Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / The Lease That Almost Killed the Deal
Transcript
- Lucas: So there's a small manufacturing business in Ohio. Family-owned, been running since the nineties, makes precision-machined parts for agricultural equipment. Revenues around eight million, clean margins, good customer concentration — nothing scary. They get a letter of intent from a strategic buyer, and the price is fair. Eight times EBITDA, about two point four million dollars. Luna: That sounds like a dream scenario. What happened? Lucas: The deal died. Not over price, not over earnouts, not over working capital targets. It died over a lease. Specifically, a clause buried in a triple-net lease that the seller had signed years earlier and basically forgotten about. Luna: A lease clause killed a two and a half million dollar deal? How does that even work? Lucas: The building was owned by a separate LLC controlled by a local real estate investor. The seller's lease had a provision called a right of first refusal on the sale of the business. It said if the tenant ever sold the business, the landlord had the first option to buy the business itself at the same terms offered by the third-party buyer. Luna: Wait — the landlord could step in and buy the manufacturing company? Not just the building, but the whole operation? Lucas: Exactly. The landlord wasn't interested in running a machine shop. But the clause gave him leverage. He told the buyer he would exercise the right unless they agreed to renegotiate the lease at a higher rent and with a personal guarantee from the buyer's owner. The buyer said no, the seller couldn't unwind the clause, and the deal collapsed. Luna: So the landlord basically torpedoed the sale to extract better terms on the lease. Did the seller not read the lease before putting the business on the market? Lucas: That's exactly the question. And the honest answer is, most small business owners don't think of their lease as a deal document. They think of it as a monthly expense. But when you sell the business, the lease can become the single most consequential contract you have — especially if you're doing an asset sale, which is how most private businesses under ten million change hands. Luna: Let's unpack that. In an asset sale, the buyer is essentially buying the inventory, equipment, customer relationships, and the right to operate from that location. If the lease isn't assignable, or if it has a clause like this right of first refusal, the buyer can't just step in. Lucas: Right. And the tricky part is, many leases require the landlord's consent to assign. That's standard. But the problem here was the right of first refusal, which is less common. It turned the landlord into a potential competitor for the deal itself. The buyer didn't want to negotiate with someone who could become their landlord and their rival. Luna: So what's the takeaway for a seller? How do you avoid this? Lucas: First: before you even talk to a broker, get a copy of your lease and have a commercial real estate attorney review it. Look specifically for three things. One — the assignment clause. Does it require the landlord's consent, and can consent be unreasonably withheld? Two — the change of control clause. Sometimes the lease treats a sale of the business as a default. And three — any right of first refusal or option to purchase the business that the landlord might have. Luna: And this is where a landlord estoppel letter becomes critical. I've seen brokers advise sellers to get one before going to market. It's basically a letter from the landlord confirming the current status of the lease, that it's in good standing, and that there are no hidden clauses that would block a sale. Lucas: Exactly. A landlord estoppel letter is a standard request in commercial real estate. And if the landlord refuses to sign one, that's a red flag. In the Ohio case, the seller never asked for one. The buyer's attorney requested it during due diligence, and that's when the right of first refusal surfaced. Luna: So by the time they found it, the seller had already spent tens of thousands on legal fees, valuation work, and broker commissions. And the buyer had spent maybe even more on due diligence. All wasted. Lucas: Yeah. And the seller had to go back to running the business after six months of distraction. Morale took a hit, key employees started wondering if the company was in trouble. It took them two years to recover the momentum. Luna: Let's talk about the continuous operation clause. I read about a case where a landlord used that to block a sale. The clause requires the tenant to operate the business continuously. If the tenant is in the process of selling, maybe they slow down on inventory orders or marketing, and the landlord claims they violated the clause. Lucas: That's a nasty one. Continuous operation clauses are common in retail and manufacturing leases. They exist to protect the landlord's property value — they don't want a dark storefront. But during a sale process, the seller might naturally reduce some activities. If the landlord is hostile, they can use that as leverage to extract a higher rent or a termination fee. Luna: What about the triple-net aspect? In a triple-net lease, the tenant pays property taxes, insurance, and maintenance. If the building needs a new roof or an HVAC replacement, that's the tenant's cost. Buyers often