Negotiate a lease when selling a business
Can I negotiate a lease with the landlord when selling a business may seem an unusual question but it’s worth getting the right answer. And the right answer is – absolutely.
Your first reaction is to probably ask why would someone selling their business want or need to negotiate with their landlord? There are plenty of good reasons and they include the following.
The first and probably most important reason to negotiate with your landlord if you plan to sell your business is that the number one reason the deal breaks down between a seller and a buyer is that the landlord kills the deal. As the owner of the business you have built many assets of value in your business. If you rent or lease the real estate that the business operates from and you have a written lease you will almost without exception need the permission of the landlord to transfer the lease.
If your lease is close to expiring you definitely want to speak with the landlord as you need to know their intentions once the lease runs out. If you do not plan to renew the lease then it is critical to speak with the landlord as they may have already started looking for a new tenant. Alternatively, the landlord may have decided not to renew your lease and may intend to run the same sort of business you have been operating out of your location. If this occurs this will almost certainly damage the value of your business and force changes to the plans you have to sell.
To ensure your business sale goes smoothly, the best strategy is to first look at the written lease. Key items to review include the date the lease expires, if the lease includes any options to renew as well as the terms, as the business owner or lessee are you able to have the lease assigned or sub-leased and if so, are you comfortable with the legal responsibilities this entails.
While looking at the lease, it would be worth checking if there is any fee for the landlord or their agent to process the transfer of the lease from the seller to the buyer and if so, who pays. Invariably the seller will make the actual payment to the landlord but the seller could require the buyer to pay the fee if the landlord approves the buyer and then the buyer decides not to purchase the business.
As the seller of the business, now that you know the status of the lease your main question may be whether to speak with the landlord or now or wait till you get a qualified buyer. Because there are so many moving parts to selling and buying a business I would start sooner than later. There are many reasons and the main one includes understanding what if any, the plans of the landlord. As was mentioned earlier, the landlord may decide to let your lease expire and operate their own business from your location. Hopefully the lease you signed prevents that from happening but the earlier you know the situation the better position you are to deal with it.
Some other reasons to talk early with the landlord include knowing what rent schedule may apply if the lease is going to expire. The recession has been long and hurtful to many business owners including landlords. It may be that there are a lot of nearby vacancies for the type of space you are renting and as a result, the cost of monthly rent has declined. This information may influence your decision about whether or not to sell so getting this information can be very helpful.
Another reason is that the situation of the landlord may have changed and they may be willing to negotiate a new outcome with you. For example, the landlord now may have an interest in selling the real estate. With this knowledge you may choose to buy the real estate and either continue to run the business or become the landlord and negotiate the terms of a new lease with a buyer of the business.
There are many obvious reasons but also many less obvious reasons. The current landlord may have health problems, succession planning, tax, regulatory, zoning, maintenance and upkeep issues to name a few. Additionally, the landlord may be working with a commercial real estate agent to broker a transaction. This may be the point of contact for the landlord so any buyer you find would need to work with this party or a property management company.
When selling your business, understanding as many of the main variables as possible is the best idea. Deal making can get complicated and get out of control as often the process drags on and new issues keep popping up to the point where it can exhaust one party and kill the deal. Following the motto of the Boy Scouts to “Always be prepared” when selling a business is a good and useful approach.
If selling your business is an option you are considering, this link will provide a simple summary of the The Many Steps to Selling Your Business>