Your lease matters, to you and to a potential buyer

 

If your business success is dependent on your location - which is almost always true for a retail business such as a clothing store, gift shop, restaurant, or any business that depends on customers finding you and coming to your location; your lease is critical.  Here are some tips to help reduce your risk and make your business more saleable.

As a business owner, your lease does two things for you: First it spells out your obligations: amount of rent, length of the lease, expenses that you must pay, etc.  Second, and often overlooked, is that the lease is a risk management tool.  While the financial terms are important and should be manageable for your operation, this post will concentrate more on the risk management features of your lease.

So, how do you use your lease to manage risk?  Here are some examples: 

  • Loss of location:  Any business is exposed to the risk of losing its location when its lease expires.  This is a risk a location-sensitive business wants to minimize.  The risk is mitigated by the term of the lease.  Generally if your business is well established you will want as long a lease as you can comfortably handle.  But, if you’re starting a business you may want a shorter lease with renewal options, or a bailout provision, if the business is not successful.  The idea is to control the space for as long as you want it while making the smallest financial commitment.  Should you wish to sell the business, your lease should provide that a new owner can take over the lease and specify the conditions under which you will be released from your lease obligations. 
  • In malls and centers with an anchor tenant:  If you have a retail business located in a multi-tenant property, it is often important who the other tenants are and whether they are selling products and/or services that compete with you.  For example, if you operate a dry cleaning shop in a small center that depends of traffic generated by the Kroger store that anchors the center, your business would likely suffer if the Kroger store closed.  Likewise, your business would suffer if another dry cleaner opened in the shop next to yours.  You can mitigate these risks to your business by incorporating conditions into your lease to deal with these events.  If Kroger closes, either your rent is reduced or you have the right to terminate your lease.  Your lease can also require the landlord to restrict what other tenants are permitted to sell so they cannot directly compete with you with the same services or merchandise.
  • Business interruption:  Another consideration is what happens if your business cannot operate due to fire or other casualty that keeps you from using your space.  Usually leases address this possibility in long, relatively boring paragraphs that favor landlords and that tenants rarely read.  A common provision is that the landlord has a period of time to repair the damage, say 60 - 90 days, and the lease stays in effect - can your business be closed that long without suffering catastrophic damage?  Alternatively, the lease may provide that if the damage is substantial, the landlord may not be obligated to rebuild but instead may terminate the lease.  If your business is highly dependent on your location, is this possibility acceptable to you?

Contrary to conventional wisdom, the dollar amount of rent is not necessarily the most important item in your business’ lease - management of business risk is key.  The ability to continue your business in the location where it is successfully established is at least as important, especially when it comes time to sell your business.