Among the most challenging, not to mention frustrating issues that small business sellers and their brokers must confront is the need to get the cooperation of the owner of the property, from whom the seller leases the premises, to complete a sale.
“If I had a dollar for every deal that crashed and burned because of landlord problems, I could retire and not have to sell one more company,” is the way one business broker intermediary describes the issue.
And like a lot of problems, dealing with the landowner is something that people tend to put off because they just don’t want to face the issue head on. There are strategies that help to solve these challenges, but it’s necessary for the seller or the broker to be very proactive in addressing potential issues with the landlord or landlady, and to take action to resolve them.
Once you’re ready to confront this challenge, here are some suggestions that might help you to achieve a good outcome.|
1. Meeting with landowner is the first step
Make sure that a meeting with the landlord--to discuss the requirement of a good lease to facilitate sale of the business--is one of the first priorities when getting ready to market a small company. It is important to determine, among other things, whether the property owner will cooperate with the sale by accepting assignment of the lease to the buyer, and--if there is a short term remaining on the current lease--whether a new lease will be provided to the buyer. Yes, it is an extra step. And some people, even business brokers--who should know better--feel that if the business cannot be marketed successfully, then the exercise with the landlord will have been a waste of time. That’s pretty short-term thinking, however. The time wasted by talking to the landowner beforehand, is nothing compared to the time and resources wasted when marketing a company that--after all the work--is revealed to be unsalable because a satisfactory lease cannot be provided to a buyer.
2. When not to talk to the landowner beforehand
Like all rules, there may be exceptions to the “landlord first” idea. One seller, who was planning to retire at the end of the year--sale or no sale, convinced his broker not to work out a new, long-term lease with his landlady before putting the retail business on the market. “I was afraid that if we couldn't’t find a suitable buyer, I’d be responsible for the rent, for years to come,” the seller explained. Another exception to the rule was voiced by a seller who felt she had a “difficult” relationship with her landlord, and did not expect his support when she went to sell. The plan in this case was to try and find a buyer who, in the estimation of the seller, would get along well with the landlord. The strategy actually worked out. The broker brought a prospective buyer to the landlord and explained that: “now you can trade in the old tenant--whom you don’t like that much, for this new tenant, who is stronger financially and will take better care of your property.”
3. How to approach the landlord/lady
One business broker who has had a lot of experience with landowners, says that he regards the landlord meeting to be an important selling situation. “Most people just go talk to the property owner and plead for a new lease, or whatever the seller needs to make the business marketable. But the landlord is going to say ‘What’s in it for me?’ so you have to sell them on the idea that they want a new tenant.”
The broker points out that he introduces a prospective buyer to the landowner in the same professional way that the buyer might go to the bank for a loan to acquire a business. That means don’t just put the landlord and buyer together in an awkward circumstance in which the landowner has all the power. Instead, the buyer is presented with his or her buyer profile, resume, financial statement and a letter from the bank attesting to the buyer’s financial qualifications. “When the landowner sees you mean business--and that you know how to conduct business--it puts everyone at ease, and improves the chances you’ll have a successful outcome to the meeting,” the broker explains.
And pay attention to the little things that can help persuade the landowner to get on your side. One buyer talks about a buyer-introduction meeting in which the landlord complained about the weeds growing in the cracks of the concrete sidewalk in front of his building. The buyer said: “I noticed that too, and when I take over, the first thing I’m going to do is pull those weeds.” Needless to say, things went well from then on.
4. Getting agreement to an assignment
Among the issues that can come up with a landowner in connection with the sale of a business, is obtaining his or her approval to an assignment by the current lessee (the seller) to another lessee (the buyer). Most leases contain a provision that states the lease can become void if the tenant transfers the company--and control of the premises--to another party without first obtaining the landlord’s consent. If the seller holds a long lease for the premises, it makes things easier when offering the business to prospective buyers. An interested buyer will be encouraged to make a deal if he or she can become the new owner with a 10 or 15-year lease. That’s enough time for buyers to get their investment back, and even have the possibility of reselling the business after a few years, if that is something they want to do. There’s a problem, however, if the lessor is not in agreement with the transfer.
One strategy to pursue, if the property owner is reluctant to approve an assignment, is for the seller of the business to remain on the lease, but have the landowner consent to adding the business buyer to the contract. The buyer--the new tenant--can become primarily responsible to pay rent and whatever extra charges are required under the lease, with the seller remaining a responsible party if, for some reason, the buyer fails to meet the obligations. This improves the lessor’s position. He or she now has two people--not one--to look to for performance according to the lease. Not all sellers are pleased with that approach, however. Understandably, they don’t relish the idea of ‘co-signing’ on the lease with the buyer and remaining responsible if the buyer fails to perform in some way. But some sellers are willing to compromise, and stay responsible for awhile, with the written understanding that if the buyer pays all rents and other fees when due, for a specific amount of time--a couple of years seems an appropriate period--the seller will be allowed “off” the lease and will have no more obligation to the landlord, regardless of what happens with the buyer’s subsequent performance on the lease contract.
