Purchase or lease?

It’s really a question of money. If you can afford it I’m not in any doubt that it’s best to buy a property. You acquire an investment which maintains and hopefully increases its value in real terms; and because you are trading from it you know it’s being properly looked after. In years to come, when you decide to call it a day, you have a valuable asset which you can then let out. In due course you can sell it and enhance the quality of your retirement. However, this is all easier said than done because:

• In the best locations it is hard to acquire property. Many owners prefer to hang onto the asset. This means that property to purchase is hard to come by and often commands a premium price.
• By no means everybody can afford it. Commercial loans usually involve larger deposits than private house purchases. Add this to the cost of acquiring a business and/or buying a lot of new equipment and it’s not hard to see that renting is the realistic option for many people. You also have to have the income to justify the loan. If you have a mortgage already then this may be difficult.

Bear in mind also that property purchase is not all straightforward.

If in due course, you let the property out, you might experience hassle with tenants. The most common and irritating of such problems is late or non-payment of rent. If you have bought a property in a location away from the most desirable central areas you might find that by the time you come to sell, property in that part of the world is not in great demand. You could then be left with something of a white elephant which involves you in ongoing advertising costs, compulsory repairs and general worry. This is something of a worst case scenario, however, and I do think that if you can afford it, purchase is best.

The renting option

However, if purchase is not an option it’s most definitely not the end of the world. Renting is the chosen route for many people who start out in business and it has the obvious advantage that you don’t need to find a substantial deposit from your own resources. Your available finances can be concentrated on fitting out the shop the way you want it. In addition, you will probably find that you have more properties to choose from.

It might also be possible to have an option to purchase written into the lease which could become exerciseable, say, at the first rent review. If the owner is agreeable to this then you have the advantage that you don’t have to compete for the property on the open market. The usual provision is that the price payable will be open market value. There will, of course, be room for debate as to what constitutes open market value at any given time but with reasonableness on both sides this should not be a major problem.

Landlords sometimes prefer small independents as tenants. Unlike bigger companies which are often inflexible about details and have to go through time-consuming meetings at different levels to arrive at decisions, small independents can make quick decisions. They are also flexible enough to fit in with landlord’s aspirations for a particular site.

A landlord will want to be assured that you will responsibly meet the tenant’s obligations under the lease. You might be required to produce a CV or business plan to reassure the landlord. It will be for you to decide if such requests are reasonable in particular circumstances.

There are a number of points to bear in mind when leasing:

• In particularly desirable locations you may have to pay a premium – what in some parts of the world is referred to as ‘key money’. This is simply the purchase price payable for the existing lease of the premises which reflects the demand for a particular property at a particular time – and it can work both ways. When the commercial property market was in the doldrums some years ago it was not uncommon to see properties advertised for rent with ‘incentives available’ or ‘reverse premiums’ – i.e. the incoming tenant was offered a payment simply as an inducement to take on a lease.
• It is vital that you are aware of the terms of the lease and that they are reasonably fair to you. Needless to say this must be sorted out right at the start. Once you’ve committed yourself to the lease you can’t complain later when you discover that it contains some terms which are not favourable to you. This harks back to the importance of engaging a solicitor experienced in this kind of work – and getting them involved as early in the proceedings as possible.
• If your business fails and ceases trading it is up to you to find a new tenant or subtenant. You have to keep on paying rent until you do and this could, of course, be a considerable burden.
• If you own a property there is a good chance that its value will increase over the years. In the case of rented property you have to hope that the goodwill of the business you create will acquire a value which you will be able to realise in the future. However, goodwill is a far less certain asset than bricks and mortar.

Getting to know the property

A general point that applies to all properties, bought or rented, is that you should find out as much as you can about any matters which might adversely affect you.

• Is another sandwich bar or café about to open next door?
• Have there been recent problems with the roof?
• Has the local authority made a recent order for essential repairs to the property? If so, it won’t be your financial responsibility, but the works might, for instance, lead to the cordoning off of adjacent pavements which could be bad for business.
• Are there problem neighbours?
• Have there been break-ins to the property or surrounding shops?
• Are any of the adjoining properties unoccupied and thus a possible route in for burglars?

