If you have the goal of selling your business, dust off your lease agreement and give it another look.
Did you know the language in your lease can prevent you from selling your business? If that’s news to you, you’re not alone. It’s alarming how little attention business owners give to the leases they sign. Many times, it can come back to haunt them years later. Business broker Tim Bellon is quick to defend the business owner. “Should they have the lease reviewed by an attorney? Absolutely, but when a business is in startup mode, choosing to save a few hundred dollars by the entrepreneur doing it themselves is a choice many make.
“Negotiation with a landlord, especially a large group, is like “bringing a knife to a gunfight,” Bellon colorfully explains. Here’s why.
Landlords write leases to protect their own interests. If the business owner defaults, there is most likely a clause/section of the lease where the business owner is a personal guarantor of the lease. Many business owners are not aware of this. If you sell the business, this personal guarantee likely will remain in place and the landlord could hold you in default if the new business owner were to quit making rent payments. If you want to assign the lease to a new owner, in almost all cases, you have to get the landlord’s permission and approval.
All of this can become a problem if the business owner doesn’t leave some room to maneuver. “I advise my clients to assume you are going to sell the business, even if that isn’t in the short term plans. A health event or other family matter can change the well-intended plans quickly,” Bellon explains.
An inflexible lease can kill the sale of your business, even if you have a willing buyer. Here are some of the pitfalls Bellon looks for in client leases:
At least 10 years left
If your buyer is obtaining Small Business Administration (SBA) funding, the bank will usually require that there are at least 10 years left on the lease. This is because they want the lease to match the amortization of the loan. It’s ok if 10 years can come from multiple extension options.
You want some options to transfer the lease. This can become more complicated if you had the landlord make tenant improvements that were cost amortized through the remaining years of the lease. In the most iron-clad lease agreements, transferability is prohibited altogether.
Most landlords will demand a personal guarantee on the lease. What some tenants don’t realize is that if they were to transfer the existing lease to the new owner, the original signer will remain as a personal guarantor. This means that you’re personally exposed if the new buyer of the business defaults.
The landlord has the final say
If you secure a qualified buyer and every other detail has been worked out to buy your business, you still need the landlord’s approval to transfer/assign the lease. Because there is a new party responsible, the landlord will require a credit check, personal financial statement, and other sensitive information needed to complete the transfer.
If you’re thinking about selling your business, Bellon’s advice is to pull out the lease now and have it professionally reviewed. This is part of his process when he creates a marketing plan to sell businesses. “I make sure we can work with the lease even before we list the company. If we need to renegotiate with the landlord, I want to start that process early.”
“The two things most likely to kill a deal to sell a business are the accuracy of books and conditions of the lease.”
Bellon’s parting advice is don’t forget about your lease, and don’t go it alone. Seasoned brokers are trained to help you navigate complex business sales.
About Tim Bellon:
Tim Bellon, Owner VR Business Brokers: Tim was born and raised in North Dakota, and after the culmination of a 21+ year career in the U.S. Army, he and his wife Beth retired in Apollo Beach, FL. He earned his Bachelor’s Degree in History and Political Science from Concordia College, and a Master’s of Science in Defense Analysis from the Naval Postgraduate School.
Tim joined the VR Business Sales Team in 2012 as the owner and managing broker of an office serving the greater Tampa Bay, FL. During this time, he has focused on helping business owners realize their goals through selling, buying, or growing businesses. He also assists individuals, and companies looking to expand, in the identification and acquisition of businesses.
Tim is community-oriented and is a proud member of the following organizations; International Business Brokers Association (IBBA), Business Brokers of Florida (BBF), SouthShore Chamber of Commerce, Commercial Finance Association (CFA), American Legion, Disabled American Veterans (DAV), and the Knights of Columbus. Tim can be reached via email at TBellon@VRSouthShore.com.