Why Leases Matter When Financing the Purchase of an Existing Business

Matt Webber, an experienced finance broker with LendSmart, shares his insights in this guest post on why lease terms can make or break a business purchase and its funding.

When buying an existing business, most buyers focus on the numbers: revenue, expenses, goodwill, and assets. Yet one factor often overlooked, the lease, can make or break the success of the business and the ability to secure finance. As a finance broker, I see time and again how lease terms directly influence lending outcomes, and why they should be treated as a critical piece of the puzzle.

The impact of lease terms across different industries

Industrial businesses: the warehouse with a short lease

Imagine purchasing a logistics company that operates from a large warehouse. The lease has only two years remaining. A lender will hesitate to offer a loan term longer than the lease itself, which can significantly increase loan repayments.

If the lease is not renewed, even if a new location can be found in time, the business may still face significant challenges such as:

• Cost of relocating machinery and equipment
• Lost revenue due to downtime
• A new location with less convenient access to main roads
• A smaller or less efficient layout in the new floor plan
• Increased rent and or fit out expenses

Any one of these issues could hamstring an otherwise profitable business. If your lender is worried about this, you should be too.

Retail businesses: the café that cannot survive without location

Retail businesses are often the most exposed to lease risk. Picture a café thriving on foot traffic in a busy shopping strip. If the lease is not renewed, relocation could devastate the business. Customers may not follow, and goodwill could evaporate overnight.

For lenders, this risk is significant, and they will closely scrutinise renewal clauses and landlord intentions before approving finance.

Office based businesses: the professional practice at the mercy of the landlord

You might think office based businesses are less affected by lease terms. While it is true they are more flexible, risks remain:

• Increased rental expenses can reduce profits if the landlord increases rent significantly at lease renewal
• Staff retention issues can arise due to longer commutes, poor parking, or outdated fit outs if relocation is required

Lenders may scrutinise these leases less, but can your business afford to lose key staff?

The bigger picture

Across all industries, the commercial lease is more than just a legal document. It is a cornerstone of business value and a key determinant of finance viability. Remaining lease term, landlord power, and renewal risk all shape how lenders view the deal, and ultimately whether buyers can secure the funding they need.

What should buyers do?

If you are considering buying an existing business, do not underestimate the lease. Before signing contracts or applying for finance, sit down with both your lawyer and your finance broker to review the lease terms in detail. Together, we can identify risks, negotiate stronger positions, and ensure your finance strategy aligns with the realities of your tenancy.

Your business future depends not just on the numbers, but on the ground beneath your feet.

Ready to discuss funding options?