Leasing your restaurant instead of selling it: the arithmetic almost nobody does

The conversation repeats itself. A restaurant owner is tired, or wants to do something else, or simply doesn't enjoy it any more. But letting the business go is hard: they built it. And then the idea appears that sounds reasonable to everyone: I'll lease it out.

I don't sell it, I don't let it go, and rent comes in every month. If I want to come back in two years, I come back. And if not, I'll see then.

It's an idea that looks good and turns out expensive. It's worth understanding why.

What you're leasing isn't the premises

Here's the mistake underneath it. When you lease an apartment, what you hand over is a space. The tenant uses it, gives it back, and short of serious damage the asset is worth roughly what it was worth when you handed it over.

A running restaurant doesn't work that way. What you hand over isn't a space: it's a reputation. Customers who have been coming for years don't distinguish between you and whoever is now at the till. To them it's the same restaurant, with the same name, on the same corner.

If the tenant lets quality slip, they're not the one who loses reputation. You are, because the business is still yours.

And reputation is exactly what you were trying to hold on to when you decided to lease instead of sell.

The full arithmetic

Let's use round numbers to see the shape of the problem. Take a restaurant that could sell today for a certain amount, and which instead gets leased out for two years.

On the income side, the sum is easy: twenty-four months of rent. It's real money, it arrives on time, and you don't have to do anything to receive it.

On the cost side there are three items almost nobody writes down:

1. The decay of the operation. If the tenant cuts back on ingredient quality, on staff or on maintenance, their margins go up and yours don't change at all. The incentive points the wrong way from day one.
2. The loss of sellable history. When you finally do go to sell, the buyer will ask for the last two years of numbers. Those numbers aren't yours any more: they're the tenant's, with their decisions and their cutbacks. If they're bad, they drag the price down. If they're good, the buyer can argue the credit wasn't yours.
3. The cost of recovering. Rebuilding a damaged reputation takes months of flawless operation, and that time costs too.

A concrete case

We saw a restaurant in a rural area on the market for around a million dollars, business and property together. The owner decided to lease it out while a buyer turned up.

The tenant didn't hold the standards. When the business finally sold, the price had to be adjusted by about a hundred thousand dollars. Close to ten per cent of the value, lost to operational decay.

Run that against what the lease brought in over the same period. It's hard for any rent to cover a hole that size.

When leasing does make sense

It isn't an absolute rule. There are situations where leasing is the right call:

• When what you're leasing is the empty property, with no brand, no staff and no inherited customers. Then you really are leasing a space, and the apartment logic applies.
• When the tenant brings their own concept and their own name. If the place changes identity, your reputation is no longer on the line.
• When there's a real reason to wait, such as public works about to change the foot traffic in the area, and the lease is a bridge with an end date.
• When you know the tenant and their track record. Demonstrated reliability and a good credit history change the equation considerably. They don't eliminate it, but they change it.

What doesn't work is leasing out the going concern, with your name and your customers, to someone you don't know, hoping they'll look after it the way you would.

The question worth asking

If you're at this crossroads, the useful question isn't “lease or sell?”. It's this one:

Am I leasing because it makes economic sense, or because I can't bring myself to let go?

Both are legitimate answers. A business you built isn't only an asset, and nobody has to make the decision with a calculator alone.

But it's worth knowing which of the two it is. If it's the second, leasing isn't solving the problem: it's postponing it, and charging you interest.