The WORST mistake Sellers make when they have less than 3 years remaining on their Lease is to do nothing as they don’t want to be stuck with a long Lease if they re-sign for another Term. The other mistake they make is, not knowing what to do about their Lease!
If you’re selling your Business, you need to look at increasing the saleability of your Business:
- Make sure you have at least 3 years remaining on your Lease
- Find out whether the Landlord anticipates to exercise any Demolition clauses, is planning to sell the Premises, plans to increase the Rent, Security, and/or Outgoings amount; and establish if the Landlord is open to negotiations if these changes will significantly impact your Business negatively
- If you have less than 3 years remaining on your Lease, you need to ask your Landlord if they would grant a further Lease Term, add a Lease Option to the current Lease, or grant a New Lease on the same terms and conditions. This is extremely important for three main reasons:
- The Buyer needs to have enough time to make their return on investment, make a profit, and repay any loans to the Bank if purchasing the business using finance;
- The Buyer knows that if their circumstances change and they need to sell the Business, then they can subsequently offer the next Buyer something to buy; and
- If seeking finance, the Banks will need to assess the serviceability of the Loan. Generally 3 years minimum is sufficient provided the Business has the capacity to service the Loan and your Buyer has financial strength behind them otherwise, 5 years is your best bet as it’s considered a lower risk investment for the Lender; and a “no-brainer” for your Buyer.
The longer a Buyer has to make a return on their investment and turn a profit, the greater the SALEABILITY of your Business and the HIGHER the Buyer is prepared to pay for your Business.
Selling a Business requires the Landlord to assign the current Lease to your Buyer on the same terms and conditions (hence it’s called an “Assignment of Lease”). Provided the Lease provides for an assignment to take place, the Landlord cannot unreasonably withhold an assignment so you aren’t “stuck” with a long Lease at all.
Nuts and Bolts…don’t hold back on signing a new Lease, exercising any Lease Term Options or asking for a further Lease Term. Buyers will not look seriously at your Business, or at all, if the risk of being forced to close their door in 1 or 2 years is “Guaranteed”.
If you have any questions relating to this Article and would like to chat with one of our Consultants about how your Lease may affect the sale of your Business, please get in contact with us by email at firstname.lastname@example.org. Always happy to chat!
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The information contained in this post is an opinion based on past experience. Do not take this as Legal advice.