Comments & Replies: 14 Topics: for sale by owner, landlords, selling a business
Discussion Description: While there may be exceptions, I believe the best practice is to let the land owner know about your plans to sell the business - meaning a new tenant for him or her - before you begin marketing the company for sale. There are two schools of thought on this important question. BBN Members weigh in.
Comments & Replies
The landlord needs to contacted well before the close of escrow since it is a contingency and requires their approval of the buyer/tenant for a lease assignment and or new lease.
I usually obtain landlord approval after the Purchase Agreement is signed but before escrow is opened. I usually allow 30 days to obtain landlord approval while other due diligence contingencies are being removed. Not all brokers do it this way but when I open escrow, I have a very high likely hood of it closing.
The landlord consent is a very important item and one hates to get surprises at the last minute. Sometimes getting landlord consent is a breeze and sometimes it is surprising next to impossible. So get this one out of the way early.
As a seller you want anything that can kill your deal, as soon as possible. There is nothing so disappointing; both to a buyer and seller, to work on getting a deal closed only to have the landlord pull the rug out from under you at the last minute. That being said let's talk about best practices.
The minute due diligence is completed, start the lease process. It can take a month for many landlords to approve a buyer. Property managers ask for financial information and up to $1,000 to process the paperwork. You want the lease contingency done so you can sleep nights.
The seller or his business broker should contact the landlord at the beginning of the marketing process to find out if the landlord is going to have any surprises. What kind of surprises? Let me count the ways.
1. Sellers have been known to ask for $50,000, just to let the seller sell the business. Otherwise they will not approve the buyer.
2. They want a hunk of money, up front, to give options to the existing 5 year lease. Buyers want 10 years or more left on the lease.
3. The landlord does not plan on renewing the lease when it comes do and the tenant didn't have a clue.
An ounce of prevention is worth more than a pound of cure.
This is a very strategic area. Many factors might influence the decision, but my preference is to save the lease until last, unless the landlord is already aware that you are selling the business. Even then I like to save the lease. Once you are comfortable that the transaction will take place subject only to the lease, then I would recommending approaching the landlord. I also find that during discovery we will often find areas in the lease that warrant discussion. I do not like to burden the landlord unnecessarily until ready.
However, if there are issues that might effect the ability of the business to sell or the value of your business they should be addressed during or prior to the listing your business for sale.
We are soon closing on a sale that was almost lost because the seller did not consult with the landlord, despite assurances to us (the broker) that she had. "Oh, the landlord is just fine with a new tenant. We're now on a month-to-month, but he's going to keep the same terms and provide a five-year lease with a five-year option." But, the seller would not let us talk directly with the landlord.
This is a retail location, and long-established presence in this area is a major asset of the business.
So, we enter into a contract, contact the landlord to get the new lease drafted and signed, and discover that he has been continuing the month-to-month as a favor to the seller, doesn't want the business to continue at this location, and, if it did, wants to double the rent. The buyer now faces the daunting task of finding a new building, getting it prepared for tenancy moving all the fixtures and equipment, and educating the public about the new location. We reached out to the commercial real estate community, found a new venue just two blocks down the street, negotiated a new (very favorable) rent, and saved the deal. But, the seller took a 25% "haircut" to cover the buyer's costs, down-time, and increased marketing expense.
The lesson to sellers? Have this conversation with your business broker early! If you have a lease with a lot of time left and un-exercised options, check with your broker and business attorney to determine if your lease allows for approval of a sublet or assignment that "cannot be unreasonably withheld." If you are on a month-to-month rental or near the end of a lease, discuss with your broker the pros and cons of entering into a new lease, before listing the business and before discussing the possible sale with the landlord. Then, when your rental situation has been clarified, approach the landlord. Better yet, have your broker be involved in this step to orchestrate a smooth and uneventful transition of tenancy. The last thing we need in a sale is a "surprise," and, dealing with the landlord in advance can avoid a fatal flaw in the transaction.
This Discussion's Contributors
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