How To Buy a Business: Retail Leases

Leases can be deal killers when buying a business

Let me share a real life lease horror story with you. A few years ago an entrepreneur I know “had come into some money,” as the old expression goes. While I won’t say how much it was it enabled him to buy almost any small business selling for $2 million or less. After looking at business for sale opportunities for a few months, he found a three store chain selling to the tourist market. He contacted the two owners and began his due diligence on the company. Everything looked pretty good during this phase, so he decided to make an offer on the company.This led to a counteroffer and the negotiations phase was in full swing.

As the deal looked like it was going to go through, both parties decided that it was time to let the landlords know about the proposed sale. The landlords were two businessmen who had acquired substantial holdings in the downtown core and owned the three buildings that the three stores were located in.

This is when the nightmare began. After reviewing the buyer’s personal financial statement the landlords decided that he would increase their risk because as an individual he didn’t have the net worth of the two current store owners. This resulted in the sale being canceled. The store owners pleaded with the landlords to let them sell off the stores. After running them for over two decades, they were ready to retire and enjoy their sixties. However, the landlords wouldn’t hear of it.

After a frustrating month of attempts to meet with the landlords and offer additional ways of increasing their comfort levels, the buyer finally gave up and walked away from the deal.

I know that the stores didn’t sell for another two years because I kept tabs on the situation out of curiosity. After that, I lost track of the business die primarily to ceasing my trips to the city they are in.

This is an example of what can happen with leases. You have a motivated buyer and seller who have agreed on a price, want to do the deal, and a third party kills it.

The takeaway here is to have a thorough understanding of the lease early on whether you’re the buyer or seller, lest you waste several months like my friend did.