IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family-owned businesses. The following blog article has been provided by Mr. Seth Rudin and Ms. Kelly Richardson. Mr. Rudin is a senior business broker at IBA (www.ibainc.com) and Ms. Richardson is the Commercial Director of Rowley Properties (www.rowleyproperties.com).
Engaging Landlords in the Sale of a Privately Held Business:
A Look at Best Practices
Kelly Richardson, CCIM, the Commercial Director of Rowley Properties, and Seth Rudin, a Senior Business Broker with IBA and a specialist in the sale of commercial real estate associated with privately held companies and family businesses, sat down and discussed the “best practices” for engaging property owners, or landlords when transitioning ownership of a business that leases their property.
Ask the Experts
Kelly Richardson, CCIM, is the Commercial Director of Rowley Properties and has been in the real estate industry for over 33 years. In addition to her extensive experience in commercial real estate, she serves as the Economic Development Commissioner for the City of Issaquah, Washington and is the Past President of the CCIM Washington State chapter (Certified Commercial Investment Members are recognized experts in the commercial and investment real estate industry). Her role in these capacities highlights her significant expertise and dedication to fostering economic growth and development in the region.
Seth Rudin is a Senior Business Broker with IBA and holds Commercial Real Estate licenses in both Washington and Oregon. With more than 30 years of experience in business sales, real estate, and finance, Seth brings his clients a wealth of knowledge and insight. He is also a former business owner, providing him with a unique perspective and understanding of the challenges and opportunities entrepreneurs face.
Their combined experience in commercial real estate, economic development, and business sales, leadership roles, and firsthand entrepreneurial insights make Kelly Richardson and Seth Rudin highly knowledgeable and reliable experts in their fields, especially regarding the best practices in selling a leased business.
What You Need to Know
The business ownership transition requires a new owner to inherit or negotiate a new lease from the landlord. Typically, rent is a business’s second highest expense, behind payroll costs. Sometimes, rent may be the highest depending on the nature of the company’s size, business model, and location.
Further complicating this process, if the buyer utilizes bank financing, such as an SBA loan, the bank will usually demand additional lease requirements for the new owners to secure financing for a business.
The requirements are typically a lease that matches the terms of the loan. For example, an SBA loan is 10 years, and the SBA will require either a 10-year lease or a lease with the base term and one or more tenant lease renewal options adding up to 10 years. Lastly, the banks will require access to the landlord’s property in the event of default to secure the equipment as collateral for a business deemed in default.
A buyer has two options when transitioning the tenancy for a business they are purchasing. 1. The lease can be assigned whereby the buyer takes over the responsibilities of the existing lease. A renewal option for the existing lease may exist and also be assigned, or a new lease renewal option can be added. 2. The buyer can negotiate a new lease and renewal option directly with the landlord. The old lease with the seller would terminate, and a new lease would commence when the business is considered closed at escrow.
No matter which option a seller and buyer select, the landlord must agree to ensure a simple and quick closing of the sale. However, that’s not always as easy as it sounds. This is where an expert can assist in the process. Kelly and Seth suggest the following steps to successfully engage the landlord for accepting the new tenant:
- Landlord Engagement
Kelly believes a strong relationship with the current and new owner is based on trust and transparent relationships. This includes the landlord, property manager, and tenant working collaboratively. Maintaining trusting relationships and sharing the intentions to sell makes it much easier to negotiate a lease that meets all parties’ needs. This starts with the current owner and everyone involved communicating clearly from the start of their relationship through the sale of the business.
- Effective Communication and Presentation
Seth and Kelly believe that presenting the Buyer’s Executive Profile, Financial Statements, and Business Plan is a critical first step in gaining the buy-in from the landlord or their assigned property manager. The Buyer’s Executive Profile can be a one-page summary of the buyer’s experience, skills, and intention for buying the business. The profile should touch on how the buyer will approach the business management and their quantitative goals for success. A key component is whether the new owner will be hands-on, semi-absentee, or absentee. If not a hands-on owner, the buyer will need to convey the strength of the onsite management team and how they will engage with the business.
The personal financial statements and/or corporate balance sheets should demonstrate the buyer’s financial strength to back the lease and illustrate a strong credit score. The landlord will be able to see how successfully the buyer manages their portfolio, giving confidence that they will succeed in the next endeavor.
Some landlords and property managers will want a business plan demonstrating how the new buyer will maintain and grow the business being acquired. This plan should be well organized and succinct to ensure the buyer is not operating on a whim. The business plan is a good road map as it details the company’s goals and how the buyer will achieve them.
- Face to Face Meeting
In many cases, landlords/property managers will want to meet face to face. This meeting is to establish trust and convey confidence in the experience and skills of the owner and their partners (if applicable). The landlord/property manager will assess the buyer for their personality (ease of doing business) and view of the business as well as validate the new owner’s business experience.
Kelly says, “New tenant meetings are very helpful to get a personal feel for the tenant and to better understand the new owner’s approach to the business being acquired rather than through written words.”
Seth echoed that he has seen landlord meetings go south because the buyer did not adequately prepare for the meeting, causing tension. Buyers who prepare and show respect when presenting their experience, plans, and desire for a win-win relationship are often the most successful entrepreneurs.
- Timely communication
Once the process has started between the buyer and seller, maintaining timely communication is important to reach a successful lease assignment and/or new lease. Both parties want to ensure the transaction is completed on time. The buyers should prepare to make themselves available to address open questions, negotiate items, or have face-to-face meetings.
Landlords or property managers also need to be timely in their communications. Seth discussed with Kelly that there are landlords who operate differently. Some landlords are not timely in their communications or are not always reasonable with their requirements, causing deals to fail. This is where experienced M&A professionals understand how to navigate this critical step to a successful lease assignment/new lease.
Engaging landlords in communication, negotiations, and planning is crucial for buyers and sellers to close deals on time and smoothly. This collaborative approach ensures all parties are aligned and promptly addresses potential issues that might hold up or ruin a deal.
If you have questions relating to the content of this article or the process associated with selling or buying a business in Washington or Oregon, Seth Rudin would welcome the opportunity to talk with you. Mr. Rudin is licensed to sell businesses & real estate in both Washington and Oregon. Mr. Rudin can be reached at (425) 454-3052 or seth@ibainc.com.
Further, if you have any questions about real estate in the Seattle metropolitan area, Kelly Richardson would welcome the opportunity to speak with you. Ms. Richardson can be reached at (425) 395-9577 and kellyr@rowleyproperties.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.