If you rent the building your business resides in, you must make special arrangements before listing your business for sale to help make sure the process goes smoothly and ensure the survival of any potential deal. As a renter, you will almost certainly require the landlord’s permission to transfer the lease, so why leave this stone unturned? One of the most common reasons for business deals breaking down is the landlord. Understand that they have rights too in this situation and make sure you take the proper steps in negotiating your lease before beginning the sale process.
Begin by reviewing your written lease to understand the terms to which you are bound. Hopefully this is something you familiarized yourself with when you entered into the lease agreement. If not, there is no better time to do it than before the sale. Look specifically for the lease expiration date, renewal terms and whether the lease is transferable or not. Make sure you are comfortable with your legal responsibilities. The terms may stipulate a fee to transfer the lease to the new owner. Some leases even ask for a percentage of the sale if the business sells, so be sure you are clear on how much you could potentially have to pay at the close of the sale.
Once you’ve reviewed your lease, contact the landlord right away rather than wait until you have a buyer, and be up front with your intentions. Usually a landlord needs a good reason to legally hold up the sale of a business, but they still have to approve any lease transfer or reassignment. Letting them know ahead of time lowers the potential that a pending deal will get held up. Set yourself up for a smoother transaction by being proactive and speaking to them before listing. This will help set the expectations of both parties with regards to the sale process.
When speaking to your landlord, find out their intentions. If your lease is getting ready to expire, and you haven’t spoken to them about renewing it, make sure they do not already have plans to sign a new tenant, as this could negatively affect the value of your business. The landlord’s situation may have changed as well, and they could be looking to charge more for rent, rezone, or have other business plans. They may also be going through their own life change which could affect their decision making and willingness to negotiate. If you are in the middle of a lease they could be amenable to renegotiating the original terms. It could go either way. For this reason, it’s always worth having a conversation with them, because you never know what they might say.
Assuming you’ve had a preliminary discussion with your landlord, you may be presented with a few options. For instance, rather than transfer or reassign the lease, you may be able to sublease to the new business owner. In this situation, the seller retains responsibility for the original lease terms and would create a separate lease between themselves and the buyer. A sublease makes the most sense if you are only selling a part of your business or are offering owner financing for the buyer. This allows you, the seller, to be in control of the real estate, which makes sense since you still have obligations towards the business. You would be able to have full access to the property while the buyer is using it. However, the landlord will still have to approve the sublease and the terms of the master lease may not allow for it.
Another option you may have is to negotiate an entirely new lease. This is ideal in a situation where you are in a lease that does not have a lot of time left on it and you want to ensure the buyer that they will not be kicked out or asked to leave after only a few years. Potential buyers are investing a lot of money in your business and location often carries a good portion of this value. They want to be sure they can operate in the same place for a number of years, so having a new lease ready makes your business more attractive to buyers because it gives them some peace of mind.
When selling a business with a lease, you must conduct a background check on the buyer. You will no doubt have to make sure they are financially qualified to purchase the business, but you need to make sure that the buyer has the ability to honor the lease agreement. The landlord will require this information as well, to reassign the lease, so it’s a good idea to have it ready for them. In addition, they will probably want to know if the buyer has experience running the type of business you are selling. They will be reluctant to approve a lease assignment for someone who has no experience, as it increases the risk of the business failing because they don’t know how to run it. This subsequently increases the risk that the landlord will be without a tenant. If you leave it up to the landlord to gather all of this information and it takes too long for them to look into it, the buyer may get impatient and walk away from the deal. With this in mind, see if your lease requires the landlord to approve of a reassignment or transfer within a certain number of days and try to get the approval within 2 weeks or less.
If you haven’t sold a business with a lease before, it would be a good idea to employ the assistance of a business broker. While business brokers do ask for a percentage of the sale, their experience could help you save money in the long run. Business brokers take special measures to keep the sale of your business confidential and qualify buyers, so they can help you to work with your landlord and conduct background checks and screenings on potential buyers. They will also help you review the terms of your lease and help you figure out where you stand and what your options are.
Are you preparing to sell a business you own, but you lease the real estate it operates out of? Do you have questions or concerns about the lease or negotiating changes with your landlord? Contact Corporate Investment Business Brokers today and let us help you to start the process, minimize the headaches and help make sure any potential deals go as smooth as possible.