Preparing your business for sale and oft-overlooked real estate considerations
There are many great resources and talented advisors available, many of them local, to assist businesses with positioning their company for sale. Moreover, I find that the transactions involving businesses that have taken advantage of these resources prior to sale, are often smoother, faster and involve less negotiation. That said, a surprising number of the sales of businesses are ultimately held up by real estate considerations, many of them simple and which could have been abated by an earlier review and correction if done by the selling business prior to entering into definitive agreements and the buyer’s resultant due diligence.
The below are just a few basic real estate considerations that are often overlooked by businesses and I advise you to consult your friendly, local commercial real estate attorney to review your company’s real estate, whether leased or owned, before entering into negotiations for the sale of your business.
The first consideration is particularly simple but has surprisingly slowed closings, in my experience, from small to hundreds of millions of dollars; old and existing encumbrances from loans secured on the company’s real estate that take time to correct. To that end, businesses would be well-served to take measure of all real estate loans, lines of credit, equipment loans and other loan facilities, present or past, to the business and whether they are secured against your company’s real estate. Next, make sure any of the old loan facilities that are secured by the real estate have been properly discharged, including a sufficient recording in the correct registry of deeds. Once counsel is hired by the buyer, or their lender, any such encumbrances should be caught by a title search and your counsel will get to work on discharging the same. However, old mortgages and other encumbrances can sometimes take a very long time to properly get discharged and doing so may slow down the sale. As to encumbrances from current and existing loan facilities, it is often the case that due to confidentiality and other concerns, companies do not want to tell their lenders of the possibility of sale, however, taking measure of what encumbrances on title exist and coming up a with a plan, including payoff information ahead of time, will also speed up the process.
Beyond mortgages and other possible encumbrances on your company’s real estate from lenders, past and present, there are a wide range of title pitfalls that may become apparent when the buyer’s counsel, or lender’s counsel, reviews the title report(s) to the real estate. Previously unknown rights of right of first refusal, or other purchase rights (particularly common in large office condominium complexes), may exist. Easements, never considered or previously an issue, or use restrictions never thought of or known, may be lingering in the title and when discovered may not only slow the sale but also give the buyer reason to terminate the sale or at least ask for a price reduction. An updated review of the title by your real estate counsel to take measure of any possible issues, and cure of the same (where possible) will get your company a step ahead before entering negotiations for sale.
Although there are fewer possible real estate pitfalls preparing your business for sale involving leased properties they do exist and are potentially less curable. Most obviously, a major issue with leased property and the sale of a business is obtaining the landlord’s consent to an assignment to the buyer. In general, assignment terms in commercial leases can be particularly onerous and include very strict requirements, though they often can be negotiated. Moreover, for closely held businesses where the principals are guarantors to a lease, assignment might be granted but the principals will not be released as the current lease is literally being “assigned” and the terms, including the guarantors, do not change. A termination of the current lease and a new lease with the buyer is usually ideal but can be difficult to negotiate. Another potential pitfall with commercial leases that I find could have often been addressed sooner is the issue of exclusives or use restrictions. In large commercial plazas these can be particularly tricky as the landlord is beholden to a wide variety of tenants and the exclusives may narrow what businesses can be located on the premises.
As stated above, prior to a planned sale of your business, taking measure of your businesses’ real estate concerns and engaging your friendly, local real estate attorney, to review title and all leases, will go a long way to reduce possible warts found by the buyer during their due diligence and thus insure fewer possible reasons for the buyer to seek a reduction in price and most certainly a quicker time to the deal closing.
Eric Kilchenstein