Another approach involves consulting a real estate lawyer who can advise you whether there is legal precedent arguing in favor of the buyer and seller, in their goal to effect a transfer of the lease. In most cases the seller may be required, legally, to accept a new tenant if it can be shown that the person coming onto the lease has as much financial and business ability as the person who wants to sell the business and terminate his or her responsibility to the lessor. In most contracts that prohibit a tenant from assigning the lease without landlord’s consent, there also is a provision which states: “such consent shall not be unreasonably withheld.” Naturally it does not make for good relations with the landowner to threaten legal action in order to gain some cooperation. But that remedy is available to the parties in a business transaction when dealing with an uncooperative landowner.
5. Getting a long lease
More problematic than getting consent to an assignment from seller to buyer, is the attempt to obtain the landowner’s cooperation in generating a new lease, if the current tenancy will expire in a few years. As noted above, it’s not in the buyer’s interest to take over a lease that terminates in a couple of years or so. That purchaser may still be trying to pay off obligations incurred when buying the business. And he, or she, may not--in just the space of a few years--have earned back, from profits in the business, the initial investment. Besides, a short-term lease negates the possibility of getting an SBA-backed financing commitment (assuming a qualified buyer) to help fund the deal. These, and independent loans as well, usually are structured to be paid off over a seven or ten-year period. The current requirement of SBA backed lenders is usually 10 years.
It is because of these realities that sellers and their brokers often try convincing a property owner to extend a lease that will soon expire, or to write a new lease, with enough time so the business will appeal to prospective buyers.
One strategy suggested, if a new, long-term lease is needed, is to point out to the lessor how the current business climate is impacting the commercial property market. During the expanding economy that we enjoyed up until 2006 and 2007, business success seemed more assured than at present, and commercial property owners’ chief concerns had to do with getting ‘top dollar’ from their tenants. A decline in many sectors of the economy, however, has led to failed businesses, translating to vacant stores in strip malls, shopping centers and other commercial areas. For the commercial property owner, the prime objective may now be to make sure that tenants can continue to operate successfully so they can make their rent payments on time. A lessor who is reluctant to agree to a new lease, might become more cooperative if reminded about some of the current market realities. While landlords instinctively are hesitant to tie up their property for long periods of time--fearing they will be “locked” into receiving a below-market income stream, their agreement to take a strong tenant, even if it is for several years into the future, might be their best strategy in the current market.
Another approach when dealing with a landowner reluctant to extend or write a long-term lease is to propose a series of options provided to the tenant with rent amounts to be determined when the options are exercised. This plan assures the business buyer of having the right to lease the premises for a satisfactory length of time, and allows the lessor to benefit from rent increases every few years. With a provision that ties the boosts in rent to increases in the cost of living--or some other commonly-used index--both lessor and lessee can be comfortable that whatever the rental rate might be in three and five and eight and ten and twelve years from now, will be a “fair” reflection of what is going on in the market for commercial space at the time.
6. Avoid surprises
One broker makes it a habit to learn as much as possible about the landlord’s position in the property. He’s learned--the hard way--what happens when the landlord is actually holding a master-lease and subletting to the business seller. This kind of relationship is commonly found in leases on gas stations. The actual owner of the property may be different from the oil company that is acting as landlord. When does the master lease expire? Is it possible the “landlord” being asked to provide a longer term lease does not have the right to grant it? Another surprise can occur to a business owner who learns that the property is in foreclosure, and that the lease is subordinate to the mortgage. In lay terms that means if the mortgage lender gets the right to the property because the landlord is in default, there is no protection for the tenant. He or she runs the risk of being evicted no matter how good a lease was negotiated.
Guarding against unwelcome news about the landlord’s “position” in the property often requires the help of a real estate attorney, which means extra expense and more work for a seller, or for a buyer who is assuming an existing lease or negotiating a new one. But it probably is worth it.
There are a number of issues to be concerned about when a business transaction is about to take place, and the owner of the property--where the business is conducted--has to be asked to cooperate. It’s always best to deal with these challenges sooner, rather than later.
It is easier to “hope” things will work out the way you want, of course. And that may be why so many sellers, and even brokers, are guilty of putting off the hard work to be done until the last minute. But the best way to assure a positive result is to engage in preparation, perhaps using some of these suggestions.
“Hope” is a common business strategy, but not a very good one. You’re more likely to get the outcome you want by facing up to reality and doing the work required. |
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Peter Siegel, MBA is the President of BizBen.com - a niche small business for sale listing service. Established in 1994 BizBen has thousands of businesses for sale, resources, articles, podcasts, news & tips, stats of businesses sold, and a blog focusing on buying and selling small businesses. Mr. Siegel is a national consultant and author who has written three books on the top of selling and buying small businesses. He can be reached direct at 866-270-6278.
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