The typical business owner doesn’t worry about a real estate lease except when it is created or when it is time to renew. In some cases the renewal process consists of a one-page addendum signed by both parties agreeing to a new monthly rent and an extended term with other provisions carrying over from the existing lease. This quick renewal can have unintended consequences during the late stage of the business sale transaction.
The biggest challenge is the length of time remaining on the lease when the transaction closes.
It can be a benefit (long term lease of strategically located space) or a liability
Buyers will include a satisfactory review of all real estate leases as part of the due diligence process. [quotesright]Below is a partial list of issues with a real estate lease/[quotesright] that can impact a deal:
In an extreme example, a client had a provision in his lease stating that in order to transfer the lease, the assuming party’s (buyer’s) net worth had to be equal to or greater than the releasing party’s (seller’s). A logical provision from the landlord’s perspective, he wanted a new tenant at least as financially stable as the current tenant. But dig deeper. This provision was written twenty years earlier when the seller/tenant had a very low net worth. Now, 20 years later, the seller’s net worth includes two houses paid in full, a business he is being paid nearly five million dollars for, plus cash, savings, stocks, etc.
This clause created a nearly impossible hurdle.
The moral is
before you renew your lease again, review it from a buyer’s perspective
KNOW what is in your lease before putting the company on the market.
Coming next month: “Enhance the Presentation and Curb Appeal”
- by Greg DeSimone - Beacon Equity Advisors, Inc.