#SMB Broker Insights 101.01
Hi friend,
Happy New Year! Let’s grow together this year. To get the momentum started, here is the first edition in a series of stories about SMB deals. My goal is to demystify the industry and share insights that help you close deals. Let’s get started!
Don’t forget about the lease.
In SMB deals the lease can be a deal killer – here’s a learning nugget I acquired and how it can help you close a deal.
Deal Breakdown:
Industry: Dog grooming – a robust industry coming out of the ‘dog-boom’ from covid pandemic lockdown period
Asking Price: $168,000
Annual revenue: ~$220,000
Annual EBITDA: $81,000
Reason for Selling: Owner moving away with family
Lease term: expiring within 6 months – opportunity for buyer to negotiate new terms
The listing attracted multiple buyers, including a wealthy international buyer, paying all cash, who was looking to expand the business through investment in multiple full-service vans adding mobile service to the menu offerings. The seller was of Chinese heritage, and the buyer a wealthy Chinese businessman looking to buy a business for his son to operate.
The business was situated in a standard strip shopping center in the Bay Area of California. It was a commercially zoned property, owned by a large conglomerate and managed by a large-scale professional property management company.
One of the key issues that needs to be balanced in any SMB deal is “When and how the seller should engage with the landlord?”
In this case the Seller had what they thought was a good relationship with the landlord. The Dog Grooming business was one of the reliable, successful tenants in the shopping strip, aside from the anchor tenant grocery store and a chain pizza parlor.
The landlord was planning a renovation of that side of the building, including the Dog Grooming business unit, and therefore had agreed to re-locate it to another, larger unit, with approximately 50% more square feet of usable space. However, this unit did not have the plumbing hookups required for the bath and washing stations. The landlord agreed verbally to pay for the buildout at no cost to the tenant.
As negotiations proceeded between the buyer and seller in Chinese, I was stuck as the odd man out, as I could not even understand what was being communicated between my client and the prospective buyer.
Nonetheless, we entered contract and proceeded to the lease assignment stage, when the Landlord changed tune, pulling a bait-and-switch, after taking 3 weeks to reply to an email about the buyer’s application, the landlord now required the tenant to pay for 100% of the cost of the plumbing renovations and build-out.
Naturally this spooked the buyer and the deal fell apart.
The #learningnugget here is that the Landlord is a critical stakeholder in #SMB deals. Make sure to gather all details about lease terms and lease assignment notification periods up front during seller due diligence. The Landlord cited a single clause buried in the terms that stated any intention of lease assignment must be disclosed with 60 days advanced notice. Rather than negotiate in good faith the landlord used this scare away the buyer and the deal fell apart.