The point is that people trying to dispose of properties and/or businesses don’t want to tell you things which might put you off, which is understandable. You should, therefore, find out as much as possible about the property, good and bad, before committing yourself to it. I’m not saying that difficulties concerning the points mentioned above will necessarily mean that you should not pursue an interest in a property, but they should be taken into account.

Empty unit or going concern?

There are advantages and disadvantages with both options.

Taking on an empty unit

If you take on an empty or shell unit you are obviously going to have to do the place up from scratch. This will mean a lot of time and expense. If there are old, economically worthless fittings and wiring and plumbing systems in the place then these will all have to be stripped out. Having incurred expenditure to acquire the place you will now have to spend more money and wait some time – possibly months – before you see the money starting to flow the other way. On the other hand, of course, you will not have had to pay for goodwill, fittings, fixtures or equipment.

There are other distinct advantages:

• The process of acquiring the place should be more straightforward. You are only going to be negotiating over the value of the property or the appropriate level of rent.
• You have a blank sheet on which to impose your vision without hindrance.
• Electrical and plumbing work will be much more straightforward – your tradespeople won’t have to work under and round units.
• You (and more importantly your surveyor) can have a really good look at the fabric of the property in advance. This way you are less likely to come across nasty surprises when you get into the place and start work.
• When everything is completed you can be confident that the work has been done the way you want it. And if there are any problems you know whose door to knock on to get them sorted out.

Taking on a going concern

If you take over a going concern the main advantage is that you can get trading quickly. No doubt you will want to redecorate and introduce other changes in order to stamp your own particular style on the place, but with a bit of forward planning it shouldn’t take long. You don’t have to be involved with so many tradespeople and you don’t have to worry about delivery times for serve-over units and the like. However, there are a number of potential difficulties to bear in mind:

1. Valuing the business

The problem of dealing with a small-businessperson! The value of a business relates to how much profit you the purchaser can make from it taking into account the risks and costs involved. Past profitability and asset values are important but are not the whole story.

Assuming the business you want to buy has been built up over a number of years, the owners may well have an inflated idea of what the business is worth. They may see this as the big pay-off after years of hard work – an emotional element. So in addition to the fairly straightforward business of agreeing a figure for the property (purchase price or rental), you have to negotiate figures for goodwill, fittings and fixtures, stock and equipment with the person or people whose life’s work they might represent. If recent profit levels are unimpressive you may well be told, ‘Of course the trading accounts don’t tell the whole story.’ In other words the seller doesn’t declare all their earnings. If you come up against this, simply point out that all you can go on is what is shown in the accounts.

Sometimes the negotiations can revolve around a global figure, but to arrive at this you have to value the individual components which go to make up the figure. This can involve professionals such as accountants, which, of course, adds to the expense.

You may not want to buy all items of stock or equipment. The sellers will probably resist this because second-hand catering equipment and old packets of crisps will not be much use to them and will be of little value.

In my experience such negotiations can be lengthy and tedious.

And what does goodwill really mean? It is particularly hard to work out in the case of small businesses. You will hear advisors talking about ‘the amount by which the going concern value exceeds the asset value’ or ‘what you pay for making a profit above your time and investment of capital’. But there are so many uncertainties. Will the previous loyal customers automatically come to you? If you do things differently they might not. There might also have been a strong personal following for the previous owner.

I think arguments about the value of the goodwill of small independent businesses like sandwich-coffee bars are especially weak nowadays when there are so many places to choose from, often in close proximity. Particularly since far and away the most important factor in your success will be your own hard work and imagination. Then again, if you happen to be in an area where there are not many comparable places and where planning permission for what you want to do is hard to come by, then this would inflate the level of goodwill a seller could reasonably expect to achieve.

At the end of the day you have to work out what a business is worth to you and negotiate hard. Needless to say, if there is a forced sale situation, e.g. because a seller is unwell, you will be in a much stronger position.

My wife and I started both of our sandwich bars from shell units – and we had an established customer base within weeks both times.

2. Taking on existing employees

When a business changes hands, employees of the previous owner automatically become employees of the new employer on the same terms and conditions as before. It is as if their contracts of employment had originally been made with the new employer. Thus employees’ continuity of employment is preserved, as are their terms and conditions of employment under their contracts of employment. Now, what you have in mind for the business might be different from the previous owner – also you might not be so keen on the young guy with the ring through his nose or the old lady who insists on smoking outside the front door. But if you decide to get rid of them you could find yourself on the receiving end of a claim for unfair dismissal.

