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Many business owners refrain from informing their landlord of their intentions to sell in fear that the landlord may disclose the news of the business for sale, in turn, harming the sale price. However, many M&A experts advise sellers to inform their landlords as soon as they decide that they are selling a business, because it will help them avoid wasted time and energy if the landlord does not agree to transfer or assign the lease. Landlords are perhaps one of the leading causes of failed M&A deals; therefore, it is vital to approach this issue in the correct manner.
The seller should inform their landlord as soon as they have engaged the M&A intermediary. Oftentimes, the seller waits until a buyer has been established. However, understanding the landlord’s desires for the transaction is a key factor in marketing the business for sale. It is important for the buyer and the landlord to come to an agreement pre-closing. A buyer with good credit and sound business background may have the ability to change the mind of an uncompromising landlord.
Meeting with the Landlord
The seller should approach the announcement to the landlord as a salesperson, since some negotiation may be necessary to obtain compliance. Present the news in a positive manner, outlining the details that demonstrate the advantages to the landlord if he or she chooses to comply with the M&A deal. A new managerial team is likely to improve the business as a whole. Since some lease agreements are based on revenues, the landlord may have much to gain from the buyer increasing profitability.
Small incentives may be necessary to persuade the landlord to allow the sale of the business. These enticements could be as menial as agreeing to take care of plowing or arranging for recycling pick-up. If the seller chooses to incorporate these terms, it is critical to write them into the M&A contract.
Checking the Lease
Many commercial leases include a clause that agrees to a transfer of ownership. The seller should return to the original lease to uncover the correct course of action for approaching the landlord. Depending on the length of the lease, different tactics may be necessary. If the lease is ending within the next year or so, the buyer will want to be comfortable that the lease is secure and will probably desire a new lease agreement.
Discussions with the landlord will help clear up any issues that may arise during the M&A process. Both parties may be able to collaborate with the landlord to draw up a new lease agreement.
If the landlord is not compliant, consider whether or not the lessor is “unreasonably withholding consent.” At this point, it may be advantageous to reach out to a real estate attorney.
M&A professionals encourage sellers to inform their landlords as quickly as possible when selling a business. This allows for sufficient time and negotiation if the landlord is not on board with the decision to sell in order to avoid possible roadblocks.
If you would like assistance in selling a business or dealing with landlord problems in the M&A process, please contact George & Company. We are one of the premier M&A firms in New England and we value confidentiality.