Taking Over The Lease and Business Of A Cafe/Bar - Questions, How much money upfront?

[HerbieLoveBug]

Hi All,

I am looking to purchase a cafe/bar and its lease. The asking price for the business itself is £50k and the yearly lease is £20k. There are 10 years left in lease.
I saw this forum has some good advice so I decided to join to ask some general questions about lease and business rates. I Have the money ready to buy the business but need to work out what other money I will need on top of that to complete the purchase.
1- What can I expect to pay a solicitor for their work in me buying the business?
2- When I take over the lease of £20k per year, do I need to pay a lump sum, up front, to the landlord?
3- If the business doesn't work out after a couple of years after I take it over, how can I get out of the lease without waiting for someone to buy the business off me? Or is that the only way I can get out of a lease? (I ask this question because I am worried about bankrupting myself with having to pay costly lease payments if the business fails.)
Thank you in advance for advice.
Herbie

 

[Scalloway]

3. Look for break clauses.

What is your experience in the catering business?

 

[Clinton]

1. Depends on the extent of the work. If you're doing a complicated deal with earn-outs, deferred payments, a personal guarantee etc it could be £10K+. If it's just the share purchase agreement, you may get away with £1,500 for a good solicitor.

However, what about DD? Who's doing that?

2. This is typically paid monthly. But if you're taking over a lease you need to read the terms of the lease carefully, even get them checked over by a lawyer. And don't be too sure that the landlord with "assign" the lease.

3. Any other way of getting out of the lease involves fiddling the landlord out of money ie. reneging on your contract.

Do bear in mind that selling a business is very, very, very difficult, it's not like what most people think! With micro businesses like this the stats are grim. 95% of these businesses listed by the UK's biggest business brokers do not find a buyer. I'm not just plucking numbers out of the air. I work in the industry and have access to stats at many broker firms.

And that's with profitable businesses. If a micro business is not making a profit then it's almost 100% you will not be able to sell it, not even for £1.

 

[mattk]

However, what about DD? Who's doing that?

Due Diligence.

 

[MOIC]

What’s the reason for the sale?

What does the 50k include?

What experience do you have in the same business?

Are there current staff that you will need to be responsible for?

How are you planning on improving the current turnover?

A 10 year lease can be a liability.

Think carefully with your head and get expert advice from people in the trade as well as a competent accountant to forensically check all the figures.

 

[billmccallum1957]

Google TUPE and find out.

 

[Mr D]

3 - If you have a limited company then its debts belong to it, not to you personally.
Except where you sign a personal guarantee - often the case with a lease.
Potentially you could become liable for the lease for the remaining term or until a break clause time period is reached (typically years into the lease).
Buy the business, fold a month later and you could be liable for up to £200k with one creditor!

It is also essential that your solicitor looks at the lease before you sign it, so can explain the clauses / problems.
People have in the past ended up signing that they are responsible for repairs - hey new roof needed that's £50k!

Its up to you to do due diligence, examine everything and question everything.
In a sale the current owner and their agent are not on your side. The only people you can trust are the ones you are paying for and they'd better not be the same people the other side are using.

More than a few businesses tout themselves as profitable, however you dig into the figures and you find they are loss making businesses.
Nothing wrong with buying one of them. If you know its loss making and you know how to change that.
The figures on paper tell only part of the story. Perhaps owner does not take a wage but takes his income as dividends - so a £10k profit on the books is in reality for someone else working there with minimum wage 40 hour week they are taking (40 hours usually a lot less than actually worked by the owner) then the business may well be looking at £10k a year loss!

You pays your money yous takes your chances. Up to you to do the due diligence.
Complaining afterwards that the seller should have told you about the 6 months road closure for sewer works during your busy time of year isn't going to be worth anything.

 

[mattk]

Why do directors sign personal liability agreements for leases? If tenants told landlords to Foxtrot Oscar then they'd have no choice but to drop the clause. And let's be honest, there's no shortage of commercial properties available, so it should be a renters market.

 

[Mr D]

Why do directors sign personal liability agreements for leases? If tenants told landlords to Foxtrot Oscar then they'd have no choice but to drop the clause. And let's be honest, there's no shortage of commercial properties available, so it should be a renters market.

Probably because the landlord can also say the same thing to the tenant.

Sure, lots of commercial properties. How many meet your requirements?
Like saying there are lots of houses for sale. Or lots of jobs available.
Its not the number of them, its the suitable ones.

 

[HerbieLoveBug]

Thank you for the replies everyone, there is much for me to think over before I take the plunge.

 

[BristolBiz]

The great thing is - you are asking yourself "what if...."

So many people stumble into business without considering the potential downside, it's not being negative, it's contingency planning!

Taking on a lease without a break clause is an act of unreasonable stupidity for a new business. If you do go ahead, consider what happens if the business fails, and set everything up accordingly. For example, forming a limited company offers some protection against personal liability.

Good luck with your venture, & keep asking questions!

 

[Chris Ashdown]

Is the business running at present, if so ask for the last three years accounts and take them to a accountant and ask their advice

If they are running then you will be forced to take over the present staff under TUPE laws which means if say a employee has been there 20 years you include that time in any redundancy calculations and cannot fire them easily as you have in effect taken over their contract and terms of employment

You will need to advertise which can add up to quite a lot of money

If you don't employ a solicitor, you can find out things in the contract that might seem simple to you but latter find out you are liable for massive exit costs in repair bills , equipment replacement

The landlord will also take out building insurance and charge you for it every year, but you still need your own insurance on top of that

Never underestimate the previous owners skills, they have most likely tried every trick in the book to improve sales and failed, so don't imagine you have a wonderful idea that nobody else has considered before and tried and failed

 

[Mark T Jones]

Why do directors sign personal liability agreements for leases? If tenants told landlords to Foxtrot Oscar then they'd have no choice but to drop the clause. And let's be honest, there's no shortage of commercial properties available, so it should be a renters market.

1. Because most start ups (particularly in f & b) are spectacularly naive and will sign anything that’s put in front of them

in reality professional landlords won’t drop the PG requirements, small owners might. They will possibly offset against a large deposit

 

[Mark T Jones]

Ion glad you asked the first question - far too many people think they can avoid legal

the answer of course is to get quotes from 2 or 3 solicitors who specialise in this field.

pretty much anything spent on dedicated professional advice will be well spent

the other questions really are down to negotiation between you and the vendor.

As has been mentioned, look for break clauses. Also consider vendor financing