For more information on this you should obtain a booklet called ‘Employment Rights on the Transfer of an Undertaking’ (PL 699 Rev 4). This can be obtained from your nearest Jobcentre. See also Chapter Nine which deals with employment matters.

3. Equipment

Assuming you do come to an agreement you will end up with at least some equipment which is old and out of guarantee. Will it let you down? Possibly. Is it really worth much? No. Is it state of the art? Probably not. You get the picture?

4. Decorating

It’s not so easy to get the place looking the way you want it. Previous regular customers will be able to tell that the old place has simply had a bit of a facelift – and they might not be much impressed.

5. Complying with regulations

Does the unit comply with current food hygiene and health and safety rules and regulations? Will you have to spend money to bring it up to the necessary standards? As mentioned previously it is advisable to get an EHO or other expert to look over a place before you are committed to it. For all you know the owner is selling because he has been told he has to make costly changes or face the possibility of closure. Don’t find yourself unwittingly picking up the tab for this. It is possible that a lender will wish to be assured that the premises have been checked by an expert for any such potential pitfalls.

Making a choice

The difficulty with all such considerations is that you will have to make your choice from the range of properties that happens to come on to the market when you are looking for a place. You may have weeks of waiting and fruitless viewing sessions before the right place comes along. It’s not a perfect world and you will doubtless end up having to make compromises.

What to look for in a particular shop unit

Now that you have:

• selected and primed your team of professional and other advisers
• selected a location with potential
• decided on your preferred basis for acquiring a property

… it’s time to start considering specific units. It will be unlikely that the first one you see is the right one for you. Besides, it’s a sound idea to look at as many places as possible so that you can make comparisons and get a feel for what kind of unit best fits in with your ideas. Make sure you get to know about all properties which are available at any given time.

• Make yourself aware of any new places as they come onto the market. Check all publications that advertise property. Make sure you get hold of them on the day they come out. Always try to be ahead of the field.
• Register with property agents who specialise in small to medium-sized commercial units and the sale of businesses. You will almost certainly be bombarded with lots of unsuitable material (but you can use it as scrap paper for making lists and drawing endless internal plans of the shop). Think commercial.
• Keep your eyes peeled when you’re out and about driving. Make a point of driving around the hot spots on a regular basis. You might see a sign before the unit is actually advertised in the press, thus allowing you to get in early.
• Approach the proprietors of suitable units even though they are not being advertised. This applies to any unit that might be suitable, not just ones which are trading as takeaway food outlets. It does require a bit of ‘brass neck’, I know, but it can pay off. I acquired a small office in Edinburgh in this way over 20 years ago and still own the unit and let it out. The current annual rental is equal to what we paid for the property in 1979! It’s now a valuable element of my pension fund.
• Check out empty units which look as if they might be suitable and approach your local rating office. Obtain details of the owners and try to make contact to see if they would be interested in disposing of the property. It is a very long shot but what have you got to lose? Your solicitor will be able to help with this if necessary.

I have a hunch that there may be one other source of properties in good locations in years to come. There has been a rapid expansion of sandwich-coffee bars in recent years by the big chains. I suspect some may have overstretched themselves. One such sandwich-coffee bar in a prime location in Edinburgh ceased trading after a short time. The unit was advertised to let for quite some time. It was eventually acquired by a local operator who, I suspect, picked it up for a good price. It would not surprise me if this phenomenon becomes more common; and the fact that one of the big chains couldn’t make a go of it would not mean that an imaginative independent operation could not do better.

Knowing what to look for

By the time you come to view properties you should have a fairly clear idea of what you are looking for. There are a number of important matters to keep in mind:

Is it big enough for what you want to do?

It may seem an obvious point, but if you see a place which is strong on location and price it can be tempting to try to ‘fit a quart into a pint pot’. Take a tape measure and get the vital statistics. When you get home make a scale drawing and cut out bits of paper to scale to represent work-top areas, fridges, freezers, tables and chairs. Play around with everything to see how it all goes together. When doing this always remember the following points:

• Make sure you allow sufficient space for customers to circulate and staff to move about without getting in each others’ way. There are regulations regarding the minimum width of corridors etc. Your EHO will give you advice on such matters.
• Assuming you have an internal seating area, be sure that your massive (you hope) lunchtime queue is not going to interfere with those customers peacefully reading the paper over their cappuccinos.
• You obviously hope that the venture will succeed, so make allowance also for the possibility of some expansion – another refrigerated sandwich display unit, some more chairs.

