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Everyone knows that when you buy a house, you need to budget for one or two things over and above the advertised purchase price, such as stamp duty, legal costs and removal expenses.  Well much the same principle applies to buying a lease – only with much bigger numbers…

Let’s start with the obvious:

Purchase Price

Unless you are lucky enough to haggle this down, you need to provide sufficient funds to cover, typically, 10% of the sale price at exchange of contracts and the balancing 90% on the day that you complete your purchase.  Where the business is not being sold as a ‘going concern’ (either a closed venue or, occasionally, a disposal by a large group operator), you also need to budget for VAT, which will be added to the purchase price.

 
Stamp Duty

The current threshold for paying stamp duty on a commercial transaction is £150,000, so in many cases, this will not be a consideration.  Thereafter, the same costs apply as in residential transactions, so you need to budget another 1% of the purchase price for transactions up to £250,000, 3% up to £500,000 and 4% thereafter.

One extra consideration applies where you are obtaining the grant of a new lease. In these circumstances, Stamp Duty Land Tax is levied upon the rent payable throughout the term of the lease.  The formula used to calculate your SDLT liability is quite complicated but, for example, a new twenty-year lease at a rent of £50,000 plus VAT would incur a stamp duty cost of £6,725.

 
Rent

Most landlords will expect you to lodge a deposit in respect of the rent.  The major pubcos typically look for one quarter of the annual rental figure but look out for private landlords who will often seek something more substantial.  I have seen a number of cases where an entire year’s rent has been demanded up front.

In addition, you will usually need to budget for payment of one month’s rent in advance.  Again, this condition will vary from lease to lease and may be as little as two weeks or as much as three months.

 

SAV

This is a term that you will usually see appearing alongside the advertised purchase price within any agents’ sales particulars.  It stands for “Stock at Valuation” and usually comprises all of the liquor and food stock on the premises on the day you complete your purchase.  Glassware and cleaning materials are also usually included within this calculation.  You should check with the vendor what figure they think is realistic for the particular business you are buying and, if necessary, ask to apply an upper limit of stock that you will buy.  It is sensible to employ an independent stocktaker to value the stock on the day, thereby ensuring that you pay a fair price and only purchase saleable goods.

 
Legal & Professional Fees

An innocuous heading within which there can be a surprisingly long list of beneficiaries!  Top of the list, of course, is your solicitor, who will handle the assignment of the business into your name.  He/she may also address licensing matters and/or act on behalf of the bank, if you are borrowing money.  I strongly recommend that you employ an experienced, trade specialist lawyer to do this job and ask for the fee to be fixed in advance.  In addition to your solicitor’s fee, you will be responsible for all disbursements, such as local authority searches.

Other legal and professional costs will include the cost of a structural survey (highly recommended, as most leases nowadays impart full repairing responsibility upon the lessee), and an independent valuation of the business.  Unlike the residential market, these are two separate disciplines.

 
Training

Many of the larger pubcos require you to complete a training course before they will allow the lease to be assigned to you.  The cost varies but can be as much as £995.

 
VAT

Most of the costs that you incur will be subject to VAT and, whilst you can recover this expense in due course, you must allow for the total outlay in the first instance.

 
Working Capital

So long as you have properly budgeted for all ingoing expenses, there should not be any need for a large cash reserves, although it is sensible to allow some sort of contingency, particularly if you expect to complete your purchase at a quite time of year.  It is wise to complete a detailed cash flow forecast, in order to assess when (and how much) your peaks and troughs will be.

 

Beware:

Don’t lose control of your existing business, that’s what put you in this position and be careful standards don’t slip whilst you chase the dream of a second venue

 

 
   
   
   
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