Buying a workshop unit, what to offer?

[opener]

Knowing the wide variety of occupations of readers of this forum I'm sure there must be those who have experience of buying and selling business property and hope that someone can help me.

I am about to put in an offer for a workshop on an industrial estate and would like to know the best way of playing the game.

I have 2 partners so the cost is being divided between the 3 of us but we obviously want to get the best possible price. Setup costs will be about £10,000 so we'd like to at least get that off the price.

We've been told by the agent that the owner is open to offers, the workshop has been empty for over 6 months, and we are thinking of offering 75% of the asking price.

Do you think this is a good opening bid or should it be lower/higher, bearing in mind the current situation. A friend of mine helps run a chain of shops. He said that one branch has let out the offices above the shop for half the rent that they were wanting because of the lack of demand. I don't want to offer too much and find I get my hand bitten off when I could have got it for less. But I also don't really want my offer to be treated with contempt for being too low.

Also if/when my offer is refused should I play it cool and let them sweat before putting in a higher bid? If so – for how long?
Any tactics/thoughts gratefully received.

We have plenty of work at the moment and good prospects of maintaining that, so this is a good opportunity and as I am losing my present workshop in a few months time, staying put is not an option.

I am going to have to borrow about £10-12k for this venture and I'm wondering what is the best way of doing this. Looking on the internet it seems that 8% is the going rate. One of my partners is going to put it on his mortgage at about 5% but I paid my mortgage off some years ago. It's so long since I borrowed any money I'm a bit out of touch. Can anyone help me please.

Cheers
Malcolm

 

[Doctor]

I think 75% is a low offer but a good starting point, I'd be surprised if it was accepted.

 

[sawdust maker]

Hi Malcolm

I am no expert, but I would start with my business plan. What is your expected turnover and day to day running costs. This should give you an idea of what you can afford, but remember interest rates are unlikely to stay this low for long. Sorry if this appears so very obvious. The next thing is to check out other workshops locally. If you want to know what places have sold for check out the Land Registry. There are sites on the web that give the price paid for domestic property. So to the discount, 25% discount sounds good starting point. Another option which you might think about. It to offer to rent but with an option to buy later. This could make a safer option for you if you are starting up in business.

Well those are my thoughts.

Paul

 

[crazylilting]

From what you are saying it sounds like they are asking £50,000? What is the square footage? What is access like? Are you running your own business in the premises? What are the rates on the building? £50 thousand is a lot of money but it depends on what you are getting for that. Being your own landlord is always better then renting from someone else but there are a lot of costs involved in owning property.

I rented a space for £222 a month with three phase electricity, but it was a hole in the wall that leaked and was not heatable without some serious renovations.

I think location is the key really. If you have traffic already in the estate there is potential to sell something. If you have to advertise to get that traffic you run into more overhead.

The other thing is you are in partnership with others. I'd never do such a thing unless the business was a real estate business with equal state and ability to contribute and well trusted long term relationship with the partners.

 

[opener]

Thanks for the replies so far. I've known my 2 partners for 24yrs and 10yrs and we're all good friends. I've run the business on my own for 29yrs and have to find a new workshop as I'm being kicked out. The others are both joiners and kitchen fitters on contract work and the idea is for them to carry on the contract work for the business while building up the joinery work. I will concentrate on the joinery work and they will gradually move in as the joinery work takes over from the contract work.

The workshop is modern and in good order but needs setting up as a joinery workshop, electrics, dust extraction and moving being the main costs. It's in a good position for visibility, much better than my existing premises which is off the beaten track. The purchase price is 10 times the annual rent so buying appears to be much the better option especially as we have to invest so much for the setting up.

I'm quite happy that we can afford the property but don't want to pay more than we need to as any money saved can go on new machinery. Similarly if I can get a loan for less than 8%, then all the better.

Cheers
Malcolm

 

[Richard Findley]

Hi Opener,

I wish you the best of luck with your venture.

The only thing I can really add is that, although housing prices have soured in the last 15 years, commercial property has largely remained stable. My example is a factory locally was bought for £250,000 in 1990 and sold recently for around £300,000.

Not sure if it of any help but it may be worth bearing in mind.

P.S, if you need any woodturning doing give me a call :wink:

Cheers,

Richard

 

[billw]

You really need to get a business plan which will determine what you can afford - it might well be that the unit you have in mind might well be too expensive no matter what the price.

Getting 25% off something is pointless unless the 75% you pay can assist in making your business work.

As you are buying a tangible asset I would imagine 8% should be achievable, but it depends how much equity you'll have in the property - banks these days will think primarily about how safe their investment is.

I'm a management accountant by trade and my experience is predominantly with small businesses going through start-up, distress, or radical change, so I'm more than happy to share some knowledge with you if you so require.

 

[BradNaylor]

I would have thought that in the current climate you would have a very good chance of having such an offer accepted.

Remember, asking prices are totally meaningless. The only price that counts is that which someone is prepared to pay, and which the vendor is prepared to accept. So don't think in terms of 'saving' 25%; you're not. You are simply going through the process of establishing the 'real' price.

There is a lot going in your favour. Commercial property prices have fallen by around 50% in the last few years, far more than houses have done just yet. Of course they could fall further still, but for those with the funds to proceed and who are looking to occupy the premises themselves rather than rent them out now would seem a pretty good time to be buying.

The current owners are also now having to pay the full business rates on the empty premises, which could well make them motivated sellers.

