FAQs About Facility Leases and Owned Real Estate
- When I sell my business, will the buyer just take over the lease?
- I own my facility. Should I expect the business buyer to buy the real estate from me?
- When selling my business, does the total business asking price include the real estate value?
- I own the facility but I’d like to keep it and rent it out to the buyer of my business. Can that be accomplished?
When I sell my business, will the buyer just take over the lease?
Transferring a lease to a buyer has the potential to be a huge obstacle, and one that is not necessarily under the seller’s control. The landlord has a lot of leverage in lease negotiations with a buyer of the business.
If the buyer is using a SBA loan to finance the acquisition, the lease term (with buyer options) must match the loan term, usually ten years. For example, the SBA lender may require the buyer to have a 5-year lease with an option that the buyer can exercise to extend the lease another 5 years.
For a variety of reasons, seldom does the buyer just take over an existing lease. Most lease agreements contain language outlining the terms of an assignment of the lease and those terms typically favor the landlord, thus increasing his leverage. In almost all instances, the landlord must approve the new tenant. Hopefully, the lease reads that the “landlord’s permission shall not be unreasonably withheld.” But that is subject to interpretation and provides plenty of leeway for a landlord to be a tough negotiator.
Business sellers should understand that most leases require the original tenant to remain liable for the terms of the lease if the new tenant defaults. That’s a provision that most landlords will not negotiate. Depending on the attitude of the landlord, lease negotiations can be resolved in several different ways. Please read Difficulties Transferring the Facility Lease from the How to Plan and Sell a Business website for further explanation.
I own my facility. Should I expect the business buyer to buy the real estate from me?
If possible, it’s best to allow the buyer to make the lease or buy decision. Ideally, we have an asking price for the business, a separate asking price for the real estate, and we also offer the facility under lease terms if that’s what the buyer prefers. That kind of flexibility can be helpful in terms of getting a transaction closed with a particular buyer. Some buyers have strong feelings that they want to buy the real estate while others may have a strong mindset about their desire to only lease the facility.
On the other hand, some sellers also have strong feelings about their desire to sell or lease the real estate. We can accommodate the seller’s mindset, but we may lose some buyers based on their opposite viewpoint about the lease vs. buy decision.
Please read Real Estate Transfer Issues to learn a lot more about some of the implications, obstacles and recommendations when selling real estate along with the business.
When selling my business, does the total business asking price include the real estate value?
No, the business is priced separately from the real estate. The cost of occupancy is included (or imputed) as an expense before the value of the business is determined.
At closing, separate contracts will be signed: one for the acquisition of the business; the other for the lease or purchase of the real estate.
I own the facility but I’d like to keep it and rent it out to the buyer of my business. Can that be accomplished?
Yes, that desire can be accommodated. However, as indicated in a previous response, the ideal approach is to be flexible and allow the buyer to make the lease or buy decision. When a seller insists on continuing to own the real estate and leasing it to the buyer, we may lose some legitimately-interested buyers.
*********************************************************************************
If you have a question, send an email to jim@bizowneradvisors.com.
*********************************************************************************
FAQs about Business Exit Planning Considerations
FAQs about Listing Agreements and Fees
FAQs about Confidentiality, Advertising and Disclosures
FAQs about the Business Sale Process
FAQs about Assets Included in a Typical Business Sale
FAQs about Negotiating the Price Terms and Structure of Offers
Jim Stauder, CPA (inactive) is the President of Biz Owner Advisors, LLC. He has been providing business brokerage services in the St. Louis Metropolitan area, including Metro East, since 2001.
