Buying a bar in Tenerife - How not to!

Bars for sale in Tenerife, Be very careful!!!

Bars for sale in Tenerife!

A popular advertisement all over the internet and a popular search on the internet – Bars for sale in Tenerife….

Many expatriates dream of relocating to Tenerife, maybe buying a bar in Tenerife or doing some part time work – just enough to be “comfortable”. They figure a nice bar, near the beach – not too busy though! Have to have plenty of time to relax and take some sun.

While some only dream, others pluck up the courage and take action. They book there flights, have a look at some bars for sale in Tenerife over the internet and arrive here keen to purchase. they do the rounds with some “Business Advisors” or Estate Agents and finally decide upon that perfect bar – the one that’s not too quiet, not too busy and earns plenty.

And that’s where it all goes horribly wrong!!!! Within 2 years of arriving, up to 75% of these Tenerife Bar entrepreneurs, end up going back home, very disappointed and out of pocket. The really unlucky ones last a little longer, drawing on their savings, borrowing from friends and family, a never say die attitude to keep the business going – they will go home with nothing….

  • So where does it all go wrong?
  • How can so many people make so many mistakes?
  • Surely some of them are successful?

Well yes, there are success stories and the successful ones are more than happy to tell you about it. But, no one likes to shout about failure so the ones who don´t make it, don´t make much noise.

There are many reasons why Tenerife bars fail, here we hope to highlight a few of them.

  1. Inexperience – A huge factor in any business. An ex plumber, a retired civil servant, a policeman who has just qualified for his pension. All kinds of people with all kinds of backgrounds give it a go. So many of them have zero experience when it comes to running a business, most of them have never even done bar work, let alone managed a bar. On top of that, this is not a bar in the UK, with UK regulations. It is a bar in Tenerife, Spain. That means Spanish! Spanish law, Spanish rules and regulations as well as Spanish Bureaucracy. There is a reason why most of the successful Spanish bar owners here have been in the business for 10 years or more.
  2. Competition – There are thousands of bars in Tenerife which are dependent upon tourist trade. There are so many in each area now that many of them have to resort to employing “PR´s” outside on the street to try and persuade the passing tourists to stop for a drink or a bite to eat. The fact is, there are simply not enough tourists to keep all of these bars trading profitably – simple economics. As such , in the busier areas, many bar owners are forced to be so competitive that the price of their drinks is driven down to almost a break-even level on the price they buy their stock for. Pints of lager for 1€ a pint is not an uncommon promotion. But think about how many of these pints a bar owner has to sell per month at a couple of cents profit, after staff and other costs – a lot of drinks! Recently the tourist trends have moved away from self-catering hotels to apartment rentals. Many holidaymakers now include a trip to the supermarket as an essential activity on their first day after arrival, stocking up on food, beer and wine and spending a lot of their evenings relaxing on their balconies, rather than spending their money in the bars and restaurants. The other visible trend has been the inevitable rise of All Inclusive hotels. Many have been specifically built for the All inclusive market, many more are jumping on the band wagon to cash in on the trend. they have become the bain of the Tenerife Bar owners, keeping tourists and their money away. All in all, the competition is savaging the bar trade and the number of bars in Tenerife that are up on sale is at an all time high.
  3. Mis-selling – Unfortunately there is a constant stream of wannabe bar owners lured by the dreams of a bar in the Tenerife sun, easy money and a fantastic new lifestyle. Couple this with a drop in the demand for holiday homes and estate agents have been quick to move in and exploit the naivety. Most buyers will purchase only the trespaso which is the lease on the bar. These can be sold for as little as 25,000€ well within the budget of most – a personal loan for this amount can be acquired from a UK bank in 24 hours which makes the purchase very tempting. What buyers must consider though is why would anyone would sell a profitable business for so little? the short answer is – they wouldn’t! Think about it – if you owned a bar in Tenerife that was bringing in 2,000€ to 3,000€ profit a month for you and your partner to live on, would you accept as little as 9 months profits? If you answer yes and you are a business owner, then please contact me and I will purchase your business off you – cash – tomorrow! Lets take a realistic example -A bar where a 5 year leasehold is available for 30,000€, and the rent is 1000€ per month. The freehold is valued by the owner at 135,000€:

So, you have to pay 30,000€ for 5 years which works out at 500€ per month dead money. Plus 1000€ per month for rent. In Spain, the self -employed have to make compulsory social security payments of approx 220€ per month each, so for you and your partner, another 440€.

