Short-Term Leases in Business Sales: Strategies for Success
By Terri Sokoloff, CBI, CNE, GRI/Broker, Specialty Group
Are you a business owner contemplating the sale of your business, but faced with a limited time left on your lease? The real estate component of a business sale is often as crucial as the sale itself, and for those with limited time left on their lease, navigating this scenario requires careful consideration. Let's explore viable options and strategies tailored to business owners looking to sell with short-term leases to protect your business's salability and value.
Review Your Lease
Ensure you have a complete copy of your lease along with any amendments. If your lease is approaching renewal, be aware of any notice clauses. Whether it's a 180-day or 90-day notice requirement, always communicate in writing. Send notices through certified mail and overnight delivery, requesting acknowledgment of the renewal option. Avoid relying on verbal representations from landlords—especially crucial for business owners with short-term leases considering a sale.
Holdover Clauses
If your lease has expired, check for a "Holdover" clause, which could lead to additional rent charges. Landlords often hold significant leverage in these situations. Recently, we encountered a tenant who remained in the space for three additional years, incurring $45,000 in additional rent. Don't rely on the landlord's oversight; be proactive in understanding and addressing holdover clauses.
Why to Avoid Month-to-Month Leases
While month-to-month leases may seem flexible, they pose risks, particularly for business owners looking to sell. Buyers may bypass business owners and negotiate directly with landlords, potentially leaving you without a space. Consider negotiating a two-year lease or a longer-term lease with an exit clause to mitigate this. However, be prepared to compensate the landlord for the flexibility provided in the form of additional rent payments, typically ranging from three months onwards.
Negotiate a Shorter Term or Exit Clause
Whether you're considering a short-term or long-term lease, explore negotiations with your landlord. Suggest a shorter lease period, say two years, or go for a 5–10-year lease with a well-defined exit clause. An exit clause, often referred to as an escape clause, allows one party to terminate the agreement. Typically, landlords will require additional rent payments as compensation for providing this flexibility.
Professional Guidance
Engage with a business broker experienced in handling sales with short-term leases. Their expertise can prove invaluable in navigating negotiations, understanding lease terms, and strategizing to maintain the value of your business. Licensed Brokers can help bridge the gap between sellers and buyers, ensuring a smoother transition amid lease-related challenges.
Emphasize Lease Importance
Highlight the pivotal role the lease plays in the overall sale of the business. Educate potential buyers on how a favorable lease contributes to the business's stability and growth potential. Illustrate how a secure lease can be an asset, attracting buyers and positively influencing the business's overall market value. Emphasizing the significance of a favorable lease will help buyers understand the long-term benefits of the investment.
Navigating a business sale with a short-term lease requires proactive and strategic planning. By understanding the terms of your lease, addressing holdover clauses, negotiating favorable terms with your landlord, seeking professional guidance, and emphasizing the importance of a secure lease, you can protect the salability and value of your business in the face of lease-related challenges. Visit the BizBuySell Broker Directory to find a broker with experience selling business with short-term leases to help you navigate the sale of your business.
By Terri Sokoloff, CBI, CNE, GRI/Broker, Specialty Group