Have Contract to Buy but Financials Aren't Panning Out

[VaPizzaMan]

Hello
I read these posts all the time and they are informative and helpful. My wife and I put a contract offer on a pizza shop doing $202000 yr with a stated cash flow of $29000. Among other things the offer was contingent on getting a new acceptable lease and studying the financials. The current owners informed the landlord in October they wouldn’t renew a 3yr lease option with a 4% increase per year. The landlord in now offering us a new 3yr lease that’s a 25% increase over the current rate. He cited “market conditions” driving the new rate.
Second. The place has been mismanaged since the current owners took over 3yrs ago. There financials don’t show any positive cash flow, ever, and certainly not the $29000 they claim for this year. The business was offered to us for $60000, a 2x multiple of cash flow. We offered $50000 and they accepted. Also, they have stated assets(equipment, improvements etc) at $32000 and that number is pretty accurate based on our inspection of their shop.
My question is twofold for this deal to happen for us. We know that the store will make money, its near a college campus and has been operating for about 20yrs under 3 different owners. Sales will only go up. 1. Is it reasonable to ask the landlord to give us the 4% rent increase for 3yrs as stated in their current lease? After all, if the current owners renewed the option in October this would be a non-issue and 2. There is no positive cash flow and they have since admitted as much. Does this now become an asset sale where we can offer them the value of the equipment($32000)? Do I go even lower?
We really like the place and its potential but not so in love where we can’t walk away if the terms aren’t right. Any feedback?

VaPizzaMan

 

[NicksPizza]

There is lots to be leery of here. No cash flow is an asset sale, if that. If it is a business sale, then you should be able to negotiate assuming the lease, if it is worth having. Look at the language of the lease.

Who quoted you the value of the equipment? If the seller, then get a list, serial numbers, and get another appraisal.

My first issue is to demand the seller renege and execute the 3 year option at 4% increase. If that isn’t an option, then the lease terms are quite negotiable. If landlord has people beating down the door to get back into that space, then he can yank the price right up. This is a really lean market, so playing bold negotiations is the thing to do.

There is a lot of really wierd stuff going on here with a no-cash-flow business and the springing lease.

 

[royster13]

Do not buy anything based on your “heart”…Only you can decide if the potential is worth the risk you are taking…Do a detailed “Business Plan” covering off all the variables…

 

[bodegahwy]

You have two separate deals in front of you. BOTH have to make sense to move forward.

1st, the lease:

Find out for yourself what the market rate for a lease is. Never mind the old lease. Getting a lease that you can live with is a go-no-go issue for this scenario.

The Landlord is looking at a vacancy during which no rent will be collected and possibly other turnover costs such as a lease commission and a tenant improvement allowance.

With today’s economy, the leverage is with you.

2nd the business:

The existing business has announced they are quiting. There is no income. This is an asset sale. The assets are somewhat more valuable if they do not close for an extended period but in the end, what they have to sell is equipment. The equipment is worth very little.

I would offer them something like 20K. Their alternative is to get about 5-10K from an equipment broker.

Good luck!