Once you have selected one or a small number of prospective businesses to buy which meet basic requirements, the time has come to look in more depth at various aspects of their operation.
The lease on the premises
There is a very true saying “If you don’t have a lease, you don’t have a business”. Going concerns that can be from home or just about anywhere are the exceptions. Most must have proper premises and a sound lease. Much time and money are wasted examining the books and seeing how to improve profits when viability is often being undermined by nothing more nor less than the lease.
Obtain a copy of the lease
Most are for a three-year period, with an optional further three and a rental escalation of 12 to 15% a year. Further periods have to be negotiated with the landlord.
- Onerous clauses, for example, stipulated as little as six months notice of sale or intended renovation of the building. Some years ago, a few businesses came on the market in a 14-floor office block. A six months demolition notice clause was affected. CBD office and trading space were at a premium and no tenant dreamed the landlord would demolish a building that size. But down it came to make way for a 30-floor block. Moral of the story: Check with the landlord what his intentions are. He has no reason to lie as he already has a tenant.
- Check costs additional to basic rentals, such as a proportion of the rates, exterior electricity, promotions, budget and security. You may find you’re just working for the landlord.
- Turnover clauses which push up the rent when your turnover tops a certain level are, to me, criminal. The harder you work and build up your business, the more you pay the landlord. Their clauses turn honest shopkeepers into petty criminals, forced to conceal their true figures.
- Does the lease specify trading hours? Don’t assume so. A couple bought a gift shop that opened 5.5 days a week, despite the fact a co-tenant, a large supermarket, also opened on Sundays. No one had realised the lease stated the landlord could extend the hours. The couple now slaves away seven days a week.
- Does the seller have the right to cede or sublet the premises? Most leases will require the landlord’s permission, which should also state that this should “not be unreasonably withheld”.
- Some smaller unscrupulous landlords demand an up-front cash payment from the proceeds before agreeing to transfer the lease to the purchaser.
- What does the lease allow you to do on the premises? You may want to widen your product range or change some basic concept of the business. Check that doing so does not contravene lease conditions.
So important is the lease that you make it a condition of purchase that your attorney first approves the document.