get spooked by deferred maintenance that shows up in due diligence. Lucas: That's a separate issue but related. In the Ohio case, the lease was triple-net, and the building had an old roof that needed replacing. The buyer wanted the seller to fix it before closing. The seller didn't have the cash — he was counting on the sale proceeds. That became another friction point, though the lease clause was what ultimately killed it. Luna: So you've got three potential deal-killers hiding in a lease: the assignment consent, the right of first refusal, and deferred maintenance obligations under triple-net. And none of them are about the core business. Lucas: Right. And what I find interesting is that most guidance for business sellers focuses on financials, customer concentration, and operational improvements. The lease is often an afterthought. But I'd argue it should be reviewed even before you decide on a valuation range. Luna: Because if the lease is unassignable, the business might not be sellable at all. Or the buyer will discount the price heavily to account for the risk of having to negotiate a new lease. Lucas: Exactly. I've seen deals where the buyer insisted on a ten-year lease extension at a fixed rent as a condition of the sale. The seller had to go back to the landlord and negotiate that upfront, which is awkward because the seller doesn't have the same leverage as a buyer would. Luna: And if the landlord says no, you've got a problem. So what's the practical sequence? Seller gets the lease reviewed by an attorney. Then what? Lucas: Then, if there are problematic clauses, the seller has two paths. One: try to get the landlord to amend the lease before going to market. That might mean paying a fee or offering a small rent increase in exchange for removing the right of first refusal. Two: disclose the issue to potential buyers early and let them factor it into their offer. The worst thing you can do is hide it and let it surface in due diligence. Luna: Transparency, as always. But what about the scenario where the seller owns the building himself? Then he doesn't have a landlord. That simplifies things, doesn't it? Lucas: It does, but it creates a different complexity. If the seller owns the real estate separately, the buyer might want to buy both the business and the building, or just the business and sign a new lease with the seller as landlord. That can actually be a positive — the seller can get a second stream of income from the lease. But it also means the deal becomes more complex, with two separate valuations. Luna: Let's get specific about what a seller should ask their lawyer to look for. Give me the checklist. Lucas: Okay. One: the assignment clause. Does the lease allow assignment? Does it require landlord consent? Is consent conditional on anything like 'reasonable' standard? Two: change of control clause. Some leases define a sale of more than fifty percent of the company's equity as a default. Three: right of first refusal or option to purchase the business or the assets. Four: continuous operation clause. Does it require the business to operate at all times? Five: use clause. Does it restrict what the business can do at the location? If the buyer plans to change the product mix, that could be an issue. Six: maintenance and repair obligations. Especially capital expenditures. Seven: sublease and assignment restrictions that might affect a temporary transition. Luna: That's a solid list. And I'd add an eighth: the estoppel letter itself. Sellers should request one annually, even if they're not planning to sell, just to have a clean record. Lucas: That's smart. Because once you're in a sale process, the landlord knows you're motivated. If you have an estoppel letter from before, you have leverage. Luna: And if the landlord refuses to sign it then, that tells you something too. Lucas: Exactly. So the Ohio story is a cautionary tale, but it's also instructive. The seller made one mistake: he didn't look at the lease before engaging a buyer. That mistake cost him two years and a lot of money. But the good news is, you can fix it with a few hours of legal review and one letter. Luna: And it's worth it. If you're listening and you own a business that might be worth selling someday, pull out that lease this week. Not next month. This week. Lucas: Yeah. And speaking of things that are worth it — if this episode saved you from making a similar mistake, or if you got value from it, consider supporting the show. We keep it ad-free because we want to give you clear, practical information without any sponsor noise. If you found today useful, you can buy me a coffee dot com slash fexingo. It's that simple. Luna: A small gesture that goes a long way for us. And honestly, knowing that these episodes help people avoid real-world pitfalls is what keeps us going. Lucas: Alright. So to wrap up the lease lesson: review it early, get an estoppel letter, and flag any red flags to your broker before you put the business on the market. That way, the only thing that kills your deal is a better offer — not a forgotten clause. Luna: And if you've got a lease story of your own — good or bad — we'd love to hear it. You can find us on the Fexingo Business podcast network. Lucas: Next time, we're going to talk about earnout structures that actually work. Not the traps — the ones that align seller and buyer interests. That's a good one. See you then.