Can a Landlord Stop You From Selling a Business?
As a small business owner, you’re probably used to steering your ship. But if you’re selling a business with a real estate lease, get ready to add another decision-maker to the transaction: your landlord.
As a general rule, your landlord can’t stop you from selling your business, but they can impose conditions and restrictions in a lease agreement that can definitely throw a wrench into your sale plans.
When the sale of your business includes a commercial lease, it’s important to factor it into your exit planning. And the sooner you involve your landlord in your plans, the more likely you are to avoid delays and obstacles to the sale of the business.
Why Include Your Real Estate Lease in Your Business Sale?
Maybe you’re thinking, “If my landlord gives me a hard time, I’ll just omit the real estate lease from the sale and let the buyer work out a new lease with the landlord.” But selling a business without a real estate lease can affect your business valuation, reduce your pool of potential buyers, and even derail a potential sale.
Your commercial lease is key to your business’s valuation. A lease represents an established location known by customers and proven to generate customer traffic. Buying a business with an existing location is a lot less risky than launching in a new, unproven location. Just as important, having a commercial lease in place provides added assurance that rent cost will be predictable over a period of time.
But the benefit you may reap from selling a business with a commercial lease depends on the terms of the lease outlined in your lease agreement.
Review Your Lease Before Listing Your Business for Sale
It’s important to know the terms of your lease so you can head off any potential problems and negotiate successfully with a buyer and your landlord.
Some of the terms to look for when reviewing your lease include:
- Start date and termination date
- Whether a guarantor is required
- Can the least be assigned?
- Is subletting allowed?
- Options for renewal
- Allowable uses for the space
Prospective buyers will scrutinize your lease just as they will any other business asset. So it’s important that lease terms be as favorable to the tenant as possible.
If your lease is set to expire soon, consider negotiating renewal options with your landlord that offer longer lease terms. You can also negotiate details about lease renewals, such as the percentage increase in rent.
It goes without saying that your ability to negotiate favorable lease terms hinges on your relationship with your landlord. Make sure you abide by the rules of the existing lease and your responsibilities as required.
That said, a business broker and a real estate lawyer can be valuable in reviewing your current lease and negotiating with your landlord, especially when it comes to some of the more significant aspects of the lease.
Length of Lease
Keep in mind that potential buyers are looking for predictability. They want assurance that they’ll be able to stay at the business’s existing location and their rent cost won’t change. Potential buyers will usually want to take over a lease with a tenancy of at least three years remaining because it allows them to predict their rent cost for the foreseeable future. SBA loans can also impose requirements for the length of the business lease included in a sale.
When a lease is month-to-month, the rent cost and even a tenant’s ability to remain in the space is subject to the whim of the landlord. Consider renegotiating your month-to-month lease with your landlord if you’re getting ready to sell your business. A business broker can be especially helpful in negotiating an agreement that potential buyers will consider favorable.
Are You the Guarantor of Your Lease?
Landlords often insist upon a guarantor when signing a commercial lease agreement with a new tenant. A guarantor is another party who is responsible for rent payments if the lessee doesn’t meet their obligations. In many cases, the landlord asks the tenant for a personal guarantee when signing a commercial real estate lease, and the tenant often remains as guarantor even after it has been renewed.
If you are listed as the guarantor on a lease agreement that’s transferred to a new buyer, you’ll be on the hook for rent payments if the new owner defaults. So it’s a good idea to remove yourself from the lease agreement before the sale of the business.
Can You Assign Your Lease?
A lease that can be transferred will include an assignment clause: wording that states that the lease can be transferred to another tenant. In most cases, the assignment clause also includes conditions for the transfer of the lease. For example, the lease might state that assignment of the lease requires the landlord’s approval.
It will be easier to transfer your lease to the buyer of your business if it includes an assignment clause. But keep in mind that most state laws don’t allow landlords to refuse a lease assignment unless they have a very good reason.
Still, there can be additional hurdles to assigning your lease to the buyer of your business.
It’s not unusual for landlords to impose assignment fees, reasoning that the administrative work and the additional risk of taking on a new tenant warrants additional compensation. Assignment fees typically range from $2,000 to $5,000. But some landlords see lease assignments as opportunities to share in the windfall of your business sale and they can ask you for a percentage of the sale price of your business.
A business broker can help you to navigate the situation and negotiate a reasonable fee for your lease assignment. Keep in mind that you’ll probably be required to pay legal fees and a security deposit to assign your lease.
Can You Sublet Your Space?
In a sublease arrangement, you, the tenant, become the landlord. You sublet your space to another tenant and take responsibility for collecting the rent from the new tenant. However, you remain responsible for paying rent to the landlord.
It’s unusual for a commercial real estate lease to allow a tenant to sublease. But if you are able to obtain landlord approval for subletting your real estate, you will continue to be responsible for paying the rent to the landlord as long as your lease is in effect.
When to Reveal Plans to Sell Your Business to Your Landlord
Landlords can hold up the sale of a business in a number of ways. They can take their time running credit checks and approving a new tenant. They can impose conditions for providing landlord’s consent to a lease transfer. Because your landlord holds most of the cards in lease transfer negotiations, you’ll want to discuss your intention to sell your business early.
You don’t necessarily need to have a buyer already when you approach your landlord about the sale of your business. And in most cases, you should not wait until you and the buyer have entered the due diligence stage of the sale process. Landlords can throw a wrench into your sale plans right up until you are in escrow, so you should leave a lot of time to work through any potential problems.
Make sure you understand exactly what your landlord will require of a new tenant. Some landlords will want to thoroughly investigate a new tenant. They’ll ask for financial statements, credit scores, work histories, and more. Knowing your landlord’s requirements upfront can help you prepare a buyer for the lease assignment.
If you are preparing to sell your business with a real estate lease, consider hiring a team of professionals to help navigate the process. Visit the BizBuySell Broker Directory to find a seasoned broker who can guide you through the negotiation process, particularly when engaging with your landlord. Including a broker from the start can simplify your experience and guarantee a seamless business transition, from understanding lease terms to securing favorable agreements.