Finance for hospitality, retail and fitness businesses

Ask an owner what their venue is worth and they will usually start with the fit-out. Ask a lender and they will start with the lease, because the fit-out is the one significant asset in the business that cannot be taken and sold, and at the end of the term it can turn into a bill.

That single fact shapes everything about how these businesses get funded: which facility suits, how long the term can be, and why the earnings case has to carry weight that security carries in other sectors.

What actually differs

The lease is the asset, and the make good is the bill

A facility cannot sensibly run longer than the security behind it, and in a leased venue the security is the right to keep trading there. A five year term with a five year option is a different borrowing proposition to three years with nothing after it, and the difference shows up as a shorter term, a tighter cover requirement, or both.

Then there is the end of it. A make good clause sets out what condition the premises must be returned in, and it is among the most expensive and most disputed parts of a commercial lease. For a highly customised fit-out, which describes most hospitality, salon and clinic spaces, the cost can be very substantial. It is worth knowing two things.

• A general make good clause does not automatically oblige you to strip out the fit-out. Reinstatement usually has to be an express written condition, often attached to the landlord's consent to the works in the first place, so the consent letter matters as much as the lease.
• Statutory protections differ by state and typically apply only to retail premises. In New South Wales, for example, the Retail Leases Act limits a landlord's ability to recover make good costs that were not disclosed. Whether that helps you is a question for your solicitor.

From a funding point of view make good is a liability with a date on it, and the businesses that get caught are the ones that meet it for the first time in the year the lease ends. It belongs in the forecast from the start.

The add-backs a venue has, and the one that goes the other way

This is the sector where the earnings rebuild does the most work, because the reported profit of an owner-operated venue reflects a remuneration decision at least as much as a trading result.

Owner wages normalise in both directions

If you pay yourself more than the job is worth, the excess is an add-back: an incoming owner would not have to pay it. But if you work sixty hours a week in the kitchen and pay yourself very little, the honest rebuild goes the other way, and a market wage for the role is deducted before the earnings are adopted. A buyer cannot run the business for free and a credit team will not assume they can.

Owners are often surprised by that, and it is better to be surprised by us than at credit. It is also the reason a venue that looks highly profitable on the tax return can support less debt than its owner expects, and why the honest number is worth having before you commit to a price.

What those add-backs are worth

The categories above at the illustrative amounts shown, $121,000 in total, against the three things a venue business borrows for.

The third row is the one worth staring at. The same earnings support $317,000 against a five year acquisition facility and $748,000 against a twenty-five year property one, because property can be written long and goodwill cannot. If the premises ever come up for sale, that is the transaction to take seriously, and the rent you stop paying becomes the largest add-back in the next file you build.

Security, when there is nothing to repossess

A commercial oven, a set of gym equipment or a shopfit is worth a fraction of what it cost the moment it is installed, and removing it costs money too. So most venue facilities are written against a general security agreement over the business, personal guarantees from the directors, and quite often property held outside the business.

That last point is worth being plain about. Where an owner has equity in property, it frequently becomes part of the structure, and that is a decision with consequences well beyond the business. It deserves a conversation with your accountant and your solicitor before it is agreed to, not after.

The covenant that binds

Debt service cover is the number the decision turns on. After settlement the trouble in this sector usually comes from a fixed charge cover or minimum EBITDA covenant, because trading is seasonal and a quiet quarter in a business with high fixed costs moves the ratio quickly. Test the covenant against your worst quarter, not your average one.

What the file needs

• Two to three years of financial statements and tax returns, plus current management accounts.
• The lease in full, including options, the rent review mechanism and the make good clause.
• Any landlord consent to the existing fit-out, because that is often where a reinstatement obligation actually sits.
• Weekly or monthly trading figures, so the seasonality is visible rather than averaged away.
• Owner hours and roles, so the wage normalisation can be done properly rather than guessed.
• For an acquisition: the contract, the vendor's adjusted earnings claim, and every add-back behind it.

The acronyms, in one place

What we can and cannot tell you

Andorra Advisory Group is a commercial finance brokerage and advisory practice. We build the analysis and the documents, and we arrange the facility where you want us to. Nicholas Clunes: Credit Representative Number 530711 is authorised under Australian Credit Licence Number 387856. The advisory fee is fixed, quoted before the work starts, and payable regardless of whether finance is approved or what the analysis concludes. Where a lender pays commission on a facility it is paid to The Lending Lab Pty Ltd; it is not payable on every transaction and the amount is not ascertainable at the time of quoting. You are free to take the analysis to any broker or lender you like, at the same fee.

So no lender is named here and no policy is quoted. Every threshold is a level commonly seen, and every lender sets its own. We give no taxation advice, no legal advice and no financial product advice. What your lease obliges you to do, including any make good, is a question for your solicitor, and the statutory position differs by state and by whether the premises are retail.

General information only. Not credit advice, not a credit assessment, and not an offer of finance. Lending decisions rest with the lender and depend on your circumstances and their criteria.