How does the Sale of your Business Affect the Lease?

Richard Leissner, Jr.

Attorney

Today, we interview Attorney Richard Leissner, a Partner at Howard, Stallings, From, Hutson, Atkins, Angell & Davis, P.A.  Mr. Leissner has extensive experience in all aspects of residential and commercial real estate sales and acquisitions, leases and various other real property transactions. In this interview, Mr. Leissner discusses how selling a business can affect your lease, earnest money deposits, how to benefit from working with an attorney, and more.

Key Points from our Conversation

  • You should hire an attorney prior to executing an agreement to sell the business.
  • Both the buyer and the seller should look at the lease to determine what disclosures, if any, should be made by the landlord.
  • My advice is to build a relationship with an attorney while you are involved with your business, not when it’s time to sell the business.
  • Don’t try to buy or sell a business on your own.

Interview

Tina: I am selling my business, at what point do you recommend hiring an attorney and what role do they play in the process?

Richard: You should hire an attorney prior to executing an agreement to sell the business, for sure.  This does not always happen.  As the seller’s attorney, I would want to ensure the seller is getting an adequate price for his/her business and ensure the purchase is structured properly (i.e. asset purchase versus purchase of shares/membership interests).  The attorney acts as a facilitator, obtaining information the seller needs from various sources and providing information to the seller’s other professional servicers (CPAs especially), as well as the point person to deal with the buyer and their team.  At a minimum, the attorney needs to prepare purchase and sale documents and assist the seller in making representations and warranties. If the client wishes, the attorney will be intimately involved in all phases of the sale and will be at the closing table when the paperwork is finalized and the money is dispersed.

 

Tina: What are the three most important things that an attorney can contribute as I sell my business?   

Richard: I can really only answer this in relatively general terms.  (1) Preparation of legal documents essential to any sale; (2) protection of the seller’s interests before and during the sale of the business; and (3) legal research and legal analysis of the myriad of issues that inevitably come up during the sale.

 

Tina: How does the sale of my business affect my current lease? 

Richard: As with most things, it depends.  For instance, if you are selling the assets of your business to another business, you may need the landlord’s permission to assign the lease to the purchasing entity.  If you are operating a single-member LLC and are merely selling your membership interest to a third party, this may not impact your lease at all.  Both the buyer and the seller should look at the lease (with assistance of competent counsel, of course) to determine what disclosures, if any, should be made by the landlord.

Both the buyer and the seller should look at the lease to determine what disclosures, if any, should be made by the landlord.

Tina: I am buying a business. How long of a non-compete should I request from the seller?  

Richard: This varies by state and even by profession.  In North Carolina, as in many other states, non-compete agreements are disfavored by the courts.  They will need to be reasonable as to time and geographic territory.  If you, the buyer, do not want the seller competing with you for five years, as opposed to two years, then the applicable geographic territory will probably have to be narrower.  If the business you are buying only has offices in one state, your non-compete probably cannot restrict the seller from competing in neighboring states.  Even a well-drafted non-compete agreement may end up being deemed unenforceable by a superior court judge.  As a buyer, you should consult with an attorney regarding the laws in your state concerning non-compete agreements, as it very well may impact the price you are willing to pay for the business.  

  

Tina: Can I use a standard non-disclosure agreement with buyers when selling my business? 

Richard: Again, this depends.  If you are selling your business to a publicly-traded company, the rules regarding disclosure of the potential sale are going to be materially different than if the mom-and-pop deli is selling out to the butcher down the street.  However, non-disclosure agreements are not uncommon and are often vital to the success of a sale.  Both sellers and buyers often have an interest in keeping the terms of a sale confidential, at least until the sale is completed.  Each non-disclosure agreement should be tailored to the transaction.

 

Tina: I own 75% of the business and my spouse owns 25% of the business, it’s an S Corporation. Can I force my spouse to sell if I find a buyer? 

Richard: I would imagine this depends on the laws of your State and the by-laws and shareholder agreements of your corporation.  It is critical when establishing an S-Corporation that the by-laws and shareholder agreements are drafted effectively to meet the needs and desires of the shareholders.  Great care should be taken in drafting the initial corporate documentation, so that everyone is clear on their rights, duties and obligations to the company and to each other.  As the company grows and changes, as the shareholders’ relationships grow and change.  The shareholder agreements and by-laws and other corporate agreements may have to be amended or modified to change with the company and the shareholders.  

 

Tina: How would a business owner get the most out of working with an attorney? What tips do you have for working with an attorney when selling a business?

Richard: My advice is to build a relationship with an attorney while you are involved with your business, not when it’s time to sell the business.  This will allow you and your attorney to get to know one another and for the attorney to become familiar with your business.  When the time comes to sell, an attorney familiar with your business will more likely be able to help you negotiate a more favorable sale for with less attorney time than if your attorney were unfamiliar with you or your company. 

Be honest and forthright with your attorney about what you want from the sale of your business.  Is it more important to you that the right person buy your company or that you get top dollar for the business?  Are you selling your business to start a new one or as part of your estate planning?  Does your attorney have the staff and legal knowledge to handle your sale and will your attorney tell you if he/she does not? 

My advice is to build a relationship with an attorney while you are involved with your business, not when it’s time to sell the business.

Tina: Is it really necessary to receive an earnest money deposit from the buyer? If so, can you hold the earnest money deposit on my behalf?

Richard: It is usually a good idea to receive an earnest money deposit from a buyer, to ensure that the buyer is serious and that you will recoup something in the event the buyer breaks the contract prior to closing.  While you are involved with a buyer, your business is off the market, so to speak. You will be making disclosures to the buyer, taking time to make the buyer comfortable, and paying your attorney and other professionals to get the deal done.  Moreover, courts may be reluctant to force a buyer who has pulled out of a contract to buy your business after breaching the contract.  In those situations, the earnest money deposit may be the only money you ever see from a broken deal.  Typically, the seller’s attorney could hold the earnest money but I would want to do so only with an acceptable escrow agreement in place.  In the event of a dispute between the buyer and seller, the buyer may not want the seller’s attorney holding the earnest money and the seller’s attorney may not feel comfortable holding it in such instances.

 

Tina: Do you have any other tips or advice for anyone buying or selling a business? 

Richard: Don’t try to buy or sell a business on your own.  Selling or buying a business, even a small one, is a complex and serious thing.  There are a lot of moving pieces, from market analysis, to taxes, to liens and loans, to various and sundry warranties and representations that must be considered, even when a sale goes smoothly from start to finish.  Buyers need to know the ins and outs of the business they are acquiring and may not know where or how to obtain the information they need.  While sales are not adversarial in the same way as litigation, they certainly can become hostile.  The parties on one or both sides of the transaction are usually looking out for their own best interests and may not place the same emphasis as each other on issues of disclosure, integrity, honesty and the like.  Buying or selling a business may be the most consequential transaction you ever make and you need professionals assisting you along the way, both to facilitate the process and to protect you, the client.  And, at the end of the day, it is cheaper to pay an attorney to avoid a mess than it is to pay an attorney to get you out of one.