this is the third guide in the series on writing a business plan for your restaurant (there are 10 in all). Make sure to go back and read the introduction and previous guides if you have missed them.
In this guide we’re going to touch upon:
Types of leases
How much rent you should pay
Other considerations like deposits
Costs associated with signing a lease
Pop over to our hospitality page on our website to download an updated cash flow spreadsheet which is updated to include all the property bits we’re looking at below.
So how do I get a lease?
There are two types of leases that you may come across:
A new lease - you’ll be dealing directly with the landlord
A lease assignment - this is where a current restaurant has had enough and assigns the lease to you - you’ll deal with the current tenant mainly
One thing that surprises many people new to commercial property is that you need to pay stamp duty on new leases. Stamp duty is calculated based on the rent you will pay over the life of the lease.
Let's do a quick example.
Most restaurant leases are between 15 and 25 years, so we’ll use 20 years here, with a £40k rent. Add the VAT (so £48k per year) and then you work out the NPV of the rent for the lease.
NPV (net present value) - in very simple (and slightly incorrect terms), this is what the lease costs in today’s money. Get googling if you want to know more.
In this example, we’ll assume the NPV is £564k. You take off the stamp duty threshold of £150k and then tax what you
have left at 1% (so £564k - £150k = £414k x 1% = £4,140 to pay)
You pay this when you sign the lease, so it’s one to go into our cash flow. As stamp duty is a bit of a pain to work out, we’ve built in a stamp duty calculator to the cash flow sheet.
Old leases often come with premiums, but old leases also often come with equipment so it can be very useful, especially for restaurants which require a full kitchen. One of the good things about an old lease being assigned to you is that it does not carry stamp duty on the rents in the same way a new lease does.
Lease premiums - an amount you need to pay to the landlord or the current tenant to sign up to the lease. Stamp duty is payable on this.
How much rent should I pay?
There is no hard and fast rule on how much rent you should pay but restaurants typically pay between 10-12% of their net sales in rent. The higher this percentage the more likely you are to fail - the numbers just don’t add up (slim margins, remember?)
You can quickly see that this comment is a bit ‘chicken and egg’ - the site you choose will massively impact the sales. So you will need to look at quite a few sites and crunch some numbers before putting in offers (see our later guides on how to forecast sales).
If you are just looking for a number to feed into your projections before you start looking, get googling and find some local restaurant properties that are the right kind of size and use those rents - plus 25% to allow for a realistic rent (chances are the one’s you can find online are more ‘off pitch’ than you want).
Anything else I need to navigate?
A landlord may require you to put down a rent deposit, especially if this is a new venture. This is typically between 3 and 6 months.
You may be able to negotiate a rent free period, so you don’t have to stump up rent straight away. Often the landlord will cover the fit out period with rent free period, but it you can get longer rent frees. It’s all up for negotiation, so the better the site the less you’ll get out of the landlord.
If you can’t get a rent free period you will need to pay rent upfront. Rent is typically charged quarterly in advance. So your first quarter's rent plus rental deposit plus stamp duty can be a big hit to your cash reserves and you have only just got your hands on the keys!
Finding a site is hard! It is not like finding a house with a couple of websites to browse.
And it is not a level playing field.
Large chains pay property agents £30k / £40k or more finders fees if they find them a site. And the agents know the chains well as they have been doing business with them for years. When a good property comes on the books of an agent, it will be a long time before it is offered to you.
In the agents' defence, you are a new and you have an unproven concept with a high chance of failure - landlords would prefer to have someone with track record renting the property off them (your lack of financial history is why landlords are likely to ask you for deposits).
Nevertheless, properties do come up that will suit you. When you do find a winner, there are a few more fees for you to pay - you’ll certainly need to pay for a lawyer to do your lease (£4k - £9k) and if you are working with a property agent there will be a fee to pay there, which you can estimate to be 10% of the first year’s rent for the purposes of your cash flow.
So lets build this into your cash flow.
Go to the bottom of our hospitality page to get an updated version of the cash flow sheet or add this to your own (if you haven’t done the first guide on cash flows - go and take a look - that has the building blocks to a great business plan).
Using the info in this guide we can add a new section to our cash flow.
We’ll be adding more to this opening costs schedule in the next guide when we talk about the costs of fitting out your venue.
Finding the right site - it’s so important
For a lot of new restaurants, site location is the most important success factor.
I’m not going to go into too much detail on selecting a site - you’ll get better advice from someone who is not an accountant - but it is worth highlighting a few points.
Right road, wrong end
It may sound ridiculous, but being at the ‘wrong end’ of a good road can cause you a huge problem. Even being on the wrong side of a junction by 20 metres can mean you have to undertaking a lot of hard marketing so people know you’re there. This is just down to foot fall.
If the foot fall doesn’t reach you and you rely on a lot of walk-in trade, you need to work extremely hard to drive people to your site. So really pay attention to this when looking at sites.
If the rent is cheaper than you expect for the road you are on, chances are you are at the wrong end, so think about whether you have a concept which can drag people in.
Check out this short piece by Lee Skinner (Inamo Restaurants) which picks up on a few items, including site selection and is a must read for those of you thinking about starting out:
Too much competition
Finding competition in the area you are opening can actually be quite a good thing - you know there are customers in
the area and it indicates that the area has some ‘pull’. However, if there is a lot of competition offering the same cuisine as you, steer clear. Even if you are offering the best in that class of cuisine, you are making your life very difficult. There are only so many ways the pie can be sliced and you’ll all be getting a small slice.
Too big or too small - both are a problem.
If you go for a site which is too big, you’ll be paying too much rent (and other overheads) for what you actually need and you’ll also need to fill the space with chairs (or partition it off). I’ll say it time and again in these guides - your profit margin is thin so you don’t want to be wasting money.
If your site is too small you may not have enough seats to hit the sales you need to succeed or enough kitchen space to offer the menu you want.
So finding the right site is hard. And finding a prime site, with high footfall is even harder. If you get it really wrong, it can spell disaster - large successful chains close failing sites all the time and that is down to the site selection (otherwise the whole chain would close, not just that bad site).
If you are a complete marketing genius, being off the beaten track isn’t a disaster
If you already have a great social following from your food truck, being off the beaten track isn’t a disaster
If you are supplying something brilliant / unique / unusual, being off the beaten track isn’t a disaster
If you serve a particular niche, being off the beaten track isn’t a disaster
If you are planning to absolutely rinse delivery, being off the beaten isn’t a disaster.
Match your site to the concept you have.
Failing that, adapt your concept to match the site you can actually get.
To finish; an extract from an article written by Charlie McVeigh in January 2019 (from the Propel Hospitality newsletter - if you are not already signed up to it, go and get signed up now)
“ The current crisis in the sector represents an opportunity for resilient brands but also ones that are comfortable and confident in their own skin…..Learning to adapt is also a key ability, especially for startups. The days of the cookie-cutter brand are coming to an end so you need to be able to tailor your offer to where you are and want to be – location underpins everything.”
In the next guide we look at how much it will cost you to fit out your new site!
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