Who are the vendors? A property company? A commercial landlord offloading one of his units in order to get some cash in? The liquidator of the previous occupier? The previous occupier who has now retired? Do they own the property outright, or do they have a big loan outstanding on it? If the agent won't tell you then simply ask around at other units on the estate. People love to gossip!

Establishing the status of the vendor could be key to identifying the lowest price which they would be willing (or able) to accept. It could also open up another possible strategy.

Like Crazylilting I am a little worried about the idea of buying property as a brand new partnership. My suggestion would be, if possible, to reach an agreement to rent the premises for say three years with an option to buy at any time within that period at a previously agreed price.

This would give you the security of knowing that any monies expended on fitting out the premises would not be wasted in the result of the business being successful, as you would be buying the place anyway. More importantly though, it would give you a 'get-out' in case the partnership doesn't work as well as hoped.

There would also be cash-flow advantages. You would not be having to part with big sums of money as a deposit on buying the property to begin with, money which could be used developing the business instead. Never underestimate the funding requirement of a new-start business! If it worked out you would have three years in which to put the deposit together, hopefully from the profits flowing in.

Just a thought...

Cheers
Brad

PS - DO NOT EVEN THINK ABOUT TRADING AS A PARTNERSHIP!! IT IS ESSENTIAL THAT YOU OPERATE AS A LIMITED COMPANY FROM DAY ONE.

Buy the property through a seperate limited company and lease it to the trading company.

There are a thousand reasons for this. See an accountant.

 

[RogerS]

If you do opt for the short-term rental then avoid personal guarantees of any description.

Understand your point re not having a mortgage..which is why we never totally pay ours off as it gives flexibility in the future for, hopefully, raising funds at reasonable rates.

Security of workshop vis a vis break-ins? Something to consider maybe.

Echo comment re business plan.

Good luck with whatever route you decide to go down.

Roger

 

[crazylilting]

I think bradnailer has some good points. The thing about starting a partnership on future success is that it rarely turns out like that and someone always looses out. Being that you know these fellas for a long time a serious discussion needs to be made on the what if's and how you will handle them.

What if the joinery part does not take off?

You are looking for a business to support three upper management positions. Anyone in the woodworking business will let you know that is impossible unless you are going big. I mean really big. Which means the property you are looking at is way to small for such an enterprise.

From what you are saying you already have equipment and it also sounds like you run a fairly successful business or you wouldn't be contemplating such a move. I've been in business for a year and a half or so and haven't seen a single paycheck that i could say this is my money to spend. The business eats everything and more if i had more.

If i were looking at the building i'd start the bidding even lower. The property is only worth what someone is willing to pay for it and i doubt anyone else is looking to buy it very much. make a ridiculously low offer you know will be refused and let it sit for a bit, do not counter offer simply say that you don't know if the market can bear any more then the offer and explain your situation. Like brad says they are paying the rates on that building and god knows how many others. It could me more of a thorn in their side then you realize.

 

[BradNaylor]

Another thing strikes me.

It sounds like you have a workshop full of equipment which you will be installing in the new place while your new partners will be bringing very little gear.

I would urge you to consider retaining ownership of your equipment personally while leasing it to the new company for a nominal few hundred pounds a year.

That way, if the new venture goes **** up or you fall out with your partners you always have the option of pulling your gear out.

I've been there!

I also endorse Roger's comments about personal guarantees. Avoid at all costs. I had to go bankrupt because of a personal guarantee to a landlord.



Cheers
Brad

 

[opener]

Many thanks for all the replies and all the excellent advice.

I spent last night trying to write a business plan and doing a cashflow forecast, a bit of a headache but I seem to be getting there slowly.

The rent now – buy later option has its attractions but would I have as much leverage on the purchase price if the sale wasn't to be for 2 or 3 years?

Cheers
Malcolm

 

[CNC Paul]

Many thanks for all the replies and all the excellent advice.

I spent last night trying to write a business plan and doing a cashflow forecast, a bit of a headache but I seem to be getting there slowly.

The rent now – buy later option has its attractions but would I have as much leverage on the purchase price if the sale wasn't to be for 2 or 3 years?

Cheers
Malcolm

Malcolm,

If you are bringing your machinery to this partnership, you are writing the business plan, you are doing the cashflow forcast, what are the other two bringing to the table ?

 

[BradNaylor]

Many thanks for all the replies and all the excellent advice.

I spent last night trying to write a business plan and doing a cashflow forecast, a bit of a headache but I seem to be getting there slowly.

The rent now – buy later option has its attractions but would I have as much leverage on the purchase price if the sale wasn't to be for 2 or 3 years?

Cheers
Malcolm

Negotiate the purchase price before suggesting the lease-with-option-to-buy idea. A lot depends on the position the owner is in, as I said earlier.

My suspicion is that the owner will be pretty desperate to find any acceptable solution and you will have him over a barrel. These are not good times to be in possession of empty commercial property.

I agree with Paul - what are the other two bringing to the party?

Cheers
Brad

 

[opener]

Thanks for the advice on the offer, very helpful.

I have the most experience in running a business, albeit a one-man business, therefore I have taken it upon myself to do the business plan etc.
The other two both have experience of working in joinery shops, and site fitting, but their main experience is in 10 years of working with a major kitchen manufacturer which will be of great benefit in expanding the business which at present hardly touches kitchens etc.

Cheers
Malcolm