After 25 years San Diego selling businesses, I can say that I have looked at tens of thousands of businesses for sale advertisements. And quite often, I see ads that read “Below Market Lease” or “Terrific Location Next to Theatre” or other features relating to the business location or lease. The lease may be an asset of the business under your ownership, but will that asset transfer to the new owner, and will it make your business more valuable? Here are some things you may wish to consider when determining how much your business is worth, and the transfer of lease asset value. There are a number of factors how your lease can impact selling your business.
We occasionally see a simple lease, maybe just a couple of pages, between a tenant and a local landlord. But these are very rare and certainly not the norm. More often than not, we are dealing with corporations that own dozens or hundreds, or even thousands of shopping centers or industrial buildings. And even if the landlord is Joe the engineer at Qualcomm, Joe has hired a property manager or leasing agent to manage everything related to your lease. And the one constant with professional managers and large property owners, is that they don’t appreciate that you are selling your lease as an asset of the business. It’s their investment, and they are going to look for every possible way to “participate” in your business sale. This might mean fighting the assignment of the lease, renegotiating the terms, asking you to sign a new lease with different terms, rejecting your ability to assume the options to renew, or charging you a fee to consider an assignment of lease.
First, hopefully your lease contains a clause that an assignment of the lease “cannot reasonably be withheld.” This might be assumed by many but having it in agreement helps. And watch for other language that states that any change of ownership results in the termination or renegotiation of the lease.
Second, if the landlord knows your lease is under current market rents, they are going to try everything possible to bring it back to market rents, or as close as they can. Landlords often fall back on provisions in the lease like the new owner’s qualifications or operating experience to justify a change in the terms.
Third, if the business has been in a location for a long time, there is a good chance that the property ownership may have changed over the years. Or that the management company is using an all-new lease form that they want all their new tenants to sign for consistency between their properties.
Fourth, if landlords find themselves in a position where they are unsure of the new tenant, or no longer like the terms of the original lease, they may say that the options to renew are not transferable. In fact, many new leases have provisions that specifically state that the options are only provided to the existing tenant, and specifically not transferable.
Fifth, most landlords charge a new tenant application fee and or an assignment of lease fee. This can range from a few hundred dollars to five thousand dollars to write a new lease. So, look for this clause in your existing lease.
Obviously, sellers need to review their lease to see what is specifically allowed, specifically disallowed, and what charges or fees might be involved, before putting their business on the market. And be aware that while you might be paying $5,000 a month under the market value, the buyer may not get that same deal. And if your lease contains a relocation clause, allowing the owner to relocate you to a different but similar size space in their center, that could potentially be a huge issue for location dependent businesses or businesses with lots of improvements or inventory to move. If the new owner is faced with paying $60k per year in additional rent, or being forced to move to an inferior location, that didn’t add value to your business at all, that might have killed it.
Looking to sell a San Diego business? Vanguard Resource Group can help you determine the fair value of a leased asset. Contact us for expert guidance with San Diego business valuations.