Think about a business that has a great location.
(article continues below)
In my case, I'm thinking about a poster store across the street from the Chicago Art Institute. They sell high-end posters, including many reprints of paintings in the Art Institute. With tons of tourists visiting the Art Institute and incredible foot traffic just from being on Michigan Avenue, this business has been a goldmine for the owner.
In fact, years ago, he had a few other locations throughout Chicago. With great hesitation, he signed a long-term lease across the street from the Art Institute. His big bet paid off, so much so that the one store on Michigan Avenue outperformed all of his other stores to the point where it didn't even make sense to keep the other locations open.
For businesses like this one, location is a huge component of the overall worth of the company. Having such a good location, a location that drives business way above and beyond the price of the rent, allows a business owner to sell for a premium.
But not always.
The key is that the great location is transferrable to the new owner, with reasonable terms. If the landlord for the space has a clause in his lease that allows him to reject a new owner or change the terms of the lease upon a transfer of ownership, that could kill the deal in a heartbeat, don't you think?
For the reasons outlined above, it's important that business owners who are contemplating an exit some number of years in the future make sure they have an acquisition-friendly lease. If the location is great and the lease terms are favorable, prospective business buyers will be very happy if the current business owner has locked in favorable rents on a long-term basis with options to renew and all of those goodies transferring over seamlessly to any new owner.
Now, think about the other side of the coin.
A bad lease and a bad location can be a poison pill to getting a business-for-sale transaction done. Maybe the business owner is locked into paying $40 per square foot for a lease in a neighborhood where comparable spaces now rent for $20 per square foot.
No business buyer would want to continue with the current terms. Even if the lease obligation is to the business owner personally, it could still mess up the deal. That's because the seller will need to price the business higher in order to cover his future losses from the lease, assuming he cannot get out of the lease.
Even if the business is sold as an asset sale, the selling business owner might not be willing to settle for a price that doesn't allow him to buy out the lease and still have a profit. In some cases, the math just doesn't add up and a deal cannot get done.
Long story short, location is on center stage for many business-for-sale transactions. In fact, if the location is important, the first question a buyer will likely ask will be about the lease on the business location.