Today we have the opportunity to interview Ms. Ella Lim, the managing-member of Lim & Company, P.L., which services all of Florida! In this interview, she shares insight on how a sale can affect a lease and whether, legally, a business owner must inform a landlord about the sale of a business. Ms. Lim also explains escrow, customer contracts, and how an attorney can help business owners.
Tina: How does the sale of my business affect my lease?
Ella: It depends on the terms of your lease or your state laws, if any. If your lease explicitly states that you must seek approval by landlord, then you must seek approval from landlord. Make sure you have the approval in writing to prevent any potential lawsuit if the new owner does not abide by the lease. Prior owners always seem to get pulled into litigation unless there is written documentation that they have been released. If your lease doesn’t address the issue of selling your business, then you need to see if your state has any statutory laws in favor of the landlord.
Tina: Am I legally required to inform my landlord that I am considering selling my business? At what point do I need to inform my landlord? I have been having problems with my landlord and I do not think he will extend the lease if he knows I am selling the business.
Ella: If the lease is not a part of the deal in selling your business, then you may not be required to inform your landlord. But remember, you still have to fulfill any agreement with your landlord until the date of expiration. This includes any notices you must give to the landlord of not renewing or vacating the premises, usually a sixty (60) or ninety (90) day notice are in leases.
Now, if renewing a lease is part of your business sale, then you will want to make sure that the landlord is willing to renew the lease with the new owner. You will want to facilitate a meeting to ensure that happens. Part of buying a business is to continue the established business profit margin; not many buyers are willing to pay for a business only to have to restart and rebrand it somewhere else. You will need to review your lease agreement with the landlord to see what exact time frames of notices are required. Being prepared and doing things prior will only help you with the business sale and prevent any foreseeable problems. Having a problem with the landlord may work in two ways: (1) landlord may be willing to work with new owner because you will no longer be in the picture; and/or (2) landlord has a tenant for an additional period of time with immediate continual rent without landlord having to try to seek a tenant and losing rent during that period.
Being prepared and doing things prior will only help you with the business sale and prevent any foreseeable problems.
Tina: How do I ensure that key customers stay after I buy a business? Can I address this with a contract?
Ella: If the business is a service providing business, there is no guarantee that key customers will stay with you as the new owner forever. If there are existing service agreements, I suggest that you review those agreements prior to purchasing the business to see what options the customers have. Most customer agreements for services have terms that state the agreement will be abided by successor interests. A really good agreement will have terms outlined in the event of a purchase of the business. Good management, service, and business relationship will determine whether key customers will stay. If there is an existing agreement, something to consider is to meet with key existing customers to enter into a new contract with them. This will establish the beginning of a business relationship, give the customer a chance to meet you in person, and have a new agreement between you and the key customer for a new time period. As far as buying a pure service business like a dry cleaning or convenience store, there are no guarantees that key customers will stay with you. In these types of businesses, the quality of service and good management will reign.
Tina: What is escrow? It is necessary?
Ella: Escrow refers to an account held by a third party where all funds are held to be paid out to the necessary parties. It is usually preferred to ensure that all debts or liabilities outlined in the purchase agreement are satisfied. This will include but not limited to: seller’s mortgage, if real property is involved; taxes; documentary taxes; and seller’s liabilities. Leaving disbursement of funds up to seller may cause problems, especially if seller does not pay off what it/he/she is supposed to payoff to give the buyer a clean start. If real estate property is involved, then an escrow account will be required for the closing. If it is just a business transaction, the seller’s attorney will most likely use a trust account to serve as the escrow account. Keep all records and request copies of satisfactions for your business records.
Tina: What does an attorney provide business owners, besides legal advice?
Ella: The type of attorney you will need depends on the type of business you are buying/selling. You may need either a commercial real estate attorney or a business transactional attorney. Depending on the experience of the attorney, you may need both. Full service law firms have departments where the work is divided among different attorneys. So, the commercial real estate attorney will be handling the closing aspect of the land/building of the sale while the business transactional attorneys are drafting all the agreements for the purchase and sale of the business. If your purchase/sale does not involve any property, you can get by with just a business/corporate attorney. What the attorney will do for you is give you legal advice on what needs to be done and what problems you may have based on the existing documents and proposals. If you are the buyer, your attorney will review the purchase contract to protect the buyer. If you are the seller, your attorney will be the one drafting the purchase contract and associated addendums for the sale according to your terms. Some try to do it themselves, which usually results in a lawsuit or litigation because the terms were misunderstood or misinterpreted as to their meaning. An experienced attorney should spell everything out in clear language so that anyone can read the agreement without it being vague or incomprehensible.
The type of attorney you will need depends on the type of business you are buying/selling.
Tina: Do you have any other tips or advice for anyone buying, selling or appraising a business?
Ella: Do your research and homework before you even start the process. Do your research on the industry of the business. Because of today’s economy, businesses have to function differently within their industry. How marketable the business is will play a factor in the purchase price. You should look to see what liabilities and expenses are associated in the business. Understanding what you are truly buying or selling will alleviate a lot of problems from the start. Understand what debts/contracts/liabilities are joined with the business. Are you buying the existing business and name or are you buying business with the intention of creating a new name? If you are serious about buying or selling a business, I always recommend that there is an appraisal on the business and its assets. Most banks will require it if you try to finance the purchase through a bank. If you plan on financing the business purchase, I highly recommend a buyer to see if the business will qualify for a commercial loan.