What is a Contingency?
A contingency in the sale of a business is a condition in the contract of sale or offer that must be resolved, satisfied or rectified by either a buyer or seller. If they are not satisfied then the sale will generally not go forward. Most offers on a business contain one or more contingencies. The sale may be subject to the buyer obtaining financing, or the seller repaving the parking lot. Experienced business brokers have seen just about every contingency there is. Most of these are placed in the offer by a buyer who has concerns about one or more issue and needs it or them to be satisfied before proceeding with or closing the sale.
It may be as simple as the sale is contingent upon the buyer receiving a five-year extension of the lease by [a certain date]. Or, the offer to purchase may state that the sale is conditional upon the buyer’s approval of the seller’s books and records.
The difference between the two examples is that in the first one, it is a specific event that must be satisfied, and a time limit is specified. The second example is open-ended, meaning that a buyer could opt out of the deal by disapproving the books and records essentially for any reason.
Here are some tips on contingencies:
- There should be a time period in which the contingency must be satisfied. Without it the deal could go on almost forever.
- It, or they, as the case may be, should be reasonable. There is no point in making the sale contingent on moving the building to the next state. As they say – “it ain’t going to happen.”
- Contingencies should be limited to very important or critical issues – those that impact whether a buyer will actually purchase the business or not. Minor items should be resolved prior to an offer being written.
- Confidentiality or proprietary issues may influence whether a buyer will buy the business, but the seller is not willing to proceed until an offer containing price and terms is agreed upon.
- Contingencies come in all sizes and shapes. Very few offers don’t contain at least one, and usually more than one. They are an inevitable part of selling – and buying a business. A business broker knows what is reasonable and what is not.
How Do You Transfer a Lease When Selling Your Business?
By Troy Frank, Owner — Indiana Equity Brokers
Estimated read time: 7 min
The short answer: There are three ways to handle a commercial lease when selling a business: assign the existing lease to the buyer, negotiate a new lease directly between the buyer and landlord, or have the seller sublease the premises to the buyer. Lease assignment is by far the most common approach, but it requires landlord approval in almost every case, takes 15 to 30 days or more, and — this part surprises many sellers — doesn’t automatically release you from liability if the buyer later defaults on the rent. The lease needs to be reviewed and addressed before your business goes to market, not during due diligence.
Here’s a scenario that plays out more often than sellers expect. A deal has been negotiated, a price has been agreed upon, and the buyer is ready to move forward. Then someone reads the lease and realizes it prohibits assignment without landlord consent, or the landlord uses the approval process as an opportunity to renegotiate terms. The closing gets pushed. The buyer gets nervous. The deal falls apart.
The commercial lease is often the most overlooked part of selling a business. It doesn’t generate revenue, it doesn’t appear on the income statement, and sellers rarely think about it until a buyer asks to see it. But for any business whose location matters, the lease is one of the most important documents in the transaction. This article covers how lease transfers actually work, what your options are, what sellers stay on the hook for even after closing, and how to avoid the landlord becoming a deal-breaker.
The Three Ways to Handle a Lease When Selling
Your lease situation at the time of sale will generally fall into one of three categories, and how you handle it affects the deal timeline, the buyer’s risk, and sometimes your own exposure long after closing.
Assignment of the Existing Lease
This is what most business sales use. When you assign a lease, you’re transferring your rights as a tenant to the buyer. They step into your shoes as the leaseholder and take on the obligation to pay rent and comply with the lease terms going forward.
Assignment sounds straightforward, but there are two things sellers routinely get wrong about it. First, almost every commercial lease requires landlord consent before an assignment is effective. The landlord typically has 15 to 30 days to review and respond, and they can impose conditions — a personal guarantee from the buyer, a higher security deposit, a rent review — as part of granting approval. Second, and more important: assignment doesn’t automatically release you from the lease. In most standard commercial leases, the seller remains secondarily liable to the landlord even after the assignment is complete. If the buyer stops paying rent two years after closing, the landlord may have the right to come after you for the balance.
Getting a formal release of liability from the landlord at the time of assignment is something sellers should push for, but landlords aren’t obligated to provide it. Whether you can get one depends on the landlord, the buyer’s financial profile, and how much negotiating room exists. This is worth discussing with your transaction attorney before you close.
