SELLING YOUR BUSINESS
The Lease – Asset or Anchor?
By Phillip Chapman
At a recent Australian Institute of Business Brokers (AIBB) conference, the hot topic in realising successful Retail business sales was the Retail Lease. At the heart of this topic were two significantly common mistakes Business Owners and Brokers make, namely: (1) not managing the lease as an asset of the business , simply put “What a vendor does before listing their business for sale?”; and (2) the assignment of the lease or “What they do after a buyer is secured?”.
It is alarming that many Business Owners have failed to consider their lease contracts when selling their businesses. In selling, most would seek advice on the value of the Business but overlook the value of the lease. If they do consider the lease, financial advisors tend to concentrate on the amount of rent and neglect to take into account the value/risk components of the lease, such as critical path, real estate performance, current and future demographic mapping and risk grade. It is sadly a path to failure because “what is not measured cannot be managed.”
Each Industry is important to the tenancy mix of any shopping precinct or Lessor’s investment, and locality rules dictate the location and number of outlets, making Landlords an important part of the sale.
Prior to listing your business for sale, an independent and subjective review of the lease and the real estate performance is strongly recommended. Remember that taking proactive steps to reduce the risk grade (for Buyers and their Financiers) through improving the critical path in conjunction to evidencing strong Lessee/Lessor relationships will not only underline the value of your business and attract a higher quality Buyer, it will also reduce the lead time to sale.
“You (the Vendor) need to promote all facets of the lease as an asset as buyers have a tendency to treat the rent as an Anchor.”
You (the Vendor) need to promote all facets of the lease as an asset as buyers have a tendency to treat the rent as an Anchor – it is up to you to determine the risk/value proposition prior to listing the Business for sale.
These are some common mistakes Business Owners make when selling their business. Apart from not addressing the Risk/Value proposition, for some reason there is the tendency to let the Lessor be the first person to know that they intend to sell the Business. Unless you have a long term lease already in place, telling the Lessor (or their agent) that you seek to sell places a lot of influence in the sale proceeding with the Landlord.
Although State and Territory Legislation is highly prescriptive in the area of lease assignments and approval of same by Lessors, bringing the Lessor into the equation too early introduces the Landlord’s plans and agenda and negates your own.
This is why any review of the lease (including risk/value proposition) will assess the type of Landlord, property profile and market alternatives.
Strategically, preparing the Lease prior to a sale will restrict the influence Landlords may have over your opportunities to deal with your Business (including the Lease). Preparing the Lease for a sale is a topic that requires more attention available than in this forum which opens us to the other common mistake after the contract is entered into – dealing with Lease Assignment.
Firstly, a large proportion of Landlords have their own Assignment Applications and processes (including costs), and very few know of these let alone understand them prior to listing their Business for sale.
Part of setting the Lease up prior to sale (hopefully included in the Lease Review) is acquiring the applications and identifying the time lines and processes if an assignment is sought and, of course, the costs associated with this endeavour.
For a quick overview, here are just some components of an assignment which may be included in the application:
- Application Covering Letter to Landlord
- Application Forms:
Assignee Details (Full name, Aux, etc.)
Assignee Resume (Experience)
Assignee Assets + liabilities
Assignee Business/Financial References
Supporting information (Business Plan, Branding, etc.)
- Assignor/Assignee Disclosures (Depending on Statutory Requirements)
Secondly, most Business sale contracts will identify a settlement date that does not take into account the lease assignment processes and time lines.
Even more alarming is the lack of understanding as to who is responsible for the Assignment Application. Remember that just noting “subject to lease assignment” in the contract does not adequately address the issues associated to assigning the lease. A quick resolution to this problem is to include an Assignment Application Kit (or similar) and presented with the Sale Contract.
Including a checklist of tasks for both the Business Vendor and Buyer will go a long way to a smooth and timely sale. It is important to remember that the underlying responsibility is upon the Vendor (Assignor) as it is they who have the contractual relationship with the Landlord.
In closing, the ideal model for a smooth and successful Business sale is to adopt these two concepts, (i) set up the Lease for sale just as you would set up and present the other physical and financial facets of your business, and (ii) have in place a sound knowledge and checklist of the steps and timelines to make an Assignment Application.
Addressing these two areas prior to listing your Business for sale evidences to any prospective purchaser and more importantly their financiers that the lease is an Asset and not an Anchor (risk).
* Phillip Chapman is the one of Australia’s leading retail industry experts and founder of Lease 1. Lease1 is Australia’s leading specialist Retail Shop Lease Information and retail Lease Management Service providers and understands the industry of Retail. Serving (Retail) Tenants Australia Wide since 1997, Lease 1 prides itself on its “no landlords allowed” philosophy, based on growth through strategic referral retailer member alliances. For more info go to: www.lease1.com.au