Should I sell my freehold or find a tenant? We receive regular requests for advice from freehold owners of pubs who no longer want to run the business themselves, but don't necessarily need all the cash that would be freed up by an outright sale.
The obvious benefit of selling the freehold is that it releases cash immediately to either purchase another business or to invest.
However, some people wonder if they could get a better return on their money by finding a tenant who would pay them rent.
The most important thing for a prospective landlord to consider is whether or not the rent is secure and will be paid on a regular basis. Remember, the only way a tenant can pay the rent is if it is set at a realistic level. The business needs to produce sufficient profit so that a tenant can pay part of that profit as a rent (usually between 40% to 60%), leaving sufficient money for the tenant to earn a living commensurate with the amount of time and effort invested.
The obvious benefit for the owner of leasing the property is that, with very little input, the owner receives a regular monthly or quarterly income. Also, the freehold asset is retained, and generally, should increase in value.
While a number of positives can be attributed to each route, there could be possible drawbacks that merit consideration. The most obvious is that a tenant could fall on hard times or ruin the business. The main danger is that the tenant stops investing in the business and the general condition of the property deteriorates.
Also, if a tenant is struggling, they will stop paying the rent. Therefore, the ultimate danger is that a landlord is faced with the tenant going bust or "doing a runner", and they are handed back an empty property, in poor condition, and perhaps with no inventory. In addition, they probably wouldn't have the profit-and-loss accounts from when the tenant was running the business, so if they wanted to sell the property, it is likely they'd receive a lower price than if they had sold it as a going concern with good profit-and-loss accounts at the outset.
There is an option here for the owner to take back the business, run it themselves for a number of years and try to produce profit-and-loss accounts that would mean a healthy sale at some point in the future.
However, this could happen at a time when the owner had intended to retire and use the income as part of a pension.