I wanted to make you aware of something worth considering when preparing your cafe for sale, particularly when it comes to the way banks assess finance applications for small businesses and hospitality venues.
The lending criteria and the way banks assess business finance can have a significant impact on the sale of your cafe, especially in the later stages of the process. Naturally, this is something that we want to try and avoid wherever possible.
With this in mind, it’s important to consider how a potential buyer is going to finance the purchase and whether there are any issues that could hold up the sale. One area that is particularly worth paying attention to is the lease.
How the lease can affect the sale of your cafe
We became aware of this issue through a client of ours who had a really good buyer lined up. This person had industry experience, cash in the bank, good equity in their property and had made a solid offer.
On paper, these guys were ticking all of the boxes. They were the kind of buyers that you wish there were more of.
The deal had gone really smoothly, up until the point that the bank looked in more detail at the lease.
The lease was a five-by-five, with four years already gone. This meant there was one year remaining on the current term before the next five-year option could be exercised. In terms of the return on investment and the size of the deal itself, the lease seemed quite reasonable.
The buyers had previously spoken with their finance broker about the lease term, and there appeared to be no problem with it at all.
However, when the broker submitted the paperwork to the bank, the lender raised concerns about the time remaining before the next lease option could be exercised. Because there was only a relatively short period of time left before the option date, the bank refused to lend on the business.
This was a real example of how an otherwise promising sale can run into problems when the buyer’s finance application is assessed in more detail.
What you need to consider when preparing your cafe for sale
The important thing to take away from this is that the overall lease term is not necessarily the only thing a bank will look at.
The time remaining before a lease option can be exercised may also be relevant, depending on the lender and the type of finance being applied for.
Different lenders have different policies. Some may consider the remaining lease term, while others may take the available options into account or assess the application using other criteria. For example, published commercial lending products from Australian banks include conditions that link the loan term to the remaining lease period, although the exact requirements vary between products.
This means that you shouldn’t assume a buyer will automatically be able to obtain finance simply because there are several years remaining on the lease or because the lease includes an option to renew.
If you’ve got a business that you’re looking to sell and you expect that the buyer will need finance, it’s worth being aware of this and preparing accordingly.
How to prepare your lease before selling
By preparing thoroughly, you can identify potential problems before they arise, which is really what good exit planning is all about.
Here are a few things that I would recommend checking before you bring your cafe to market:
- How much time is left on your current lease? Make sure you know exactly when the current lease term expires and how much time a prospective buyer will have before they need to exercise an option.
- What options are available? Check whether your lease includes further options to renew and the dates by which those options must be exercised.
- Can the lease be assigned to a new owner? Review the lease conditions to understand what is required to transfer the lease to a buyer and whether landlord consent is needed.
- Could you negotiate an extension? If your lease is approaching an important expiry or option date, it may be worth discussing an extension with your landlord before the sale process begins.
- Has the buyer spoken to a finance broker? Encourage prospective buyers to seek finance advice early, rather than waiting until the sale is close to completion.
It’s also worth having your lease reviewed by a solicitor who is experienced in commercial leasing. This can help you understand your obligations and identify any issues that might affect the sale.
Of course, not every buyer will need finance, and not every lender will assess a lease in the same way. However, taking the time to understand these requirements can help you avoid unnecessary delays and give prospective buyers greater confidence in the purchase.
Speak to a finance broker early
One of the most important things you can do is encourage your prospective buyer to speak with a finance broker as early as possible.
A finance broker can help the buyer understand what information the lender will need, what sort of finance may be available and whether the lease could present a problem.
This is particularly important if the buyer is relying on finance to complete the purchase. Finding out about a potential issue early gives everyone more time to explore their options, rather than discovering a problem when the sale is already well underway.
It’s also important to remember that finance approval is ultimately up to the lender. Even if a buyer has a good financial position and relevant industry experience, there are no guarantees that their application will be approved.
A little preparation can make a big difference
Hopefully, this has given you a little bit of insight into an extra something that’s worth taking into account as you start preparing your cafe for sale.
The lease is just one part of the sale process, but it can have an important impact on a buyer’s ability to secure finance. By reviewing your lease, understanding the available options and identifying any potential issues early, you may be able to make the process smoother for both yourself and your buyer.
Good exit planning is all about preparing thoroughly and dealing with potential problems before they arise. The more prepared you are, the better placed you’ll be to manage the sale process and work towards getting your deal across the line.
I wish you all the best with the sale of your business, and please feel free to let us know if you have any questions at all.
Want to learn more about preparing your cafe for sale?
If you would like to learn more about preparing your cafe for sale, why not book in a call with us?
On this 45-minute call, we will cover the following with you:
- What the current market value of your cafe might be.
- The steps you need to take to prepare for the sale.
- What the market is like at the moment.
- How to make sure that your cafe stands the best possible chance of selling.
There is no charge for this call, and there is no obligation. At the end of the call, if we think that we can help you, we’ll let you know how we work. If we don’t think we can help, we’ll give you some advice about alternative options.
Either way, you’ll come off the call with a much clearer idea about the potential value of your business and what you need to do next to achieve a sale.
If you have not already found our Exit Planning For Café Owners Facebook Group, why not join us.
This article is general information only and is not financial, legal or credit advice. Lending policies and eligibility criteria vary between lenders and can change. Buyers should obtain advice from a finance broker and seek legal advice about their lease before making decisions about a business purchase.
