3 red flags: Be smart with your lease if you may sell your business

One of our most popular guest expert articles is “Ready to Sign Your Lease, But Your Landlord Has Work To Do?” by Cliff Ennico. Readers check it out every day.

Cliff offers some extremely good advice for business owners as they enter into a new phase of an existing business or the establishment of a new venture. However, for some business owners, there are other, more forward-looking, considerations.

If you think that you may be putting your business up for sale within the period of your new lease, you need to take a wider view of the lease details and look at it from the perspective of a potential buyer. Here are some things to consider:

Term. If you plan to sell, how likely is it that your buyer will want to keep your operations in all their current locations? For example, if a competitor or the owner of a related industry were to buy your business, that person might want to consolidate operations and close one or more of your current locations. An iron-clad, long-term lease would tend to put off that buyer, or at least exert downward pressure on the sale price.

Transferability. Can your new lease be transferred to a new owner, and if it can, are there any other stumbling blocks related to this issue? For example, if you’ve been in the same location for a long time and have merely “renewed” your lease under its original terms, there may be some “baggage” in the lease that you’ll want to drop. For example, it’s not uncommon for new renters to be required to “personally guarantee” the lease. That could make you personally responsible for the lease after you sell the business.

In a similar way, there may be language that gives the building landlord the right to approve the new owner or renegotiate the terms of the lease when it is transferred. These situations can cause significant problems during the sale that result in a price reduction, delay, or both.

Responsibilities. If you have a long-term relationship with your landlord, you may have developed some casual understandings about “who does what” with regards to common expenses associated with the property. These don’t really “transfer” when you sell. Buyers will want responsibilities to be clearly defined, otherwise they are, in a sense, buying a “pig in a poke” and could find themselves responsible for unexpected expenses.

When it’s time to renegotiate your lease, don’t get lazy and just pencil in a new rent and term. Look at it from the perspective of a new buyer and also from your position, should you decide to sell. If you have any inkling that you might put your business on the market, talk to an expert, such as a broker or lawyer familiar with business sales in your area or industry. A bad lease can weaken your position or even scuttle a sale.