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“Takeover fee” or “Key money”: do you really understand the implications?

“Takeover fee” or “Key money”: do you really understand the implications?

commercial-lease-agreementIn Chiang Mai / Thailand (as in other countries) the ownership of many commercial premises such as restaurants, bars or guesthouses/hotels (Building Owner: “Landlord” or “Lessor”) is separate from the business operating therein (Business Owner: “Tenant” or “Lessee”).

The Tenant leases the property (or land) from the Landlord on a contractual Term (maybe 2-3 or more years) and pays rent (let’s say Baht 30,000pm) to the Landlord.

Bussinesses-in-Chiang-mai-keymoneyAt some point, the Tenant may decide to “sell” his operating business for an agreed price (the “Takeover fee”), and the components of this fee/price (let’s say Baht 500,000) should include at least: his physical improvements to the property, his “goodwill”/business name recognition, fixtures and fittings included in the sale (ie chairs tables, kitchen fittings), the ongoing right to his NET profit (ie profit after staff, marketing, repairs, cost of goods etc) and his current and forward bookings (if a guest house or hotel (if any)).

The amount of this Takeover fee is materially affected by:

  •      the net profitability of the business
  •      evidence of some real records of income and expenditure over a reasonable period of time

plus

  •      the duration of the Tenant’s existing lease
  •      any contractual right to a lease extension
  •      the willingness/agreement of the Landlord to agree to a transfer of the lease, or further extend the lease and, if so, at what rent

If the new Tenant later “sells” the business, normally he can seek to recover all or some of this Takeover fee from the next incoming Tenant—or even more if he turns around a business with low profits into one with high profits!

Sometimes the Takeover fee is called “Key money” and there are cases, even when there is no operating business, where certain Landlords may demand Key money (not to be confused with the rental or security deposit which is paid to ensure the Tenant’s obligations under the lease).

Finally, in most cases, even though the ratios of the components to each other within the said Takeover fee can vary, most people just look at the total amount of such fee/money payable as a total business cost.

Clear… or more confused?Confused-about-the-Chiang-Mai-Property-Market

If you need our advice on specific cases, please do not hesitate to contact us—but you really need to decide if the amount of the Takeover fee or Key money is worth paying before you make any binding commitment!

Perfect Homes is a leading Chiang Mai real estate agency with extensive experience in the city, regionally, nationally and internationally.

(10) Comments

  1. Dave

    on   said 

    I inquired about several properties and I could not believe the take-over fees for some of the properties another one of your competitors was asking for some business that were not even operational.

    Reply
  2. Roland

    on   said 

    At last someone trying to explain the vagaries of the mysterious “key money” issue!

    It’s hard to find a Landlord or Tenant who can justify exactly what this payment is for or how it is derived.

    Thanks for the clarity.

    Reply
  3. Jenny

    on   said 

    I have been thinking of buying an existing business in Chiang Mai… you have just answered many of my queries. Always find your blogs and information sheets informative, please keep them coming.

    Reply
    • Perfect Homes (Chiang Mai Properties)

      on   said 

      Hi Jenny, Thank you for your comments, Keith is working hard on his articles, he has a great deal of experiences in Asia on commercial properties. lets hope he can help you.
      I see you have also emailed us, Keith will be in contact soon.

      Reply
  4. James Holt

    on   said 

    It’s time this practice was stopped and the law was changed.
    A payment for goodwill is acceptable if you take over a business making a profit.
    Can’t understand how they can justify a fee for taking over commercial premises where no business is operating – normally because it couldn’t make a profit!
    Also I have no idea how they arrive at this fee!
    These payments have put me off setting up a business in Thailand (using Thai staff, of course)!

    Reply
    • keith

      on   said 

      Agreed, some good points, although it will be very, very hard to change this “system” which prevails across much of Asia, and not just Thailand.

      One consolation is that if you are selling a business you can usually recover part or all of the key money you invested from the incoming tenant/operator.Plus, in some cases, this payment can be viewed as “advance” rental when the monthly rental is relatively low.

      Reply

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