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Renting vs buying a property


You’re opening your own shop and have a location in mind, right? So now’s the time to consider if renting or buying is right for you. In this instalment of the How to Open a Shop Guide, we’ll explore everything there is to consider from deposits and leases to insurance and BIDs.

As part of the process of setting up your own business, you’ll have a decision to make on whether you should buy or rent. This is a big decision to make and either way there’s lots of consider. The upfront costs of setting up from scratch can be off putting but the rewards in creating something new as you want it. When buying an existing business there’s less needed upfront but can be just as much to prepare for like reputation, building repairs/maintenance and existing employees.

 

Advantages and Disadvantages

Buying a shop that’s already established may be a lot less work than starting from scratch. If you get it right, there can be many good reasons why buying an existing business could be the right move for you. Remember, though, that you will be taking on the legacy of the business’ previous owner and need to be aware of every aspect of the business you’re about to buy. This means there can actually be much more to consider when buying an existing business compared to buying or renting a new building.

 

Advantages

  • It may be easier for you to get finance as the business will have a proven track record.
  • A market for the products will have been established in the area.
  • There may well be established customers, a reliable income, a reputation to capitalise and build on, and a useful network of contacts.
  • A business plan and marketing method should already be in place.
  • Existing employees should have experience you can draw on.
  • Many of the problems will have been discovered and solved already.

 

Disadvantages

  • You often need to invest a large amount up front.
  • If the business has been neglected, you may need to invest quite a bit more on top of the purchase price to give it the best chance of success.
  • You will need to honour or renegotiate any outstanding contracts the previous owner leaves in place.
  • Consider why the current business’ owner is selling up.
  • Think about the feelings of current staff – it’s possible they may not be happy with a new boss, or the business might have been run badly and staff morale may be low.

 

HOW TO VALUE A BUSINESS

Valuing a business can be one of the most worrying parts of buying an existing business. There are several valuation methods you can use. Your accountant can also help you value the business.

 

To get a general idea of how healthy the business is, look at:

  • The history of the business
  • Its current performance – sales, turnover, profit
  • Its financial situation – cashflow, debts, expenses, assets
  • Why the business is being sold
  • As part of your investigations, talk to the vendor and the business’ existing customers and suppliers. They may be able to give you information that affects your valuation. For example, if the vendor is being forced to sell due to decreasing profits, your valuation will be lower. They may also be able to give you general market information about conditions affecting the business.

 

The most difficult part is valuing the intangible assets. These are usually difficult to measure and could include:

  • The company’s reputation
  • The relationship with suppliers
  • The value of goodwill
  • The value of licences
  • Patents or intellectual property

 

You should consider how the value of these assets could be affected if you decide to buy the business. The list below details other factors that will affect the value:

  • Stock
  • Assets
  • Products
  • Debtors
  • Creditors
  • Suppliers
  • Employees
  • Premises
  • Competition

 

Once you have considered all these factors you can then decide how much you want to offer, or whether you want to buy it at all. If you do decide to make an offer, and agree a price with the seller, a period of time is allowed for you to verify that all of the information you have been told is accurate, known as due diligence.

Due diligence should give you a realistic picture of how the business is performing now and how it is likely to perform in the future.

 

Read more about valuing a business at the Start in Business website here.

Find detailed financial information about companies on the Companies House website here.

 

Due diligence

Don’t start due diligence until you’ve agreed a price and terms with the seller. For a down payment they may agree to take the business off the market during your investigation. The investigation period is negotiable – but most small businesses need at least three to four weeks. Due diligence is about much more than the finances of a business. You need to come out of this period knowing exactly what you are getting into, what needs to be fixed, what it will cost to fix them, and if you are the right person to take on this business.

 

Key areas to cover are:

  • Employment terms and conditions (Bira can provide support for this, find out more here)
  • Outstanding litigation
  • Major contracts and orders
  • IT systems and other technology
  • Environmental issues
  • You may also need information from external sources such as the landlord, tax office or bank.

