Landlords have more control over your business than you think. But can they kill the sale of your business?
Wendy did everything she was coached to do. She was approaching retirement, and after 25 years, she was ready to sell her business to fund the next phase in her life. Her books were clean with properly noted expenses, she had 5 loyal employees, and a good book of business.
However, she missed one detail that caused her buyer to walk and her deal was dead.
What happened? Her landlord killed the deal.
“I see it happen all the time,” says Bianca Evans, Business Broker with Transworld advisors. “The signed lease needs to have very specific language and time left to be compatible with a business sale.”
The reason can be summed up in one word: “stability.” The buyer wants the peace of mind to know that they will be in the same location with the same known costs for some time. The bank wants to know that the business has at least 10 years of life left on the lease so that the loan they made is secure. The landlord wants to make sure the space doesn’t go empty.
All three parties in addition to the seller have a vested interest in the lease life and terms.
As part of the services a business broker, like Evans, will review your lease. . Although she is careful not to give legal advice, she does point out major components of a lease and what it may mean to your opportunity to sell the company.
Make sure the lease is in good standing
You will need your landlord to transfer the lease to the next party. If you owe them money, there is a slim chance they will help you. So in effect then the landlord can kill the sale of the business.
Have at least 10 years left on the lease, or confirmation that your landlord will provide additional options
This is a Small Business Administration (SBA) requirement if your buyer will be getting an SBA loan. It’s ok if you have “options to renew” totaling at least 10 years. The reason is because of the 10-year loan amortization. If those options aren’t already in place, it’s worthwhile to discuss this request with your landlord before you list your business for sale.
Transfer clauses
You will want an option in place to transfer the lease. Some lease agreements cause you to be in default if you sell the business without notifying them first. This can get more complicated if you took tenant improvements that were cost amortized through the life of the lease. In those cases, even if you can transfer the lease, there is a good chance there is a cost involved.
Personal guarantee
Most small business leases require a personal guarantee. This means that if the business defaults, the landlord can pursue your personal estate. Even if you successfully sell and transfer the lease, in almost all cases you are still listed as one of the personal guarantors for the balance of the lease. Landlords rarely waive this requirement because there is little incentive for them to do so.
Landlord approval
If your intention is to transfer the lease, and the language allows, you still need the approval of the landlord. They will vet your new buyer to determine their credit risk. The buyer will have to provide personal financial statements and have their credit pulled.
Evan’s mantra is “No surprises.” Before she lists a business, the lease is part of the overall package when she examines the business.“We don’t want to have a buyer in hand with expectations, and a problem develops with the lease in the 11th hour. If there is a sticking point with the lease, we need to find out early, develop a game plan, and potentially renegotiate with the landlord.”
That can be easier said than done. After the ink dries, the landlord will be hesitant to change the terms. However, it’s not impossible. Seasoned landlords have their clients buy and sell businesses frequently, so they have been through this before. Evans’ advice is to start the process early. Large landlord property groups have layers of bureaucracy, legal departments, and other red tape that can get in the way of a seller’s important plans.
“Signing a lease is complicated and implications can be felt years in advance. This is why it is so critical to spend a few dollars and get an attorney to review. Leave yourself the option of selling your business,” Evans says.
About Bianca Evans
Bianca Evans is an experienced business broker based in Jacksonville, Florida. She is a top producer in her field. She has made over 160 transactions since 2006 which makes her among the most seasoned in the area. She is a Certified Business Intermediary (CBI), a Certified M&A Professional (CM & AP), a Board Certified Intermediary (BCI), and has her B.S. degree from the University of Florida.
Other notable accolades and achievements:
•The Million Dollar Plus Award 2008, through 2020
•Dealmaker Award top 3% in the state for completed deals 2018
-Most dollars sold in North Florida in 2018, 2019
•Sold an array of industries including manufacturing, wholesale/distribution, service, retail, restaurants, professional offices, and more.
•25 years of Sales Experience
She maintains her professional networks by participating in a variety of associations including the International Business Brokers Association (IBBA) and the Business Brokers of Florida (BBF).
One interesting fact about Bianca is that she used to be a business owner herself! She has been on both sides of the transaction when she purchased and later sold that same business. She finds that perspective invaluable when relating to her clients and balancing the many details and emotions.
She is licensed in Georgia and Florida and speaks fluent German.
To reach Bianca, email: [email protected] or visit her website https://www.myfloridabusinessbroker.com/