When a business sells, the real estate side often decides how fast the deal closes and whether it closes at all. Buyers and their lenders look at the location before they look at the logo. Here is what they check and how to get ready.
If you lease your space
Remaining term and options
A buyer is paying for future cash flow, and that cash flow depends on staying in the location. Many buyers finance with SBA 7(a) loans, and lenders typically want the lease term, including renewal options, to run at least as long as the loan. A short remaining term can delay or derail financing, so renewal talks with your landlord often need to start before you list.
Assignment clause
Most leases require landlord consent to assign. Read the clause now: what the landlord can ask for, whether consent can be unreasonably withheld, and whether you stay liable after the sale. Expect the landlord to review the buyer's financials and possibly ask for a new guarantee.
Estoppel certificate
Buyers and lenders often ask the landlord to confirm in writing that the lease is in force, the rent is current and there are no defaults. Clean up any open issues early.
If you own the building
You have more options, and more decisions:
- Sell both together. One transaction, often financed together. The buyer needs more capital, which can narrow the pool.
- Keep the building and lease it to the buyer. You get ongoing rent, and the buyer needs less cash. Set a market rent, because an inflated rent makes the business look weaker and a low rent leaves money on the table.
- Sell the building separately later. Useful if the real estate has upside the business buyer will not pay for.
Either way, get the business and the real estate valued separately. Lenders underwrite them differently, and blending them usually hides value.
Items buyers and lenders ask for
- Zoning and permits that allow the current use, and whether any conditional use permit transfers to a new owner
- Environmental history, since lenders often require a Phase I report when real estate is financed
- Building condition and any deferred maintenance
- Occupancy costs as a percent of revenue, which shows whether the location is sustainable
Start early
The best time to fix a lease or property issue is six to twelve months before you go to market. A business with a clean, long-term location sells faster and with fewer price cuts during due diligence.