New Lease
Sometimes the existing lease is expiring or near expiration, the terms are unfavorable, or both parties prefer to start fresh. In that case, the buyer negotiates a new lease directly with the landlord and the seller’s lease ends. A new lease is drafted between the buyer and the landlord and the seller has no ongoing obligation.
This approach is cleaner for the seller because there’s no continuing liability, but it introduces risk for the deal. The buyer and landlord are now negotiating independently, and there’s no guarantee the landlord will offer terms the buyer can live with. If the landlord raises the rent significantly or offers a shorter term than the buyer needs, the deal can unravel even after everything else is settled.
For a buyer using SBA financing, the lender typically wants to see a lease with at least as much remaining term as the loan, often 10 years total including options. A landlord who won’t provide that can effectively block an SBA-financed acquisition even if the seller and buyer are in complete agreement.
Sublease
A sublease is less common in small business sales, but it comes up. In a sublease arrangement, the seller remains the primary tenant and the buyer pays rent to the seller, who in turn pays the landlord. The landlord’s relationship stays with the seller. The buyer never has a direct lease relationship with the landlord.
Subleases are sometimes used when the existing lease prohibits assignment, when the seller wants to maintain some control over the premises, or when the landlord is difficult to work with directly. But they create ongoing entanglement between seller and buyer that most parties want to avoid. The seller is functionally a landlord to their own buyer, with all the responsibilities and risks that come with that role.
What’s Actually in Your Lease: What to Check Before You List
Before your business goes to market, someone needs to read your lease. Not summarize it, not describe it from memory — actually read it. Here’s what matters for a sale.
The assignment clause. Does the lease allow assignment? With or without landlord consent? Some leases prohibit assignment entirely. Others allow it only with consent that “shall not be unreasonably withheld.” Some leases give the landlord the right to reclaim the premises if you want to assign, which means they could effectively end your tenancy rather than allow the sale.
Time remaining and renewal options. A lease with eight or more years remaining, including renewal options the buyer can exercise, is an asset. A lease expiring in 18 months is a problem, because buyers and SBA lenders both need term certainty. When we’re preparing a business for sale, the lease term is one of the first things we flag.
Change of control provisions. Some leases are written so that a change in the ownership of the business entity — even without a formal assignment — constitutes a transfer that requires landlord consent. If you’re selling the business as a stock sale rather than an asset sale, this matters. The buyer may think they’re acquiring the entity without triggering the lease transfer clause, and they’d be wrong.
Personal guarantee terms. If you personally guaranteed the lease when you signed it, that guarantee may persist even after an assignment unless the landlord specifically releases it. This is another detail sellers overlook until a deal is already in progress.
What Landlords Can — and Can’t — Do
Landlords have a lot of power in this process, but they’re not unlimited. In most states, including Indiana, if a lease allows assignment with landlord consent, that consent can’t be unreasonably withheld. The landlord can review the buyer’s financials, require a personal guarantee from the buyer, or ask for a larger security deposit. What they generally can’t do is simply refuse without cause, or use the approval as leverage to raise the rent beyond what the lease terms already allow.
That said, “unreasonably withheld” is a legal standard, and what counts is something a court decides — not something either party decides on their own. Landlords who are slow to respond, who impose unusual conditions, or who use the approval process as a negotiating tool can delay or derail a closing even when they don’t have a legal right to block it.
This is exactly the situation described in our post on whether a landlord can kill your business sale. The short version is yes, they can create enough friction to do real damage, even when they can’t legally say no.
The practical lesson is to engage the landlord early. Once you have a signed letter of intent and a credible buyer, approaching the landlord as a courtesy before a formal assignment request is often more effective than making the assignment demand the first contact. Landlords who feel blindsided by a sale are more difficult than landlords who’ve been kept in the loop.
When the Lease Is a Deal Problem — and How to Get Ahead of It
The sellers who run into serious lease problems during a deal are almost always the ones who didn’t look at the lease until a buyer asked about it. By that point, any issues become urgent, which weakens your negotiating position with the landlord.
The sellers who handle it well are the ones who reviewed their lease before listing, understood what they had, and either resolved issues in advance or disclosed them honestly to prospective buyers upfront. A lease issue that’s disclosed at listing is a known quantity. A lease issue discovered during due diligence feels like a surprise, and buyers treat surprises poorly.
