Business Valuations Online

Securing Lease Terms

Securing Lease Terms

As financial professionals, we understand the importance of risk management in ensuring the success and longevity of our clients' businesses. One critical factor to consider when assessing risks is the security of a business's location. For businesses where their location is critical to the ongoing success of the business, securing lease terms that extend as far into the future as possible is crucial.

Negotiating favourable lease terms is a complex process that requires a deep understanding of the real estate market, as well as legal and financial considerations. As you work with your clients to negotiate lease agreements, it's important to keep in mind the long-term implications of the terms being negotiated. Will the terms of the lease allow your client to stay in the location for as long as they need to? Are there any clauses in the lease that could put the business at risk if certain conditions are not met? Is the client able to effectively transfer the lease to a new business owner if necessary? etc.

A recent client of ours had actually run out of their existing lease and was operating under a ‘month-to-month’ lease, where the landlord could ask them to vacate within 30 days, leaving them homeless. The business was otherwise quite low risk and profitable. We advised the client to consult a lawyer and negotiate a new lease before placing the business on the market, as the premium they could add to the business value was in the order of $230,000. Definitely worth the time and expense to engage a lawyer to help negotiate a lease!

Don’t forget that lease agreements can be renegotiated. Building a good relationship with the landlord and negotiating favourable terms can make a significant difference in the future of the business. Securing long-term lease agreements can provide stability for a business, which is especially important during tough economic times, and given the current economic climate, that could only be a good thing!

Diversifying your client's locations is another important step in mitigating risks related to their location. Having multiple locations can provide a cushion against unforeseen events such as natural disasters, economic downturns, or changes in consumer behaviour. However, this strategy comes with its own set of challenges, so be sure to carefully assess the costs and benefits of each location before expanding. Conduct thorough market analysis and assess the potential risks and rewards of each location.

Zoning and land use regulations are also factors to consider when assessing location-related risks. For example, a business I was valuing (a few years back now), was being valued for potential purchase by my client. The business was being sold with an extended lease on purpose-built premises owned by the current business owner, at great expense. What had not been disclosed was that the business was located in a ‘corridor’ designated as the path of a new motorway that had recently been approved for construction, leaving the prospective purchaser to deal with relocation of the business and dealing with the inevitable bureaucracy for compensation. Our valuation reflected the risks associated with this discovery… with a significant reduction in value when compared to the business listing price.

Depending on the industry, there may be specific zoning requirements or regulations that affect the ability to operate in a specific location. Understanding these regulations and ensuring compliance can help avoid any legal or regulatory risks. Consult a (good) lawyer to ensure that your client's business is in compliance with all relevant regulations.

Ensure that the client business has adequate insurance coverage for the premises in place to protect the business in case of any unforeseen events. Depending on the nature of the business and location, there may be specific insurance requirements or considerations to keep in mind. Talk to your preferred insurance professional to ensure that the right coverage is in place, or at least learn what options are available.

Securing the lease terms of a business addresses one of the major risks facing a business: ensuring a stable location going forward. Proactively helping your clients address their business premises risks is a good first step in protecting their assets… in short ‘Lock it in Eddie…’