 

View our step by step guide to buying a business here.

 

RENTING

Finding the right premises for your business is crucial if it is to run effectively and make a profit. A key decision is whether to buy or rent property. Renting ties up less capital which can be invested in the business instead. It can also give you flexibility to relocate easily if your business needs dictate.

 

The type of premises you rent will be partly dictated by how much you can afford, taking into account extra costs such as business and utility rates, and building insurance.

 

The advantages

Buying business premises is a big step and it’s important to carefully consider whether renting is a better option. Renting provides flexibility for your business. You are not locked into property ownership and you can agree on the length of the lease that you require according to your business needs. It may also be possible to remove yourself from the rental agreement, which is useful if you want to relocate.

 

Financially, renting can make good business sense. It ties up less capital than buying, freeing up cash that could be used elsewhere in the business. You are not exposed to interest rate rises, except indirectly at rent reviews or if your rent is index-linked. There is also less potential for unexpected financial shocks – unless you wish to assign your lease to someone else, falls in property value will not affect you.

 

Also, you will have no concerns about capital gains tax unless you decide to sell your lease for a premium. You may have less responsibility for the building if you rent rather than buy. You will generally have to look after repairs and maintenance inside the building but external maintenance is more likely to be the responsibility of the landlord, particularly in multi-occupancy premises, though you may have to pay a service charge.

 

Renting can also give you space for negotiation. You or your agent can negotiate any aspect of the lease, either at the start or if you want to renew it after the lease ends. Always check to see how rent is reviewed before you sign the lease.

 

Leasing

Leases typically have agreements of between three and 25 years and can offer long-term stability. However, some leases are inflexible, tying you in to the whole of the pre-agreed lease length. You will probably be able to negotiate this with your landlord, perhaps inserting break-clauses into the contract to allow early get-outs – you should certainly check before signing the contract.

 

Other than the rent itself, key areas of the contract that you should study include lease length and service charges.

 

Lease length

It may suit your business needs to rent on a monthly rolling basis rather than signing up to a long lease. While this offers you less long-term protection, if your business is new, you may want to consider a short lease of three years or less.

 

Service charges

Check how much these are and what services they cover, such as cleaning and heating. Establish what facilities you may be sharing with other tenants. Service charges are an additional cost to the rent and can be more expensive than if you organise them yourself.

 

Under the Landlord and Tenant Act 1954, you have the right to remain in occupation of the premises and renew the lease once it expires. However, there are specific cases when the landlord can refuse to grant a renewal. Your solicitor will be best placed to advise you.

 

Things to consider

Contracts can be complex, so consider professional help from a solicitor or chartered surveyor. While this can be expensive, mistakes can also be costly to fix.

 

Deposit

A deposit will be required – typically equivalent to three or six months’ rent. You may not realise it, but there is also stamp duty payable on all commercial leases.

 

References

Normally, the landlord will request references to confirm you are able to pay your rent. You may find it advantageous to have a guarantor for your rent and other liabilities under the lease.

 

Business Improvement Districts (BIDs)

You should also be aware of costs associated with Business Improvement Districts. If a scheme goes ahead in an area (with a majority vote from business ratepayers), you will liable for some costs. However, you will also benefit from improvements to the local trading area.

 

Other restrictions

Before renting a property, make sure you have planning permission to make any changes you need to the property. Planning permission is not always required if you wish to make alterations to the property. Generally, it is not needed if you want to make changes to the inside of the building or minor alterations to the outside, such as fitting telephone connections. Also, a specific application is not needed if you want to put up low walls or fences, as these fall under general planning permission. However, planning permission is generally required if you want to extend, convert or change the external nature of the premises. The majority of significant building work has to conform to building regulations. It is always a good idea to check with your local planning authority whether the development will require planning permission at the proposal stage.

