By Anthony Cullins
No one wants to be blindsided by real estate issues during a business transfer.
Many business owners use leased real estate to house their company. There are benefits to having someone else deal with the maintenance, general upkeep, and curb appeal. Make sure to do your due diligence if you ever what to sell your company, because leased real estate adds homework to a business transfer.
Before ever putting your business on the market, you need to be familiar with the legal language in your lease.
Most facility leases will address the issue of assignability of the lease. Many will allow the lease to be assigned but usually “only with written permission from the landlord.” You also hope to see the phrase that the landlord’s permission “shall not be unreasonably withheld.“ In addition, there may be provisions explaining that the landlord needs to approve a new tenant. There also may be notification time frames stated, as well as the landlord’s required response time. It is also possible there will be transfer fees associated with obtaining the landlord’s approval.
Typically, if a lease is assigned to a new tenant, the original tenant remains liable in the event of a default by the assignee. The implications are if the buyer struggles after acquiring your business and stops making payments on the lease, the landlord can look to collect lease payments from you for the remainder of the lease commitment. In the final definitive documents of the business sale, you will likely have indemnity clauses in your favor from the buyer. Though you have the legal right to do so, there is no assurance that funds will exist to reimburse you if the buyer defaults on an assigned lease. A business broker can help to structure your transfer to cover these types of contingencies, so make sure to provide them with all the facts.
There is another complicating factor.
If the buyers’ financing is based on an SBA loan, the SBA will require the lease term, including tenant options, to match the loan term. This is usually either seven (7) or ten (10) years. That can be favorable for landlords because they can use that fact to achieve longer-term lease commitments. However, the option has to be the tenant’s, so that creates an offsetting factor. The real difficulty arises if the landlord has other plans for the leased space and is not willing to negotiate a lease term to match the loan term. Also, some landlords will use that prerequisite as leverage to try and negotiate unreasonable lease terms.
So to recap, make sure you go through your lease thoroughly. Speak with a lawyer to clarify any language that might be confusing, and talk to your landlord in plenty of time so no surprises come to the table on your way to closing. Using the right M&A company to broker your deal will not only help to get these issues in the light of day early, but they can also structure a deal to make sure you are covered in many if not all eventualities without heartache.