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When And How Should I Tell My Landlord I am Selling My Business?

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Comments & Replies: 12     Views: 10067     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director

Topics: Selling A Business     Tags: for sale by owner, landlords, selling a business

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 ďsurprisesĒ 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 letís 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 didnít have a clue.

An ounce of prevention is worth more than a pound of cure.

Any potential buyer should be approved with the landlord prior to moving forward Ė if buyer is not approved you donít have a sale!

I recommend you notify the landlord as soon as you decide to sell your business. Itís far better to find out in advance what the landlord has in mind then to have surprises later. For example. landlord might want to write a new lease and raise rent or might not be willing to write a new lease or extend the terms, but only to assign the lease to the buyer. Whatever the case might be it is better to know in advance so you or your buyer do not have other expectations.

Contributor: Business Broker, SF Bay Area

I usually recommend that you get through the majority of the Due Diligence and when buyer is comfortable with Due Diligence then you contact the landlord and introduce the Buyer. Escrow is generally not opened until Landlord has approved the Buyer and the terms of the lease have been agree to.

If your landlord is difficult to get hold of or takes a long time to respond then you may wish to contact him as soon as you can. Once you have made the initial contact with the landlord and you and the Buyer have a good feeling that there will be no issues with the lease, you can go ahead and open Escrow. But of course you will wait to have a signed lease between Buyer and Landlord before actually closing Escrow.

In case landlord has made special accommodations for you, e.g. reduction in rent, or special privileges, that are not in the lease, then it is important to speak with the landlord early to ensure that those accommodations will continue for the Buyer. Otherwise this could impact the bottom line number and Buyer will want to renegotiate the deal.

Contributor: Business Broker - Preschool Specialist

I would definitely not put off the contact with the landlord until the last moment. It can take months for landlords to respond to inquiries about leases, and you may not get the response you thought you were going to get. The ideal situation is to know ahead of time what kind of lease terms the buyer of your business is going to receive from your landlord.

To work hard on putting a deal together with someone, only to find out at the last moment that the lease terms are not going to be favorable, this can absolutely stop the sale of your business in its tracks.

If you are certain about the landlord, you know what the terms will be, then it may not be essential to contact him/her to set up the new lease immediately, but just using common sense; count on things taking longer than you expected, and act accordingly. I think the key point would be, if you have any uncertainty about the landlord you make your contact right away.

Contributor: Business Appraisals, Valuations Advisor

You can never know how a landlord will react, and the closer you get to escrow the more power he has. When I was a business broker I always told my clients to have a lease with a total of 10 years including options in hand before we even find a buyer. The SBA will require 10 years. Having negotiated the length and cost of the lease takes part of the pressure away from a lease transfer.

My feeling is that you donít want to get all the way through due diligence and then find out the landlord will not cooperate. Have your attorney look at the lease to determine if there are any problems and talk to the landlord as soon as possible.

Replies To This Comment
Dealing with the landlord early is essential; you don't need "surprises" after there's a contract in place. And, an early conversation with the landlord will reveal if the prospective seller needs to seek legal representation to assert rights under the lease, needs to negotiate new lease and assignment terms, or needs to find a new location. I recently handled a deal where, despite all the reassurances by the seller that the landlord was perfectly willing to extend the same lease terms to a new tenant, after we had a contract, the landlord would continue the tenancy only at a three-fold increase The seller had never really discussed it with the landlord. Before we could close the deal, we had to find a nearby place to relocate to and the seller took a big cut in the price.What a difference it would have made if the seller had let us negotiate a 5-year lease with a 5-year option in advance of the sale, with the current landlord or a new one.

Contributor: Richard Jamgocyan - Business Broker - Los Angeles County

Most of the time I would recommend and have seen the benefit to let the landlord know about the sell of your business way in advance ones you know you will be selling your business, before you even start advertising let your landlord know about it so when you have a buyer you can tell them that the landlord knows about it and it is no problem, see if you wait until the last minute like ones you get a buyer and what will happened when the landlord does not agree with certain things or won't let you out of the lease, all your effort will go in to the wind. So best is let your landlord know way in advance.

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.

Contributor: Transactional Attorney

In my experience it is generally best to discuss the potential sale of a business with your landlord earlier rather than later. Discussing the sale up front allows you to identify any potential hurdles, ensure that the landlord has sufficient time to review a new tenant's application, and allows the buyer some room to negotiate without the pressure of an escrow that is supposed to close shortly.

By waiting, you are putting the landlord in a position of strength with the buyer. I have seen transactions where the buyer was faced with a "take it or leave it" offer from a landlord who felt they had the upper hand, and waiting can very possibly derail your deal.

Also, while many landlords will only allow new tenants to take over on the same terms as the existing lease, a transfer may be an opportunity to negotiate favorable lease provisions for the new tenant--particularly if the lease is expiring in the near future.

Some leases spell out very specific provisions and criteria to allow a transfer, while others have more general transfer terms. Once you are comfortable that you understand exactly what your rights and obligations are under the lease, I would advise speaking with your landlord as soon as possible.

Replies To This Comment
Following up on Mark's comments, based on my experience practicing law in New Jersey and selling businesses in California, far too many business owners are oblivious to the terms, conditions, obligations, and liabilities of their lease. But, often, especially in retail, the location--the business premises--are the most important value factor of the business. Especially when contemplating or planning the sale of the business, the owner should have their lawyer review the lease and be prepared to provide the business broker with a brief synopsis of all the issues that will arise in transferring the lease to a new owner upon a sale of the business.

  Helpful Resources To Assist In Selling And Buying California Businesses
Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Shalonda Chappel-Pilgram: Escrow Services - Southern CA

Escrow services to brokers & agents, owner/sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services.

Brad Steinberg, Broker - Laundromat Specialists

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Helen Yoo: Escrow & Bulk Sale Services - Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

Joe Sandbank, Esq. - Legal Services

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

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