might be better renting an empty premises and starting from scratch? Then, presumably, my initial payout will only be equipment/advertising etc.

 

Thanks so much to you all for taking the time to respond. Think I might have to think further about this.

Do you think I might be better renting an empty premises and starting from scratch? Then, presumably, my initial payout will only be equipment/advertising etc.

Goodwill is difficult to quantify (particularly in a cash business) and even more difficult to fund.

Your ideal situation would be to find a kitted out business which has been reposessed; whatever the case, try to avoid splashing out on loads of new equipment which will depreciate immediately.

If you do go for empty premises, remember that getting the correct licences can be time-consuming.

I agree with previous comments regarding a business plan; this can be done uising your own resources and with critical input from friends & family.

 

[Richie N]

Can I ask where you are located?

 

[bizloanservices]

Thanks so much to you all for taking the time to respond. Think I might have to think further about this.

Do you think I might be better renting an empty premises and starting from scratch? Then, presumably, my initial payout will only be equipment/advertising etc.

That's certainly one way of keeping your initial investment/costs down but you will have to self fund this - no good going to the bank.

The problems with approaching a bank would be: you're a start-up and in a sector (restaurant/take-away's) which banks are not keen on.

 

[KeithGreen]

You could try vendor finance. Also if the business(es) you are viewing are being sold by an agent or broker they may have some funding options available.

By the way will you be able to service around £300k of borrowing from the income from this sandwich business?

 

[IndiCafe]

Do you think I might be better renting an empty premises and starting from scratch? Then, presumably, my initial payout will only be equipment/advertising etc.

- 3-6 months rent in advance
- solicitor fees
- planning
- licenses (eg PRS for music in the cafe)
- wall coverings/flooring/toilets/furniture
- training

Starting from scratch might not be as cheap as you hope.

 

[Rhodes100]

People always look at starting a business compared to buying a business as a cheaper option, it is something you do if you dont have enough money. That however is one of the reasons why start ups fail.

With an existing business you are buying say £40k ongoing profitability, however with a new business your profit is nil on day one. In fact I have seen plenty of start up accounts where no profit has been made in year one. So to compare these two scenarios you would still need £40k for both, and of course in year two you may still not be earning £40k with a start up.

I always recommend this finance broker who is a specialist in the catering market, if he says no, then you should perhaps be looking at a cheaper business http://www.mortgagetrolley.co.uk/

 

[Drpepper]

With an existing business you are buying say £40k ongoing profitability,[/URL]

Plus maybe £xx,xxx's of bad reputation and a failing business set around a model you will only want to change in six months time anyway, and you will want to change it

 

[Rhodes100]

Plus maybe £xx,xxx's of bad reputation and a failing business set around a model you will only want to change in six months time anyway, and you will want to change it

A failing business with a bad reputation would not be on the market with an asking price of £100k as it would already be highly profitable. Or vastly overpriced in which case only an idiot with no business acumen would be interested in it.

Even if a business is failing (due to poor management) and marketed for say £10k a buyer might be interested if the location is right, it would still be a better bet than looking for empty premises in an inferior trading position.

 

[onoffon]

Thanks for the further advice. Definately things to think about and I will contact that finance broker you have recommended.

To the question about whether I can afford to service £300k debt; yes, I can as I don't expect the business to cover my existing mortgage - but I guess the question is whether I should be running up that much debt.

I think in the end it will come down to location - if empty premises comes up in the right location then it might be worth it; otherwise I shall carry on looking at existing businesses.

Someone asked where I was based; currently in London but am looking at businesses in London/Surrey/Sussex.