You can't earn your money back on a lease that ends first

A café is a bet on a location. The lease is what lets you keep that location long enough to be paid for the bet.

That makes the length of the lease, measured against how long the business takes to repay you, one of the most important checks in a purchase.

Payback and the lease

Payback is the asking price divided by the adjusted annual profit. It tells you how many years of profit it takes to get back what you paid.

Take a $450,000 café with $90,000 of profit after paying a manager. Payback is five years.

The rule I use, and the scorecard uses, is that the years left on the lease should be at least twice the payback period, and never under five years.

• At a three-year payback, you want six years or more.
• At a five-year payback, you want ten.

The multiple is there because payback is a best case. It assumes profit holds, and that you get paid back before you start earning a return. You need years beyond payback to actually make money, and a lease that ends the month after you break even leaves you with nothing to sell.

A lease ending is also a sale price problem

When you eventually sell, the next buyer asks the same question you are asking now. A café with two years left on its lease is hard to sell at any price. If the lease is short when you buy, assume it will be short when you sell, unless you can fix it.

Options are not certainty

Listings often say "5 years plus 5 year option". That is not ten years. Before you count the option, check:

• Who holds it. The right to renew should belong to the tenant, not depend on the landlord's agreement.
• What rent applies. Is the option rent fixed, capped, or reset to market? A market reset can change the economics.
• Conditions. Some options have conditions, such as being exercised by a particular date, or only if the tenant has not breached the lease.
• Whether it was already used. An option that has already been exercised is not still available.

Ask for the lease itself, plus any variations, assignments and landlord consents. Don't rely on the broker's summary.

What changes hands

Buying a café usually means taking over, or being assigned, the existing lease, and the landlord generally has to consent. That is also the moment landlords sometimes ask for more: a personal guarantee, a bank guarantee or deposit, or a revised rent. Find out early what the landlord will require, because it affects what you are really buying.

Look as well for make-good clauses. These require the tenant to restore the premises at the end of the lease, and the cost can run to tens of thousands of dollars. It rarely shows up in the P&L until it is due.

Commercial lease rules vary from state to state, including how much protection a tenant has and what disclosure the landlord must give. Have a commercial lease lawyer review the lease before you sign.

What to ask

• How many years are left, including options?
• Are the options mine to exercise, at what rent, and will the landlord confirm that in writing?
• What will the landlord require from me on assignment, including guarantees or deposits?
• What does the lease say about make-good, and has it been quoted?

A great business on a short, uncertain lease is a good business that you may not get to keep.