Having the price and terms accepted by the seller is one of the biggest hurdles a buyer will have to overcome when purchasing a business. However, once this has been achieved it isn’t the final challenge that they will be presented with.
In addition to having finance approved to fund the purchase of the sale, there is another major element that buyers need to be prepared for to get the sale across the line; the approval of the landlord of the premises where the business is located.
Most businesses are leased. Most business owners are not in a financial position to purchase a premises, so the alternative to buying is to lease them.
A commercial lease is a document that sets out the rights and obligations of the owner of a commercial property (known as the landlord or lessor) and a third party that has agreed to occupy the property (known as the tenant or lessee).
Commercial leases can include;
- Retail Leases
- Commercial Leases
- Assignments and Sub-Leases.
Some of the key terms and conditions typically included in a lease are:
- lease duration (or term) and options to renew
- rent and rent reviews
- permitted use
- tenancy mix and competition
- repair and maintenance
- assignment and sub-leasing
- default and breaches
- redevelopment and relocation
During a business sale transaction, although the price and the relevant terms have been agreed between the buyer and seller, the next step will be the assignment of the lease to the buyer.
Almost all leases will contain a clause stating that the lease must not be assigned without the consent of the landlord. The landlord must agree to the sale by approving the buyer. Both buyer and seller both need to be aware that the landlord has a say in whether the sale goes through or not.
As part of the approval process, the landlord will want to determine the following about their new tenant;
- Information about the new tenant
- Business experience
- Skills and abilities
- Financial standing.
To ensure that the sale of the business is smooth, and to reduce the likelihood of the deal falling through because of problems with the assignment of the lease…
- Review the lease, to understand any procedures set out regarding the termination of the lease. Provide these to the broker, so they can communicate this to the buyer. Check whether there are any clauses regarding terminating the lease
- Notify their landlord as soon as you decide to sell the business, to give the landlord a reasonable time to consider your request for assignment
- Follow any procedures (e.g. writing and notice) that have been set by the landlord, for requesting their consent to an assignment
- In conjunction with the broker, provide all the relevant information about the buyer to allow them to quickly and accurately assess the suitability of the potential buyer.
- Prepare a comprehensive business plan, to provide to the landlord regarding the business
- Provide details of any plans for renovations or improvements to the landlord
- Have thorough financial information available to show the landlord
- Complete in detail any application forms required by the landlord
- Prepare numerous references, that can be provided to the landlord.
If you are considering purchasing a business and are wanting to get more information on how to be prepared for assignment of lease processes, get in touch with your local business broker today.
Call 1300 466 455 to be connected with a professional who can broker a great deal for you.
Before signing a lease or lease related documents, taking possession of the premises or paying any monies you should obtain independent legal, financial and business advice.