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  Home > Discussions > When Should I Tell My Landlord I am Selling My Business?

Blog Post When Should I Tell My Landlord I am Selling My Business?

Initiated By: Peter Siegel, BBN Facilitator at 925-785-3118, 925-785-3118 (Cell) - Log In To Message/Email This Contributor

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.

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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

Contact: Tim Cunha at 650-600-3751, 650-204-1802 (Cell)   Log In To Message/Email This Contributor
Profile: I am an experienced entrepreneur, attorney, & business professor. I & my EvergreenGoldĀ® team offer business owners sound advice & expertise to build business value & achieve profitable sales. Call me today for a FREE business evaluation & SWOT analysis for your business anywhere in the USA.
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Contact: Chuck Post at 619-227-5711, 619-227-5711 (Cell)   Log In To Message/Email This Contributor
Profile: Laundry consulting, due diligence, buyer representation: We preview laundries for you and evaluate them. 28 years laundry industry experience: buying, selling, valuing, retooling, analyzing, consulting services for laundry buyers and entrepreneurs. Contact us today about our services.
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Contact: Jeff Back at 925-736-8200   Log In To Message/Email This Contributor
Profile: J. Back & Associates Restaurant Real Estate was founded in 1988 as the first bay area real estate company to specialize exclusively in restaurant real estate. I am the past President of Charley Browns restaurants and have been involved in the restaurant business for over 35 years.
Key Words: jeff back, j. back & associates - restaurant sales, restaurant, restaurant broker, fast food, hamburger, bar, quick service restaurant, pizza, gastro pub, pub, thai, mexican, hayward, alameda, san ramon, constra costa, san jose, santa clara, oakland, dublin, lafayette
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Contact: Willard Michlin at 805-428-2063   Log In To Message/Email This Contributor
Profile: Willard Michlin is a business broker for 23 years. As a CPA & Certified Fraud Examiner, he works with buyers to get a FREE market valuation as well as full industry & financial due diligence on businesses they are interested in buying. He also offers FREE do-it-yourself due diligence training.
Key Words: willard michlin, due-diligence, due diligence, michlin, kismet
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Chuck Post Laundry Consulting USA 0719
Tim Cunha JD, Business Broker, SF Bay Area 0719
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