6 Mar 2025

Navigating Business Sales with Short-Term Leases
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Navigating Business Sales with Short-Term Leases

By Jeff DeGarmo|2025-03-15T23:35:12+00:00March 6th, 2025|Categories: Selling a Business, Starting a Business|Tags: lease, real estate, rent|

Navigating Business Sales with Short-Term Leases.

For business owners considering a sale, a looming lease expiration can significantly impact the transaction’s success and the business’s valuation. The real estate component is intrinsically linked to the business’s overall viability, making thorough lease review and strategic planning essential. Let’s explore the intricacies of selling a business with a short-term lease, highlighting the crucial steps to protect your business’s salability and value.

Scrutinize Your Lease

Before initiating any sale process, a comprehensive review of your existing lease agreement is paramount. This goes beyond a cursory glance. You need to meticulously examine:

Lease Term and Renewal Options: Understand the exact expiration date. Identify any renewal options, including notice periods and conditions. Late notice can cause loss of renewal rights.
Rent Escalation Clauses: Analyze how rent increases are calculated and scheduled. Predict future rent obligations and their impact on profitability.
Transfer and Assignment Provisions: Determine if the lease allows for assignment to a new owner. Understand any restrictions or landlord approval requirements. This is one of the most important clauses to review.
Maintenance and Repair Responsibilities: Clarify who is responsible for repairs and maintenance. Identify potential liabilities for deferred maintenance.
Permitted Use of the Premises: Ensure the business’s current operations comply with the permitted use clause. Confirm that the buyer’s intended use is also permitted.
Termination Clauses: Understand the conditions under which the lease can be terminated. Identify any penalties for early termination.
Security Deposit and Other Financial Obligations: Verify the amount of the security deposit and its return conditions. Identify any other financial obligations, such as common area maintenance (CAM) charges.
Co-tenancy and Exclusive Use Clauses: Co-tenancy clauses can allow a tenant to break a lease if an anchor tenant leaves. Exclusive use clauses grant a tenant the right to be the only business of its type within the leased area. These can be very valuable to a buyer.

Why This Level of Scrutiny Matters

Business Valuation: A favorable lease significantly enhances a business’s value. Conversely, a problematic lease can deter potential buyers and lower the sale price.
Due Diligence: Potential buyers will conduct thorough due diligence, including lease review. Any red flags can jeopardize the sale.
Landlord/Tenant Relationship: Understanding the lease terms provides insight into the landlord’s expectations and potential flexibility.

Addressing Short-Term Lease Challenges

Holdover Clauses: Be aware of holdover clauses that can trigger substantial rent increases if you remain in the premises after the lease expires. Proactively address lease expiration to avoid unexpected financial burdens.
Month-to-Month Leases: While seemingly flexible, month-to-month leases can create uncertainty for buyers. Consider negotiating a longer-term lease with an exit clause to provide stability.
Professional Guidance is Essential: Engage a business broker with experience in handling sales with short-term leases. Seek legal counsel to review and interpret lease terms and negotiate favorable amendments.

Emphasizing Lease Importance to Buyers

Highlight the lease’s role in the business’s stability and growth potential.
Demonstrate how a secure lease can be a valuable asset.
Provide potential buyers with a clear and concise summary of key lease terms.
Protecting Your Business’s Salability

By prioritizing lease review, addressing potential challenges, and seeking professional guidance, you can effectively navigate the sale of your business with a short-term lease. Remember, a well-structured lease can significantly enhance your business’s value and attract qualified buyers.

Photo by Aleksandra Sapozhnikova on Unsplash

Navigating Business Sales with Short-Term Leases

Understanding the Basics of EBITDA

By Jeff DeGarmo|2025-02-21T01:17:33+00:00February 20th, 2025|Categories: Selling a Business, Starting a Business|Tags: cash flow, EBITDA, financial health, valuation|

Understanding the Basics of EBITDA.

Ever wondered how companies get valued when they’re bought and sold? One of the most important numbers people look at is EBITDA. It’s a bit of a mouthful (Earnings Before Interest, Taxes, Depreciation, and Amortization), but it’s key to understanding a company’s financial health. Think of it as a way to see how much money a business is really making from its operations.

