Restaurant Premium

[Nara]

Hi all.

I am thinking of setting up a restaurant (I have been in the hospitality business for years, I could run & manage; both front & back of house ). I found a property that I like the look of in the nice residential area in South East of England, close to school & hospital but it is not in the city centre & limited of footfall. There are few pubs & restaurants nearby.

The capacity is 60 covers indoor and about 15 outdoor. The premise has A3 and alcohol licenses. The lease it has left is about 10 years and rental is £12k pa. The kitchen is small & need a lot of work to bring it up to standard. The rest of fixture & fitting are ok but need some work done to make it looks nicer. The asking price for the premium is £70,000.

-Do you think the premium mentioned is reasonable?
-How would you justify the cost of the premium?
-How would you negotiate the price down?

Thank you & any advice is welcome

 

[Chris Ashdown]

You make your own offer after studying the books for last 3 years or so and have a business plan that proves as far as it can that you can afford it and make a reasonable profit

You ca ask what the premium is for as a breakdown, and tick off the assets that need changing or if the profit is low why is goodwill important especially if you are changing the direction of the market of the restaurant

 

[Nara]

You make your own offer after studying the books for last 3 years or so and have a business plan that proves as far as it can that you can afford it and make a reasonable profit

You ca ask what the premium is for as a breakdown, and tick off the assets that need changing or if the profit is low why is goodwill important especially if you are changing the direction of the market of the restaurant

Thank you Chris

 

[The Byre]

I am not too sure what you mean by 'premium' - goodwill, taking over as a running business?

But if that £70k is for the whole shebang as a business, my 30 cents worth of answers is -

1. No.
2. Can't.
3. By calculating the real value and showing that calculation to the present proprietor.

They have probably been whispered sweet-nothings in their shell-like ear by some 'adviser' that their business is worth huge sums of money - when it ain't! The usual run of events goes like this -

1. They hear or read that a business is worth X-amount (usually four time profit)
2. They look at their books and see that they made £17,500 profit
3. They multiply that by four and suddenly imagine that they are sitting on a potential gold mine!

Now is the time for introducing reality into the madness.

They have conveniently forgotten to subtract the value of their (unpaid) wages from the bottom line. In some instances, both husband and wife are working in a business (corner-shop, post office, restaurant, convenience store, whatever) and each are putting in up to 60 hours a week for remarkably little money and in fact are working for less than minimum wage! They forget the value of that 120 hours a week and they forget to subtract that value (nearly £1,500) from their so-called profit.

Because profits are more 'tax-efficient' than wages, their real wages are booked as profit - but that is not the real picture. They may have booked £50,000 in paper profit, but looked at realistically, if someone took over their 'Mom-n-Pop' operation and did not work in the business, it would make a loss of £25,000.

What they have is not a business, but a job.

It really does sound as if the present proprietors are asking £70,000 for a job.

 

[Nara]

I am not too sure what you mean by 'premium' - goodwill, taking over as a running business?

But if that £70k is for the whole shebang as a business, my 30 cents worth of answers is -

1. No.
2. Can't.
3. By calculating the real value and showing that calculation to the present proprietor.

They have probably been whispered sweet-nothings in their shell-like ear by some 'adviser' that their business is worth huge sums of money - when it ain't! The usual run of events goes like this -

1. They hear or read that a business is worth X-amount (usually four time profit)
2. They look at their books and see that they made £17,500 profit
3. They multiply that by four and suddenly imagine that they are sitting on a potential gold mine!

Now is the time for introducing reality into the madness.

They have conveniently forgotten to subtract the value of their (unpaid) wages from the bottom line. In some instances, both husband and wife are working in a business (corner-shop, post office, restaurant, convenience store, whatever) and each are putting in up to 60 hours a week for remarkably little money and in fact are working for less than minimum wage! They forget the value of that 120 hours a week and they forget to subtract that value (nearly £1,500) from their so-called profit.

Because profits are more 'tax-efficient' than wages, their real wages are booked as profit - but that is not the real picture. They may have booked £50,000 in paper profit, but looked at realistically, if someone took over their 'Mom-n-Pop' operation and did not work in the business, it would make a loss of £25,000.

What they have is not a business, but a job.

It really does sound as if the present proprietors are asking £70,000 for a job.

Thank you for your reply. I asked what “£70K” is for and the current owner said “for the remaining lease” which is about 10 years left.

 

[Mark T Jones]

Actually, our opinion on whether the premium is reasonable or not is completely irrelevant and possibly misleading

You neeed to be thinking in terms of what the premise is worth to you, using some fairly challenging assumptions. You should then use that figure as your exit point from negotiations.

 

[The Byre]

The conditions of the lease may not apply to a new proprietor. The lease agreement needs to be studied carefully.

And as @Mark T Jones states, "You need to be thinking in terms of what the premise is worth to you, using some fairly challenging assumptions."

 

[ethical PR]

As a side note, you would not be able to run front of house and the kitchen of a sixty seater restaurant yourself. You say you have worked in hospitality. Have you ever run a restaurant?

 

[Chris Ashdown]

Normally with a restaurant you have the following breakdown

Assets not owned by the landlord

Goodwill, the present owners have marketed the restaurant and get a number of customers coming in which you may benefit from, think (McDonalds just the name brings in customers) Unfortunately with a restaurant unless you run exactly the same as previous then goodwill in valueless

Lease the present owner has to pay the rest of the lease if he walks out and its most likely under a personal guarantee so no value to him just a massive chain around his / her neck

So basically you are paying for the assets and the right to take over the lease and you will have to pay your own marketing to advertise the new owner and whatever you are doing different, if you were planning to keep things exactly the same then goodwill may come into it

Accounts will give you a good idea of how many people would come to this location, not much more assuming no change