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A lot of businesses occupy leased real estate. A retail store may lease storefront space on a main thoroughfare. An HVAC contractor may lease a shop outside of the city to store vans and equipment.
Based on the type of the business, the lease can be pretty critical to the sale of business. For instance, the value of an auto shop is close to $0 if there is no shop with bays to operate out of. The seller is just selling parts and equipment, if there isn't a path for the buyer to operate a going concern.
Due to the lease normally being with a third party – the landlord – it can cause issues during the sale of a business. As a firm focused on small business transactions, we've seen too many sellers and buyers invest time into structuring a deal only for the lease to throw a wrench into things. This post outlines best practices for handling a lease when selling a business.
What to do when selling a business with a lease?
Type of business sale: asset or stock?
Most businesses are acquired through an asset transaction. This means that the buyer isn’t buying your shares or partnership interests, but is buying your business’s tangible and intangible assets. They will operate the business under a new entity.
This matters because even if you have a 10 year lease with another 7 years remaining, the lease will still need to be transferred to the new entity or sublet to the new entity.
Review the Lease Agreement
In most lease agreements, you will be able to review the terms and conditions to understand if you can transfer the lease to the buyer of your business.
First, do you have the right to assign the lease to a successor entity? This is important when the buyer will be operating with a new entity.
Second, do you have to give the landlord notice in an ownership change? If you are selling your business as a stock transaction, you may still need to notify the landlord of an ownership change.
Third, do you have the ability to sublet your space? If the landlord refuses to allow you to transfer or reassign the lease, you could sublet the space to the new buyer.
Lastly, do you still have renewal options? If so, we always recommend to renew the lease for as long as possible.
Aside from the above questions, you'll also want to understand what happens to your security deposit (and your personal guaranty) in the event of another entrepreneur acquiring your business.
Consult Your LandLord
Depending on what you find above, oftentimes you will need to consult your landlord. If this is the case, we always recommend doing this as soon as possible. When some landlords hear about a business sale, they smell blood in the water.
They may look at this transaction as the perfect time to jack the rent for the space. This can completely torpedo deals, especially when the buyer is paying a multiple on earnings. Higher rent means lower earnings.
When consulting your landlord, we recommend trying to stay as vague as possible and frame the transaction more as a partnership or transition, rather than a full outright sale.
Options for dealing with a lease in a business sale
Option 1: Transfer the lease
This is ideal. Transferring the existing lease ensures that the buyer can continue to operate out of the space without dramatic rent increases. You will need to account for any security deposit and guarantor logistics, but the good news is that the buyer will be subject to the same lease terms and agreement as you have been as the retiring owner.
Option 2: Structure a long-term extension
In the event of a stock sale, it’s always ideal for the current (selling) owner to approach the landlord and getting the longest extension possible for the new buyer. This will set the buyer up for success, as he will avoid the scenario when a landlord tries to take advantage of a new owner by increasing rent dramatically when the current lease runs out.
Option 3: Sublet the space to the buyer
If a transfer is not allowed, you could consider subletting the space to the buyer. This is not ideal as the owner is still legally on the hook for the lease, but it’s better than having no lease, which often means the deal is off the table. It also ensures that the rent price follows the same schedule, as the original owner will simply pass along the rent directly to the landlord.
Option 4: Get creative
If the landlord refuses a long-term renewal, refuses to assign your lease to your buyer, and refuses to allow you to sublet, you need to get creative to ensure you can still sell your business. This can involve partnering with a company like With to offer to buy the landlord out from the property. This can also involve seeking new space prior to selling the business.
We recommend that you work with a business broker or attorney with experience in small business transactions.
Tips for approaching your landlord
Tip #1: Frame the sale as a partnership
By framing as bringing on a partner with a new ownership structure, the landlord will be less likely to aggressively increase rents or say no. Why? They have enjoyed having you as a tenant and will see your successor more as an extension of you vs. a green buyer who they can bully.
Tip #2: The earlier the better
We’ve seen too many deals die on the one yard line due to lease issues. Always start early. If you’re considering selling in a few years, ensure that you get the maximum amount of renewal options with the right to transfer or reassign the lease to your successor.
If you’re in the middle of negotiations with a buyer, approach the landlord to float the idea that you may need to reassign your lease as part of succession planning. Use this conversation to feel them out as to whether they will be willing to transfer the lease and they will honor the previous pricing they granted you.
Starting early is particularly important for large commercial landlords and property management companies. They may need to time to run the lease assignment or transfer up the chain of command. Waiting until a few days before the scheduled close of your business sale may cause you to have to push the closing date by a week or two.
Tip #3: Excite them about the opportunity
Once you do broach the conversation with the landlord, use it as an opportunity to excite them about the business’s future. A landlord values stability and on-time payments. Let him or her know that you will still be involved and will be setting the successor up for success.
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If you're interested in acquiring a Main Street business, Katie is your go-to person. Katie hails from Kansas City originally and majored in Art History at the University of Kansas. In her free time, she enjoys climbing, paddleboarding, and cooking.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
Calder Capital
Sam Domino