Indiana Equity Brokers reviews lease terms as part of our listing preparation process. If there’s an assignment issue, a short remaining term, or a landlord who’s historically difficult, we’d rather know at the start than find out 60 days into a deal. It changes how we price the business, how we structure buyer conversations, and whether we need to have a landlord conversation before the first buyer ever sees the listing.
Frequently Asked Questions
Do I need landlord approval to sell my business? In most cases, yes. Commercial leases almost universally require landlord consent before the lease can be assigned to a new tenant as part of a business sale. The landlord typically has 15 to 30 days to respond to an assignment request, and they can impose conditions including a personal guarantee from the buyer or a higher security deposit. A landlord can’t unreasonably withhold consent if the lease allows assignment, but what counts as unreasonable is a legal question rather than a simple one.
Can I still be held responsible for the lease after selling my business? Yes, in most cases. A standard commercial lease assignment makes the buyer responsible for rent going forward, but it doesn’t release the seller from the original lease guarantee unless the landlord specifically agrees to that release. If the buyer defaults, the landlord may have the right to pursue the original seller for unpaid rent or other obligations. Negotiating a release of liability from the landlord at closing is the right approach, though landlords aren’t required to provide one.
What happens if my lease doesn’t allow assignment? If the lease prohibits assignment entirely, you’ll need to work with the landlord to either get consent for an exception, negotiate a new lease directly with the buyer, or structure the sale in a way that doesn’t trigger the transfer restriction. An outright prohibition on assignment without any path forward is uncommon, but it does happen. This is something to address well before you go to market, not during due diligence.
How much lease time remaining do buyers and SBA lenders need? SBA lenders typically want the lease term — including renewal options the buyer can exercise — to cover at least the length of the loan, which is often 10 years for an acquisition loan. Buyers who aren’t using SBA financing have more flexibility, but they still want enough term to justify the investment. A lease expiring in 12 to 18 months with no renewal options significantly reduces a buyer’s willingness to pay full price and may eliminate SBA financing as an option.
What is the difference between a lease assignment and a sublease? In an assignment, the buyer takes over the lease directly and becomes the primary tenant. The seller’s rights in the lease end. In a sublease, the seller remains the primary tenant and the buyer pays rent to the seller, who continues paying the landlord. Subleases are less common in business sales because they keep the seller entangled in the property after closing. Assignment is the standard approach because it gives the buyer a direct relationship with the landlord and removes the seller from the ongoing tenancy.
Sort Out the Lease Before You List
The lease isn’t the most exciting part of selling a business, but it’s one of the parts most likely to cause problems at the worst possible time. Getting clarity on your lease terms, assignability, and remaining term before you go to market is straightforward when you’re not under deal pressure. After a buyer has signed a letter of intent and you’ve been off the market for 60 days, it’s a much harder conversation to have.
If you’re thinking about selling and you want to understand how your lease affects the process and the price, that’s worth talking through before you do anything else. Indiana Equity Brokers has closed more than 884 Indiana transactions, and lease issues come up regularly enough that we know how to handle them without derailing a deal.
And if you want to understand all the ways a landlord can affect your sale beyond just the lease transfer itself, our post on whether a landlord can kill your business sale covers that in detail.
Read MoreDon’t Take the Lease for Granted
The cliché is that the key to business success is: location – location – location. If you own a business in which the location is an important reason for the success of the business, and you are considering selling, then the lease is a very critical issue in the sale. The time to deal with this is not in the middle of a sale, but before you even place the business on the market.
Business brokers can recite many a story where, on contacting the landlord in the midst of a pending sale, they are told that the landlord has other plans for the space when the lease is up next month. Fortunately this is not a common occurrence, but if the lease is an issue, the time to deal with it is now.
The Steps In Dealing with the Lease
The first step is finding the lease.
The second step is to read it.
The third step is to visit the landlord and work out any lease issues.
Before placing your business on the market, you need to see where you stand on the all-important issue of the lease. After reviewing it, set up an appointment to visit the landlord. If there are only a few years left on the lease, see about getting an extension. If you have more than that left, still check into getting an option to renew the lease at the expiration of the present term. After all, if the location works, the longer the lease the better in most cases. It might also be a good time to see if the landlord has ever considered selling the premises. By owning the property, you will never have to worry about leases again.
