Freehold and leasehold are common terms used in Australia when buying or selling an accommodation type of business. The terms freehold and leasehold refer to the ownership or lease of the underlying property.
Before making a decision to buy a motel or bed and breakfast, it is important that you know the differences between the two terms to understand what assets are included in with the business.
What does a freehold business mean when buying a business?
A freehold business means that the buyer is essentially buying both the business and underlying property.
If you were to purchase a freehold motel, this would include taking ownership of the motel building along with any other non-moveable property such as the swimming pool and storage facilities.
A freehold business should include both the value of the business for sale and the property and therefore the valuation of a freehold business would be that of a leasehold business, business and land.
Advantages and disadvantage of buying a freehold business
The main advantage of a freehold business is that the building and land is part of the purchase. This may be attractive to buyers looking to secure a long term business which includes both the business and the property. Owning the property gives the buyer the added option of selling the business as a leasehold at a later date.
The disadvantage of buying a freehold business is the upfront cost can be substantially higher as the valuation depends on the value of the property. This will require a higher upfront investment.
What does a leasehold business mean when buying a business?
A leasehold business, as the name suggests involves a lease for the building and land which the business operates on.
If you purchase a leasehold motel, you will be able to operate your motel within the building and land for a fixed period of time, as stated on the commercial lease agreement.
Leasehold businesses do not include the value of the property as part of their valuation and are generally substantially cheaper than a freehold business.
Advantage and disadvantages of buying a leasehold business
Since the ownership of the property is not included in a leasehold business, a leasehold business can be a disadvantage for buyers interested in acquiring both the business and the underlying property.
Some sellers, however, do offer their business as both freehold and leasehold as an option for buyers.
A leasehold can also be an advantage for buyers that have limited funds as leasehold businesses are generally cheaper than freehold businesses. This is because the price of a leasehold business does not include the value of the property.