If you plan on selling your business now or in the future, it’s important to read your lease and share it with a business broker before you do anything else.
Selling your business can be exciting, but if you’re paying rent for your company’s space, you need to know what’s in your lease and discuss your plan to sell early with your landlord.
Your lease is an important part of the sale, so you shouldn’t wait until later in the process to get your landlord on board. Most states grant that landlords can’t unreasonably withhold consent for assignment, but that doesn’t mean they won’t contest the transfer.
Here are a few important steps to take when transferring a commercial real estate lease during a business sale.
Contact Your Landlord
It bears repeating that you should notify your landlord early on if you plan to sell your business. You want them to cooperate with you and the potential new tenant. Notifying them early in the process can keep the two of you on good footing and set your buyer up to have a good relationship as well.
In some cases, the landlord doesn’t have to approve the lease transfer, but when they do, it can be a long and painful process. Read through your lease carefully and have your business broker or attorney double-check it to understand whether you have the right to assign the lease to your buyer. Even if you have that right, the landlord still could object.
In 60% of Sunbelt’s deals the buyer gets a new lease from the landlord. This happens mostly in deals where there is an SBA loan which requires at least 10 years on the lease term.
Assign the Lease
When the lease is transferred to the buyer as an assignment, your name remains on it. This helps if the buyer paid for your business through a seller financing arrangement. If the buyer defaults, having your name on the lease simplifies the process of retaking the business.
That said, as the grantor on the lease, it could be bad for you if the buyer fails to keep up with rent payments — you’ll be responsible for paying that rent for whatever term remains on the lease.
Additionally, the landlord could ask for an assignment fee. If they’ve done some legwork to facilitate the transfer, this fee (usually a few hundred to a couple thousand dollars) might be warranted.
Sublet if Possible
When you review your lease, pay particular attention to the section titled “Assignment and Subletting.” It will let you know if you have the right to sublet to your buyer.
Most leases don’t allow subletting, but if yours does, it can benefit you if you financed all or part of the purchase of your business.
By subletting — an arrangement in which you still have a lease with the property owner but create another lease (a sublease) with the buyer — you retain access to the property and can keep some control until your loan to the buyer is repaid.
Provide a Long-Term Lease
To help cut expenses, business owners often let their leases expire and pay rent month-to-month. Alternatively, they might sell their businesses with just a few months left on the lease.
However, if you’re selling your business, having a longer-term lease at previous market rates could make it more attractive to buyers. According to LinkedIn, the 10-year lease-matching requirement for select U.S. Small Business Administration loans also could add value to your business.
Along with these options, our convenient business valuation calculator can also give you a sense of how much your business is worth quickly and easily.
A Competent Business Broker Can Review Your Lease
Selling your business requires you to keep an eye on many things at once. Contact Sunbelt Business Brokers today to have a qualified professional look over your lease and help you discuss terms with your landlord early. That way, you can avoid sticking points later in the deal.