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How is the Lease Handled When Selling My Business
How is my lease handled when I sell my business?
The lease is an integral part of the sale process. The landlord or lease can be one of the two biggest deal killers when selling your business; the other being your financials. It certainly pays to properly handle the assignment or transfer of your lease.
When should I contact my landlord and let him know I am selling?
The earlier the better. Landlords respect owners/tenants who are up-front and give them advance notice that they are selling. I see many sellers spring the news on the landlord three days before closing, only to have the landlord refuse the transfer of the lease. Contacting the landlord up-front will reduce this concern and will also ensure buyers that the landlord is flexible and agrees with the game plan.
Doesn’t the landlord have to approve the transfer of the lease to the buyer?
No, not necessarily. Be sure to read your lease as your lease should address this issue. The law in most states address assignments. Most state law says that the landlord cannot “unreasonably withhold the assignment of the lease”. What does “unreasonably mean”? That’s the magic $25,000 question, or depending on how expensive your attorneys are.
If landlords want to, they can put up a fight to keep you from transferring your lease. The reasons may vary. It certainly pays to make sure the landlord and you are one the same page before you invest a lot of time and effort in selling your business. It doesn’t pay to litigate this question. It is best to reach an agreement and move forward with you both on the same page.
What is an assignment of the lease?
With an assignment, the lease is transferred to the buyer and you remain on the lease. This can be bad or good. It is good if you are financing a portion of the sale price because this will enable you to take the business back if the buyer defaults. It can be bad because if the buyer defaults on the lease, then you will likely be held liable.
The landlord’s viewpoint is that you initially signed your lease with a specific term, probably 2 to 5 years. If you sell the business, they will keep your name on the lease and add the buyer’s name to the lease. The landlord will typically keep you on as a “guarantor”, which means you are on the hook for the lease but you have few rights left.
Why does the landlord do this? Why not? What else are you going to do?
You don’t have many other options and the landlord has nothing to lose so they nearly always do it.
What is a sublease?
In a sublease, there are actually two leases.
- Lease 1 – Landlord to you (Master lease)
- Lease 2 – You to the buyer (sublease)
This is actually very rare as most landlords will not allow it. Be sure to read your lease carefully as most leases address this issue and do not allow it. Look for a clause titled “Assignment and Sub-Letting”.
The main reason a sub-lease might be used would be when you are financing a portion of the sale price. Because you still have a lease with the landlord, you still have full privileges to access the property. This gives you more control until you are paid in full.
What is the craziest story you have heard involving the transfer of a lease?
This is sad but I have heard this several times. In some leases, the lease actually reads that when the business sells, the landlord gets half of the sale proceeds! Am I kidding?? No…………………
This is rare, but I have actually seen it happen. The clause should read that the landlord should get half of the “leasehold value” or half of the proceeds that are attributable to the value of the lease. However, the landlords I saw wanted half of the sale price of the business. The owner fought the case in court and eventually gave up; after about $30k in attorney fees.
Read your lease or at least have an experienced advisor read it to make sure there aren’t any major issues in the lease.
I have also seen many landlords who simply refused to assign a lease, and for poor reasons, in my opinion. This has happened to me twice in the last two years (Both involving fees on my end in excess of $30,000).
Is there usually a fee to assign the lease?
Sometimes there is, usually from $500 to $1,000. This varies from state to state. The fee is completely reasonable as assigning the lease can involve some work on the landlords part and they do not benefit from it monetarily.
What can I do to ensure that the landlord will assign the lease?
Approach the landlord early in the process and let him/her know of your intentions to sell your business. Ask what is important to the landlord in terms of a new tenant (experience, credit score, financial strength, etc.). when you find a buyer, position the buyer to meet the landlords needs. Help the buyer prepare a resume, financial statement, clean up their credit, and otherwise package themselves for the landlord.
How is the security deposit handled?
The landlord will typically keep your security deposit and the buyer will pay you the money for the deposit. This prevents the landlord from returning your deposit and collecting a deposit from the buyer (two transactions). Always make it easiest for the landlord, remember they are the king, or queen.
Written by Jacob Orosz – Jacob is an author, entrepreneur, and has been buying and selling businesses for over ten years. He is the owner and Principal Broker of Morgan & Westfield, a company based in Southern California and specializing in sale and appraisal of businesses. He is also the owner of www.sellmybusinesscheap.com, a company specializing in providing owners with tools and resources to sell their business without the aid of a broker.