 

You should also check the lease to see whether there is any repair work pending. You may decide to commission a survey and ensure that any such work is finished before the lease is signed in order to avoid paying the bill.

 

You are likely to be responsible for carrying out internal repairs in the building. You may also be responsible for external repairs depending on the lease. It’s important to check your liability in this area.

 

Find out if there are any restrictions on delivery or loading times that may affect your business. There may be other restrictions or covenants in the lease or imposed by the local authority – eg rubbish disposal, parking, noise, lighting, litter.

 

Insurance

The lease will state whether you or the landlord need to arrange insurance for the premises. If the landlord arranges this, you may need to take out additional insurance to cover risks, such as loss or damage to contents, which are not covered in the policy. As a tenant, you have responsibilities for maintaining the premises and for the welfare of the occupants. You may share these responsibilities with the landlord.

Getting your business sufficiently covered is vital. Too many retailers only find out that they’re not properly insured when they need support the most so it’s important to take time to understand what’s included in your business insurance policy and what’s not. Bira Insurance includes added enhancements as standard such as seasonal stock increases, theft cover for stock in the open and business interruption cover.

 

Health and Safety Regulations

If you employ staff, you must comply with health and safety law, including the Health and Safety at Work Act and an abundance of regulations. Essentially, your duty as an employer is to provide a safe place of work, identify foreseeable risks and implement sensible control measures, and inform, instruct and train your employees. Your duty of care as an employer also extends to non-employees who visit your workplace.

 

As far as your workplace is concerned, there are many things you must do, including maintaining a suitable temperature, keeping the property clean and free of waste and obstructions, providing sanitary and washing facilities, and having robust fire safety arrangements in place. Landlords and managing agents may have certain responsibilities depending on what level of control they exercise (make sure to check the lease for this information). For example, as the employer, you will be responsible for the safety of any gas appliances; however, the lease may stipulate whether it is the Landlord or the tenant that has primary responsibility for maintaining the equipment. This may lie with the owner or other person in control of the premises depending on the lease.

 

If you employ staff, you will also have responsibilities for fire safety, including measures to prevent fires and training staff in fire safety. If there is more than one workplace in a building, the landlord or managing agent must ensure fire safety regulations are met in the area they are in control of.

 

Responsibility for electrical safety is also likely to be decided by the type of lease you have. You must carry out a risk assessment of your use of any electrical equipment and ensure it is safe. However, it may be the landlord who is responsible for fixed wiring installation. Click here to find more information on electrical safety from the HSE website.

 

Rent reviews and ending the rental

From the outset, the amount of rent you pay will be agreed with the landlord. Normally, this has to be paid in advance and is due on a quarterly basis. Be aware that rent will be payable regardless of how your business is performing. If you fail to pay, the landlord will normally take action to recoup the debt. One consequence could be the loss of your lease.

 

Rent reviews give you the opportunity to challenge the rent and will normally be included in the lease. Reviews often occur every three or five years. There are a number of different approaches to rent reviews. These include fixed rental increases which give you certainty by stating how much the rent will increase by.

 

An alternative is to choose indexed rents. This means that the rent changes in line with a measurement outside your or the landlord’s control, such as the Retail Price Index. Upward only rent review clauses are common but be wary of these as the rent of your property will never fall, even when rents in the same area drop. Instead, it will rise if rents for the same kind of properties go up.

 

Consider setting up break clauses at certain intervals to allow you to assess whether you want to continue renting, without having to wait until the lease expires. You can also vacate through assignment or subletting. Assignment involves a third party taking over the lease. Subletting involves staying as a tenant but granting a sublease to another tenant. Under subletting you will remain liable for the rent even if you do not trade from the premises.

 

Normally, both options are controlled by the lease and you are likely to need consent from the landlord.

 

Go to next section – selecting the best retail business services

Go back a section – choosing a location

Go back to How to Open a Shop Guide 

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