If you are a business owner considering selling your business, make sure to get your lease in order before selling. Suppose you are a business broker or real estate agent representing the seller of a business. In that case, you will want to instruct a seller to begin thinking about the future if a lease renewal is coming up.
The largest return you will make on your business will be seen when you sell your business. Keep your landlord in charge of your transaction. The time to negotiate lease terms in your favor is when signing a new lease or renewing an existing one. Once you sign, you are bound by the terms of your lease. As business brokers, it is our job at Capital Business Solutions to best instruct you on how to get ahead of the process.
A bad lease or one with too many restrictions can kill a deal and all future deals. Here are three things you will want to include in your new lease if you are considering selling your business in the near future:
1. Make sure the lease is freely assignable
You want to avoid going to the landlord for approval to sell. The freely assignable commercial lease refers to the situation where the tenant has the right to transfer their lease to another party without landlord approval. Ensure tenant responsibilities are outlined in the lease regarding future assignments. For example, will the incoming tenant need to undergo a credit check or provide proof of funds? Will there be a specific notification period that the current tenant must provide to the landlord? Specify whether the original tenant’s liability under the lease is terminated upon successful assignment or if they remain a guarantor.
2. Build defined renewal options into the lease
A buyer of your business using SBA financing (government-backed loans to purchase a small business) will need a lease agreement with a term or options as long as the loan term. This is typically 10 years. The property’s occupancy must be dedicated to operating businesses, actively generating employment, and providing collateral for the SBA loan. The lease must be subordinate to the SBA mortgage.
3. Do not personally guarantee the lease
The personal guarantee exposes the tenant’s personal assets to potential liability if their business cannot meet rental or other lease obligations. The personal guarantee has a financial liability, as the guarantor is responsible for fulfilling the lease terms. It can affect the guarantor’s credit score and financial standing. It creates a long-term commitment for the guarantor until the lease expires.
The guarantor doesn’t have control over the property. They are financially responsible but may not have a say in managing or maintaining the property. There may be multiple guarantors in commercial settings, especially with multiple tenants in one space. In such cases, each guarantor is jointly and severally liable, meaning any guarantor can be held responsible for the entire obligation.
Things to keep in mind when preparing to discuss with the landlord regarding your new lease:
- The importance of maximizing your lease’s length, flexibility, and assignability.
- Understand how vital the lease is to being able to sell your business. A business sale is generally the last item of due diligence.
- Keep in mind that a buyer of your business should be in contact with the landlord within 24 hours of due diligence acceptance.
And if you are a business broker or real estate agent working on selling a business, don’t forget your commission for negotiating the lease between the buyer and the seller! As a licensed real estate agent representing the buyer or the seller, initiate the conversation with the landlord upfront. Don’t leave money on the table!
About The Author
Roberta Caputo is the President and Managing Broker of Capital Business Solutions (https://capitalbbw.com) – a full-service business brokerage firm connecting sellers of businesses with qualified buyers and acquisition specialists around the world. Roberta is the recipient of the prestigious Deal Maker of the Year for the State of Florida, 18-time recipient of the prestigious Million-Dollar Plus Award, Top Dealmaker Award and is the Author & Materials Expert for Kaplan University’s course on Business Brokerage.
