Leases & Landlords: Crucial Tips For Business Buyers & Sellers
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Instead, what this typically means, is that the business owner/seller has a commercial lease agreement with the person who owns the property, the landlord. When the business ultimately sells, the business owner/seller will create a lease assignment which transfers their interest in the lease to the buyer.
As interest in the lease is transferred, the buyer assumes the responsibilities and obligations designated in the lease that were otherwise attached to the seller's initial agreement with the landlord.
When purchasing a small business, the business buyer is purchasing all tangible and intangible assets. The commercial building where the business operates out of does not function the same way and is merely transferred by way of a lease.
If the new business owner wants to move locations and no longer conduct business where the seller had the business located, they must wait until the obligations of the lease have expired, giving more weight to the consideration of the location and term of the lease in place.
Buying a business and having a preconceived plan to move locations from the beginning is also a tricky issue because the business is already established in its current location and customers are already used to conducting business there.
When you sell your business, it is crucial to construct the commercial lease agreement in a way that the buyer takes over all responsibility of the lease and dismisses you from any further responsibility in the future.
Contact Your Landlord Immediately
You should inform your landlord immediately upon making the decision to sell your business. You should do this right away and not wait until you have a buyer lined up because the landlord has stake in this situation.
The lease, which is a legal binding contract, is between the landlord and the business owner, meaning you will need the landlord's approval in order to establish a commercial lease assignment with the buyer of your business.
Needing your landlord's approval and blessing to ultimately transfer a lease, is reason enough to develop and maintain a healthy relationship with your landlord from the minute you start or buy your business.
As a tenant, having a negative and unhealthy relationship with your landlord is not a constructive way to plan for the future, and one day plan for the future of your business beyond the term of your ownership.
Additionally, it is not worth jeopardizing the future sale of your business, where you risk losing buyers and potential buyers because you don't have the support or the cooperation of your landlord.
If the relationship with your landlord was never positive, then you risk litigation and legal proceedings in order to prevent the landlord from standing in the way of the sale of your business.
While the landlord would ultimately need a good reason to legally prevent you from selling your business, few business owners can afford the time, money, and headache of having to fight in order to complete their business's sale.
Timing Of The Assignment
Nothing kills the sale of a small business like time. Time can be a real factor to consider when presenting your landlord with a commercial lease agreement, because many lease agreements include a clause that specifies that the landlord has 30 to 60 days to approve a lease agreement.
Unfortunately, with this being the case, it would be ideal to get your landlord to approve the lease agreement in as few as 15 days, as many buyers will have a difficult time remaining patient beyond the first couple of weeks.
Option: Subleasing To The Business Buyer
A sublease is different from a commercial lease assignment. Rather than creating a new lease and relinquishing all responsibility to the business buyer, a business owner/seller would create a separate lease for the buyer of their business that attaches onto their current lease.
This means that the owner/seller would retain the responsibilities and obligations that they have in their current lease, and keep that relationship with the landlord.
There are multiple reasons why a business owner may sublease their business rather than creating a commercial lease assignment. A business owner may do this if they are only selling part of their business, or if they are offering seller financing to the business buyer and would use their control over the lease and real estate as leverage until they receive the full amount owed for the purchase of their business.
If this is the case, then the owner would simply the buyer give access to the property until payment in-full is received and then terminate the sublease and compose a commercial lease assignment once all outstanding debts are taken care of.
While subleasing can be helpful in certain situations, they must first be approved by the landlord with the understanding that the seller will continue to have controlling legal obligations to the landlord for the duration of the sublease. Additionally, it must be determined that there are no clauses in the original lease that forbid a sublease of any kind.
Read Your Original Lease With An Attorney
Thoroughly examining the original lease with an attorney should be one of the first things you do after informing your landlord of your intentions to sell. You must understand your contract and what the terms of your contract mean for you, your landlord, and the buyer of your business.
One of the biggest things you should look for while examining your lease is how much you will have to pay at the time of sale. Some landlords even sneak clauses into the lease agreement that will entitle them to a percentage of the sales price when the business is sold.
Finding out about this for the first time while selling your business would have a drastic impact on how much you earn from the sale, and should be uncovered and eliminated before initially creating the lease agreement in the beginning.
A helpful alternative to this clause in your lease agreement would ensure that the landlord gets a percentage of the leasehold value, rather than a percentage of the overall selling price of the business.
Plan For A New Lease Altogether
Commercial lease assignments, as mentioned before, are commonly put in place when there - is a lengthy term remaining on the lease at the time of the sale. Because a business's location and customer-base contribute to the value and therefore the price of the business, it would be nearly impossible to rationalize the purchase of a business that has a one-year lease and an uncooperative landlord.
One way around this issue and to make the investment worth it for anyone is to help the buyer of your business negotiate and create a new lease with the landlord altogether. As a business buyer, there is a tremendous level of comfort in knowing that the business you are purchasing found success in their current location, and that your business can remain there for years to come. Additionally, in order to qualify for most SBA loans, the business buyer will need to secure a 10 year lease.
If, at the end of the day, the landlord decides to forbid the creation of a new lease, then the final option would be to ask the landlord to provide the business buyer with the option to simply renew the lease at the end of the current contract. Failing to secure the option to renew or renegotiate, and create a commercial lease assignment at the sale of the business will ultimately make the sale of your business next to impossible.
Approving The Purchaser
When you find a buyer for your business, you are going to be conducting a background and financial check on them before finalizing the purchase. These background checks will be even more important when it comes time to sell your business that includes a lease.
While it is going to be your responsibility to carefully vet your business buyer, to ensure that they will make good on their payments, it is equally important for this background check to occur for the landlord. Any time there is even a chance for a lease to be transferred to a new business owner, the landlord is going to want to conduct their own investigate inquiry into the buyer, using the same critical information as the owner/seller.
Working with the landlord on this will improve your odds of gaining a commercial lease agreement once they know that there is no risk of the buyer going bankrupt a few months down the road. You can aid them in this process by finding a buyer that has experience working in the industry of the business you are trying to sell them. These factors will make me landlord feel comfortable and confident approving the sale of your business.