Modify your plans by all means, but if it is clear that it won’t work there really is no point in pursuing it, no matter how appealing the property is in other ways.

If you intend to set up a small to medium-sized operation then as a general guide a unit of between 500 and 900 square feet (45 and 85 square metres) should allow you to trade efficiently. Approximately 60% of the space will be given over to public areas: display units, tables and chairs, bar and stools and the ‘milling around’ area. The rest will be taken up by the food preparation area, office or office area, and toilet. This size may not seem very big but in fact the public often prefer a cosy, busy-feeling place to one which has empty spaces.

Is there room on the pavement for tables and chairs?

Although you may think the British weather makes this irrelevant, after years of holidays abroad people here are keener than ever on many aspects of foreign culture. Sitting outside chatting to their friends over a fruit smoothie, or simply people-watching, are high up the list.

Even if you can’t change the weather it is now possible to create a more customer-friendly atmosphere outside. You can buy sturdy and substantial umbrellas which cover large areas and look attractive. In addition you can buy patio heaters, fuelled by calor gas, which are remarkably effective and can allow people to sit outside in comfort even on cooler days. (They are less effective if it is windy.) All these things, plus tables and chairs, can be purchased at reasonable cost from any good-sized garden centre.

Cordon off the seating area with a few plant pots and you can create an attractive outward impression of your sandwich-coffee bar, which in itself creates interest and advertises the place.

Another point to bear in mind is that you will require permission from your local authority. They will carry out an inspection. They will only give permission if they are satisfied that there is sufficient room for pedestrians and wheelchair users to pass the tables and chairs with ease. They will doubtless charge a fee; in Edinburgh the initial fee is currently £75 with an annual renewal fee of £25. Permission will be granted subject to certain conditions such as a prohibition against playing music. In addition, sitting outside will probably be limited to particular hours of the day (in Edinburgh currently 10.30am until 9.00pm) and times of the year (in Edinburgh currently April until October).

Does the unit benefit from good security?

Sandwich-coffee bars don’t tend to be popular targets for people looking for money. Apart from during trading hours there really isn’t much of ready value on the premises (assuming you don’t sell cigarettes or alcohol). However, it is a depressing fact that any shop unit can be a target for burglars and vandals. If your shop is vandalized or burgled, it can be expensive, inconvenient and demoralising, so you should reduce the risk as far as possible. Bear in mind these points:

• If the shop is in an isolated position it is more likely to experience problems. In general, if a shop is part of a well-lit block with adjacent shops and flats above it is less likely to be a target. There are more people around, especially at night.
• If there are empty or derelict properties close to the shop these can provide routes into your shop for the more determined criminal.
• Does the shop have a security system and/or a roller shutter? If not, these may well be items you have to consider when making a list of outlays in your business plan.
• If most of the flats or houses around a shop have alarm systems this may well mean it is an area which experiences problems.
• If the shop is situated close to pubs or nightclubs this can be problem, not during the day, but late at night when the revellers emerge, often the worse for drink.
• If it is next door to an off-licence it might possibly used as a route into the off-licence.
• You might be very attracted by a unit with large old-fashioned front windows, especially if they have an elegant curve or two. Beware. If a window like this is smashed it can be horribly expensive to repair. It might involve ordering glass specially so that you are left for weeks with a partly boarded up frontage. Your insurance company may then increase your premiums or try to get you to put in different windows which would be less expensive to repair.

Go back and look at the place on several occasions

I mentioned hard-headedness before; it’s essential when viewing properties. You want to set up your own business. You’re in love with the idea. Watch out, because this is the time when common sense can be squeezed out of the picture by over-enthusiasm.

View the place at least three times. Get to the know the owner. As I mentioned previously it’s important to find out as much as you can – and the owner is the person who knows the answers. Ask them lots of questions. Ask yourself lots of questions. Visit at different times of day. Stand back. Talk to your solicitor and/or surveyor. Bounce thoughts and ideas off your partner. Don’t take ages but make sure you’ve considered all aspects of the place before you take the plunge.