5 Commercial Lease Red Flags That Can Kill Your Business Sale
Written by Gurjit Ghai
Personal Real Estate Corporation | Expert Business Broker in BC
⚡ Key Takeaways (TL;DR)
- Market Insight: Understand the specific commercial dynamics of the BC market before investing.
- Actionable Advice: Always normalize financials (SDE/EBITDA) to determine true cash flow.
- Due Diligence: Review commercial leases, environmental reports, and equipment age meticulously.
- Next Steps: Consult with a specialized business broker to navigate complex business transactions.
The Lease is the Lifeblood of the Business
In many commercial transactions across BC, the value of the business is inherently tied to the lease. A bad lease can render a profitable business completely unsellable. Here are the major red flags to watch out for.
1. Demolition and Relocation Clauses
A demolition clause allows the landlord to terminate the lease with notice if they decide to redevelop the property. In rapidly developing cities like Burnaby and Vancouver, this is a massive red flag. Lenders will rarely finance a business with an active demolition clause.
2. Unreasonable Assignment Fees and Conditions
Some leases require the seller to pay the landlord a percentage of the business sale price or an exorbitant legal fee just to assign the lease to the buyer. Ensure assignment terms are standard and reasonable.
3. Lingering Personal Guarantees
Ensure that upon the sale of the business, your personal guarantee is formally released by the landlord, and the new buyer assumes the liability. You do not want to be on the hook if the new owner defaults.
4. Lack of Renewal Options
If you only have two years left on the lease and no option to renew, the buyer is taking a massive risk. Secure renewal options before going to market.
Always have a commercial real estate professional and a lawyer review your lease before listing your business for sale.
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