On top of this 1,940€ you need to pay your water, electricity, rubbish collection, tax, maintenance, depreciation, advertising and all sorts of miscellaneous expenses. All this when the bar next door (who may own the freehold and thus have no rent) is constantly running his 1€ a pint promotion! So you need to sell plenty of lager, cheap breakfast, sandwiches, spirits etc to pay your monthly costs and then somehow make a decent salary for yourselves and – pay your 600€ a month rent on your apartment and have some money left over to enjoy the fabulous lifestyle Tenerife has to offer – but wait! How can you enjoy this great lifestyle when you spend a minimum of 12 hours a day running a bar? Employ someone? Sure, if you can afford another 1,500€ a month for their salary, social security and tax….

Lets see this from the perspective of the freeholder – the person you are buying the business from. They get 30,000€ cash – every 5 years – on top of the 1,000€ per month rent and they work 0 hours per week – leasing their bar out. They value their bar at 135,000€ outright and they are now taking 1,500€ per month for doing no work – or 18,000€ per year. This equates to a 13.3% return on the capital invested in their business, plus appreciation on the value of the property, depending on the market. A fantastic return by anyone’s standards!

Now, whose shoes would you rather be in? 1,500€ a month on an investment of 135,000€ and zero hours work per week – or take your chances trying to make a living running a bar where so many others before you have tried and failed?

“But, the agent selling the bar told me it was making 2,500€ a month profit easily and that could be improved with the right owners”

Really? Did they give you the last three years accounts? Did they give you solid evidence that this bar is making (or has ever made) a reasonable profit? Or did they say:

“Don´t worry about book-keeping and accounting – it´s Tenerife – we don´t do it like that over here… they don´t declare all their money to the tax authorities but I promise they do make a great profit, they have to turn customers away some nights they are so busy…”

We have heard it all , the reasons why there is no provable income, the reasons why the owners want to sell the lease on a very profitable bar for so little money – it is usually due to illness, or they are going back to the UK to care for their old parents – happens a lot to bar owners apparently – illness and sick parents back home!

The other thing worth consideration is this: Why would an estate agent or business advisor be interested in selling a bar for 30,000€? What´s in it for them? Commission on property sales in Tenerife varies but the recommended amount is no more than 5% of the purchase price. So, for an agent selling a bar for 30,000€ they have got a cheque for 1,500€ coming their way. Most agents in Tenerife wouldn´t get out of bed for that amount of commission. What generally happens instead is the bar owner names their price – 24,000€ for example and the agent simply adds on a reasonble (by their standards) mark-up. In this case 6,000€ or 20%. This is very common in business sales.

Conclusion: If you want to make money from a bar in Tenerife – do your due diligence, do your checks, question everything, ask for proof, buy the freehold and then lease it out to a mug with a dream!!!! Less work, less hassle, much easier money! (Although – in our opinion – very unethical).

But we are not finished. Let´s be a little more cynical and look at a more expensive lease – say for 90,000€ for 5 years. You buy it – well done!!! However, you´re 12 to 18 months in and start to realise that no matter how hard you try, your bar is failing, hemorrhaging cash. You have to take drastic action – now or you are going to burn through your life savings. You approach the owner of the freehold to try and re-negotiate the rent – surely it is in their best interests to help you keep the business going, perhaps they will be all to happy to help. not a chance, they are not interested, don’t want to discuss it – pay up or get out. In fact there is a clause in the lease saying the rent can be increased 5% per year – did no-one mention that? Damn, so what happens to the 90,000€ you have spent? With so many bars on the market and so few buyers it is very difficult to simply sell the lease on. Perhaps the kind freehold owner will step up and offer to buy back the lease – he does! he´s not so bad after all! He makes you an offer – 40,000€ take it or leave it…. You reluctantly accept as you are resigned to the fact you must go back to the UK and try and get your old job back. You have no choice but to try and recoup any money you can.

A nice 50,000€ profit in 18 to 24 months for the freeholder – or 40,000€ profit once you take off the 10,000€ the estate agent was paid to sell it in the first place, a good bit of business.

The day after you head back and the lease is back on the market with the same agent that sold it last time. The prospect of another easy 10,000€ commission means the agent is going to promote the heck out of this bar – front page of his website, another entry in the “specials section”. He rubs his hands with glee as an enthusiastic couple in their late forties peer into his window at the “Special Offers” board. Their pale white skin set against the blazing Tenerife sun suggests these potential clients have obviously just got off the plane – or the last banana boat….

  • If we have shattered your dreams of coming to Tenerife and living a wonderfully relaxed life, owning your own bar, opening late in the afternoons and closing whenever you feel like it – Good, get real! This is not an easy career option. You can come here, buy a bar and earn a living, but the odds are firmly stacked against you. If you are not ultra switched on, ultra careful and ultra smart, you will get burnt – and not because you forgot your sun cream!

If you have owned a bar or any other business in Tenerife and have something to add, tell us about it!

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