Lease terms for your restaurant, cafe or bar
Outside monthly profits, the biggest return you’ll get on your restaurant, cafe or bar is when you sell it.
Ensure you negotiate good lease terms for your restaurant, bar or café to set yourself up for success.
Good lease terms can set you up with money for your next venue, retirement, travel, or an entirely different venture whatsoever.
Bad lease terms can make your business nearly impossible to sell and feel like you’ve wasted 3 to 5 years of hard work and $100,000’s of dollars.
Some key points on what to look for when agreeing on lease terms for your restaurant, cafe or bar:
Rent & OPEX
Check out my article here on rent and the 6% rule you should be aiming for. This is critical.
Lease term
The lease term is the length of time you legally agree to pay the rent and OPEX and have exclusive use of the space. This can be anything – 1,2,3,5,10 years. Any number is possible.
Rights of renewal
These are standard in commercial leases. A right of renewal is an agreement, that at the end of your current term, you have the right to renew your lease for another term.
This means the landlord cannot kick you out, you are allowed to lease the space at the end of term, or end the lease and move on.
Like the first lease term, rights of renewal can be any length of time. 1,2,3,5,10 years or any other length.
Lease term + rights of renewal
The right lease term + rights of renewal are fundamental to a good lease.
Think about your restaurant, cafe or bar 3 to 5 years from now.
Sales are amazing and you are ready to sell and move onto your next venture.
A seller comes along to buy the business. They will want to look at the lease.
When looking at the lease, they will want to know that they have enough time to earn back the money they spent on the business.
And that enough time is left on the lease for another seller to come along and buy the business from them. So:
You want a first lease term + rights of renewal that provide ‘security of tenure’ for potential future sellers.
A good length to aim for is 15 years overall. This could look be: 5x5x5 (5 year first term, with 2×5 year rights of renewal).
Or: 3x3x3x3x3 (3 year first term, with 4×3 year rights of renewal).
In the first example, you spend 5 years operating, sell to another owner and they still have 10 years to operate or sell to another owner. Makes sense?
The value of your business will be drastically effected by your lease terms.
I’ve seen busy restaurants, cafes and bars that have shut rather than sell, because no one would buy their business because their lease was not set up correctly.
This literally meant $100,000’s of dollars and years of hard work down the drain.
If you need our help or advice regarding lease terms for your restaurant, cafe or bar, get in touch.
The next article in our Hospo Hints series discusses rent: How much is too much?