If location is not important and the business is such that moving it is a non-issue, then obviously the lease is not important. However, if the business is one that is dependent on its existing location, then the lease issue is crucial. The time to iron out any details is before the business is placed on the market.
The Very Expensive Desk Lamp
This is a story based on a true incident – only some of the details have been changed. The buyer and seller were ready to close on a business when the buyer asked to look at the list of fixtures and equipment that were to be included in the sale. After a few minutes reviewing the list, the buyer said that the desk lamp on the owner’s desk was not listed. The seller explained that the lamp was a gift from his parents many years ago and therefore it was not included. The buyer got very upset, stating that the lamp was just perfect for that desk and he wanted it. The seller tried to explain that the lamp had lots of sentimental value, but that he would replace it with another desk lamp. This did not satisfy the buyer, and in order to stop the sale from falling part, the seller agreed to subtract $1,000 from the purchase price to keep the lamp. That made the desk lamp a very expensive one.
The point of this is that when buyers look at a business, they assume that everything they see is included in the sale. Sellers should keep this in mind when selling their businesses. If something is not going to be included in the sale, remove it from the premises prior to any prospective buyer looking at the business. Sellers sometimes think that they can remove the painting on the office wall since their grandmother painted it. The picture really looks good on the wall never imagining that the buyer also will think it looks great on the wall – and the problems begin.
Business broker professionals have seen deals fall apart over a piece of family memorabilia that was never intended to be included in the sale, but was there when the buyer looked at the business. The word to sellers is to remove anything – and the key word is anything – that is not included in the sale. The alternative is to list everything that is not included on the listing agreement, but it is usually less complicated simply to take them home.
One other thing – if there is a piece of equipment that is inoperative, such as the computer on the back desk, or the refrigerator in the basement of the restaurant – get rid of it. Or make sure the listing agreement states that the following equipment is inoperative. Again, it’s really easier just to remove these items.
A professional business broker will see that these potential dealbreakers won’t disrupt the closing.
How Important is the Asking Price?
Depends on whom you are asking. If you’re the seller, you might say that the asking price is too low. The buyer would say, obviously, that the asking price is too high. How can they both be right? Who decides?
Most sellers have an idea of what they want for their business. It can be based on their knowledge of the industry and what similar businesses have sold for. It may be, however, based on just a wish. There is the old, but true, story of the two partners who decided to sell their business. When asked what the price would be, they both responded with the same answer – $2 million. When asked how they arrived at that price, they each said that they wanted to be a millionaire and two times $1 million was $2 million.
Sellers often say that the asking price doesn’t make any difference since it can always be reduced. What they don’t realize is that if the price is not realistic, buyers won’t even look at it. Buyers are aware that they can make an offer, but if the starting point is too high, what they consider a fair price may be so low that why bother even making the offer.
Studies using various data bases comparing actual selling prices of businesses with their asking prices show that the difference is about 15 percent for small businesses. The larger the business, the smaller the spread. Businesses sold for $1 million-plus sell for about 90 percent of the asking price, while smaller ones sell for about 85 percent of the asking price. The important thing to remember is that the data is based on sold businesses only. There is no data, obviously, comparing the businesses that didn’t sell.
Sellers have to keep in mind that starting with too high an asking price may well prevent a very qualified buyer from even looking at the business. You know your price is too high and that you will come down, perhaps even significantly, but the buyer doesn’t. What is the right price? A business broker professional has tools to help sellers arrive at a reasonable starting point. There may be comparable market data based on similar sales. There are methods based on the cash flow of the business and a multiple using other business factors such as location, down payment requirements, competition, annual sales variations and other determinants.
Ultimately it’s the marketplace that decides the ultimate selling price. Serious sellers listen to the marketplace. After all, if 10 buyers are willing to pay X for the business and there are no other buyers, the price is X. The seller doesn’t have to accept that price, but he or she must accept the fact that the market will only pay X for their business.
Since studies of thousands of business sales show that the sales price ends up being, on average, 85 percent of the asking price – so sellers shouldn’t dream or wish for too much.
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