Negotiating a lease buying a business
Negotiating a lease when buying a business adds to the complications and stress of getting into business. That is, it’s tough enough negotiating with the owner of the business that wants to sell to get a deal that makes sense for both seller and buyer let alone negotiate with landlord who has their own agenda to get a lease that allows the buyer to be successful.
If you are the buyer of a business and find you are negotiating your lease with the seller (who wants to get his liability completely off the lease) and a landlord that wants to get the best deal they can because they have a loan to pay or risk losing their real estate and investment, the following may assist you.
What are terms of the current lease?
A good place for a buyer to start is the current lease with its terms and conditions. It may be the current lease has expired and the owner or seller is month to month or the lease is close to expiring. If you can get a copy of the current lease it will show how the landlord thinks and the items that are important to them.
If the lease is current and has a period to run of 12 months or more, you don’t like the terms of the current lease and the landlord is unwilling to make a new lease or offer concessions to you then that’s probably the end of the opportunity to buy that business and so it’s onto the next. The only variable is to have a conversation with the seller to see if he’s willing to offer a concession to offset your objection.
Due diligence on the lease
As the buyer of the business you are able to negotiate a due diligence period to check out the representations of the seller and make sure they are accurate. While there is no official due diligence period prior to signing a lease there are items to check to make sure you uncover any potential problems.
For example, if the business is in a shopping center or strip mall, talk to the other business owners to see if they are happy and why or why not. Don’t talk to the employees, talk to the business owner or the General Manager as they will know.
Does the lease include fees for CAMs or Common Area Maintenance fees? If so, check how the fees are applied. Some clauses allow the landlord to exclude the anchor tenant from paying any fees and therefore the fees are levied proportionally on the smaller tenants and this can make it expensive. In some cases the fees are levied in proportion to the existing tenants, that is, if the shopping center has a high vacancy rate, the landlord is getting no rent or CAMs from this vacant space so they spread the actual costs amongst the existing tenants making the CAM costs per month very expensive.
Another item to check is to see if the real estate and building are for sale. If it is sold it will probably sell for a higher price which means property taxes will increase and this higher cost will flow to those that have a signed a lease.
How much leverage do you have to negotiate the lease?
Most buyers of a business where a lease is already in place do not have too much leverage. That is, they are unable to make requests of the landlord to lower the rent or no longer make certain charges as the current lease is signed and in place and the owner is probably meeting the requirements of the lease. If the lease is close to expiring or the current business is not performing well then the landlord should be willing to negotiate; especially if they have vacancies.
What’s the market doing for leases?
If the landlord is willing to negotiate, an essential strategy for the buyer is to fully understand their position. This includes knowing if the current lease space is too big, too small or just right. It also includes knowing if the location is right, what rents are being paid in the immediate area to understand that the rent being paid is competitive. Right now in this economy, a tenant should fight for small and infrequent rent increases as this will help make their business competitive.
Does the buyer need an SBA loan?
An SBA lender typically requires the lease to correspond to the length of the loan. That is, if the buyer of the business wants a 10 year SBA loan, the lender will require a 10 year lease for the buyer. It doesn’t mean the buyer has to sign a full 10 year lease. If the buyer thinks they want to move the business, the lender may be willing to allow the buyer to sign a 3 year lease with one 3 year option plus one 4 year option. This lease may not appeal to the landlord as they would prefer to keep the tenant so they may offer a better lease if the business buyer does a 5 year loan with one 5 year option.
A lease can be a long document filled with legalese. Have an attorney review the lease so they explain the different clauses and you are aware of the responsibility you are taking on when you sign the lease. Having the lease reviewed by an attorney whether it’s the current lease or a new lease.
For more immediate help with buying a business you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.