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


Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

Contributor: CPA, Due Diligence Services
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 let s 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 didn t have a clue.

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

We are soon closing on a sale that was almost lost because the seller did not consult with the landlord, despite assurances to us (the broker) that she had. "Oh, the landlord is just fine with a new tenant. We're now on a month-to-month, but he's going to keep the same terms and provide a five-year lease with a five-year option." But, the seller would not let us talk directly with the landlord.

This is a retail location, and long-established presence in this area is a major asset of the business.

So, we enter into a contract, contact the landlord to get the new lease drafted and signed, and discover that he has been continuing the month-to-month as a favor to the seller, doesn't want the business to continue at this location, and, if it did, wants to double the rent. The buyer now faces the daunting task of finding a new building, getting it prepared for tenancy moving all the fixtures and equipment, and educating the public about the new location. We reached out to the commercial real estate community, found a new venue just two blocks down the street, negotiated a new (very favorable) rent, and saved the deal. But, the seller took a 25% "haircut" to cover the buyer's costs, down-time, and increased marketing expense.

The lesson to sellers? Have this conversation with your business broker early! If you have a lease with a lot of time left and un-exercised options, check with your broker and business attorney to determine if your lease allows for approval of a sublet or assignment that "cannot be unreasonably withheld." If you are on a month-to-month rental or near the end of a lease, discuss with your broker the pros and cons of entering into a new lease, before listing the business and before discussing the possible sale with the landlord. Then, when your rental situation has been clarified, approach the landlord. Better yet, have your broker be involved in this step to orchestrate a smooth and uneventful transition of tenancy. The last thing we need in a sale is a "surprise," and, dealing with the landlord in advance can avoid a fatal flaw in the transaction.

If the Buyer signs off on a contingency removal form that they have "reviewed and approved the books and records." that would be an ideal time. Most deals crater during the financial part of things, so that being the major hurdle usually, you could approach the landlord once the Buyer signed off in writing they were good to go.

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.

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: 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 don t 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.

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 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.

I recommend you notify the landlord as soon as you decide to sell your business. It s 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.

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


BizBen Blog Contributer Buying a Business


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