EBITDA: The Basics

EBITDA isn’t just for big M&A deals. Traders, analysts, portfolio managers, and even lenders all use it. It helps them figure out a company’s value and its ability to pay back debts. While EBITDA gives a great snapshot of performance, it’s not the whole picture.

If you’re thinking about selling your business someday, understanding EBITDA is super important. Knowing how it’s calculated can help you show off your company’s financials in the best possible light, making your post-sale cash flow look amazing to buyers. Investors often use EBITDA to figure out a company’s enterprise value, and buyers usually offer a multiple of EBITDA when making an offer.

EBITDA vs. Cash Flow: Clearing Up the Confusion

A common misconception is that EBITDA and cash flow are the same thing. They’re related, but definitely not identical. EBITDA is a useful measure of a company’s operational profitability, but it doesn’t tell the whole story. EBITDA is more like a proxy for pre-tax operational cash flow. It gives an estimate of the cash flow you might expect after a sale. By leaving out things like depreciation, amortization, debt, and taxes, EBITDA lets buyers compare different companies on a more level playing field. It focuses on earnings before those expenses, giving a useful, yet not perfect, idea of cash flow. Cash flow is a more complete picture of a company’s financial health, as it shows how much cash it has available for operations.

Adjusted EBITDA: Making Your Company Even More Attractive

Sometimes, a company has unusual expenses or income that aren’t part of its regular operations. That’s where adjusted EBITDA comes in. It takes those one-time or unusual items out of the equation to give a clearer picture of the company’s true operating performance. This is especially important in M&A deals, because it shows what the earnings might look like under new ownership.

Think of it this way: adjusted EBITDA helps paint a more realistic picture of your company’s future profitability, making it more appealing to potential buyers and helping everyone agree on a fair price. Common adjustments include one-time expenses or income, owner-related expenses, non-cash expenses, and other non-operational items.

Photo by Nick Fewings on Unsplash

Understanding the Basics of EBITDA - image of a dollar sign

How to Finance a Franchise

By Jeff DeGarmo|2025-01-10T17:22:24+00:00December 5th, 2024|Categories: Starting a Business|Tags: financing, franchise|

How to Finance a Franchise.

Buying a franchise is a great way to start a business, but it can be expensive. The good news is that there are a number of financing options available to help you get started.

Here are some of the best ways to finance a new franchise:

Personal Savings

This is the most common way to finance a franchise. If you have the money saved up, it’s a great way to avoid having to take out a loan.

Bank Loans

Banks are often willing to lend money to franchisees, especially if they have good credit and a solid business plan.

SBA Loans

The SBA offers a variety of loan programs that can be used to finance a franchise. These loans typically have lower interest rates and longer repayment terms than traditional bank loans.

ROBS

A “rollover for business startup,” also known as a ROBS (Rollover as Business Startup), is a financial strategy that allows individuals to utilize their retirement funds (like a 401(k) or IRA) to fund the costs of starting a new business without incurring immediate taxes or penalties

Franchisee Financing

Some franchisors offer their own financing programs to franchisees. These programs can be a good option if you don’t qualify for a bank loan or an SBA loan.

Investors

If you can’t afford to finance the entire purchase yourself, you may be able to find investors to help you out. This is a good option if you have a strong business plan and a proven track record.

No matter which financing option you choose, it’s important to do your research and make sure you understand the terms of the loan. You should also be prepared to provide the lender with documentation of your financial situation and your business plan.

Here are some additional tips for financing a new franchise:

Start your search for financing early. The sooner you start looking, the more likely you are to find a lender that is willing to work with you.
Get pre-approved for a loan before you start shopping for a franchise. This will give you an idea of how much money you can borrow and what your monthly payments will be.
Be prepared to negotiate. Lenders are often willing to work with you on the terms of the loan, so don’t be afraid to ask for what you need.
Don’t forget about the hidden costs. In addition to the purchase price of the franchise, you’ll also need to factor in the cost of things like equipment, inventory, and marketing.

Buying a franchise can be a great way to start a business, but it’s important to make sure you have the financial resources to make it a success. By carefully considering your financing options and doing your research, you can increase your chances of success.

Photo by insung yoon on Unsplash