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Can Your Landlord Kill the Deal to Sell Your Business?


06/01/2021

Imagine going through the process to sell your franchise business. You’ve agreed on a price, the franchisor approved the new buyer and financing is a go. But there’s a problem: Your landlord objects. You pull out your lease agreement and it says you have to pay thousands in lease assignment fees even IF the landlord accepts the buyer. How could that be? How could your landlord hold up your life plans, potentially millions of dollars, and kill a good deal for everyone?

Many sellers don’t realize until it’s too late that your landlord is a major stakeholder in the negotiation to sell your business. Franchise businesses mostly occupy a brick-and-mortar space, so if the lease is not assigned to the new owner, it’s a devastating setback that can be difficult to overcome. “It’s absolutely a deal killer,” says Brant DeLongy with Franchise Clearly, a franchise reselling firm that works with sellers (and buyers).

When you first signed your lease, you may not have spotted some scary language. “Lease assignment fees” are charged when the landlord has to evaluate a new leaseholder (buyer). They’ll pull credit reports, background checks, and references. About $500 is reasonable, but DeLongy has seen greedy landlords charge $15,000 or even $30,000. “Fees this high absolutely change the terms of the deal and it’s usually the seller that eats most or all of it if it’s discovered in the 11th hour,” says DeLongy. Adding to the ambiguity is the fact that these fees are not usually disclosed in the signed lease documents.

There’s other language hidden in your lease that can be troublesome. In one example, DeLongy recalls a deal when a sharp buyer noticed that the HVAC unit was approaching the end of its useful life. The seller wasn’t aware, but the new buyer knew that a new unit was going to cost at least $12,000. In the end, the buyer and seller split this upcoming cost, but it caused a stressful and unnecessary situation.

Even if you are successful in transferring the lease to the new buyer, it doesn’t completely absolve the seller. The original lease signor is still held accountable for the remainder of the lease if the buyer defaults. That means if the new owner goes out of business, the landlord is coming after you - sometimes years after you sold the business. Remember, when the original lease was signed, you had to include a personal guarantee.

What to do
DeLongy has some advice: Unlike a typical business broker, his firm doesn’t work just with sellers or buyers. Franchise Clearly specializes in getting transactions closed for buyers and sellers.

His team uses a 5 step process to make sure details aren’t missed and things happen in the right order.

  1. Seller Profile
  2. Buyer Profile
  3. Execute
  4. Due Diligence
  5. Closing Checklist

“Right from the beginning, we’re collecting vital information we’ll need to complete a transaction. That includes getting a copy of the lease and having it reviewed by our team. If there is any language that’s going to be an issue, we want to find out about it right away so we can make it part of the negotiation. Our motto is - Eliminate the surprises. Surprises kill deals.”

He emphasizes that if you signed a lease that has limiting factors, don’t panic. We can work around anything and even start negotiating with the landlord. If the buyer is getting a Small Business Administration-backed loan (which is common), the length of the lease must match the loan term. This can be a good thing and provide an incentive for the landlord to be flexible.

DeLongy cautions, you only have one shot with the landlord. Because they already have a paying tenant, they have little motivation and patience for the due diligence process. When Franchise Clearly approaches a landlord, they have a packet of information ready to hand the landlord so they can make a quick and easy decision. For that reason, timing is critical.

To date, Franchise Clearly has never lost a deal due to lease terms. DeLongy attributes this win streak to the process they have developed over the years.

When you first purchased your franchise, selling it years in the future probably wasn’t on your mind. That lease you signed may be a challenge to overcome to sell your business, but don’t make the mistake of thinking that your business is unsellable.

Reach into that file cabinet and dust off the lease and all the amendments to see what you’re up against. DeLongy and his team offer complimentary reviews for franchise owners. You may want to take them up on it.

 







About Franchise Clearly®
Franchise Clearly® specializes in reselling franchise businesses. Working with owners, they work through a defined proprietary process that finds highly qualified buyers and guides them quickly to the closing table. Their innovative team approach makes for a seamless process that nets the highest offer and the best terms possible for the seller.





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