Tax & Business Insights

Business Succession -- Mary's Morass

Volume 9 Issue 4 -- July/August 1997

Far too little attention is given in business or life to one of the things the dictionary defines as "succession" -- namely, "the act or process of following in order." There are many things which need to "follow in order" in order for a business entity to succeed or, at a minimum, be terminated in an orderly fashion.

The next series of these newsletters will touch on some of the factors involved in business succession and wealth transfer. The range of subjects that relate to "succession" is large, and some businesses live or die based on highly particularized events such as the continuance of certain tax benefits, which can change without warning.

Many businesspeople have not addressed possibilities like: (1) a key employee quits and goes to work for a competitor; (2) the owner dies or is permanently incapacitated; (3) there is no insurance coverage for a loss; (4) a valuable lease expires and the business is at the mercy of the landlord; (5) some, or all, of the business' computers fail and there is no backup; or (6) the owner or principal of a business gets divorced. Remember, this is only a partial list.

As might be expected, there are answers to, or at least reasonable plans for dealing with, most of the succession problems listed above. Since space is quite limited, in this edition we will deal only with introducing the topic and one of these subjects -- lease renewal.

The Importance of Your Lease

Many businesspeople don't think about the importance of their lease until it is too late to act effectively. A good example is "Mary's," a restaurant that became a fixture in Marysville. Mary started Mary's after quitting her former waitress job and was successful in her venture, putting in long hours managing her restaurant. Her place was located next to a then-small video store.

Eventually, the video store wanted the space occupied by Mary's restaurant. Unfortunately for Mary, her year-long lease had expired and she was automatically on a month-to-month common law lease status, often called a "tenancy at will."

"At will" means at the will (i.e., "good graces") of the landlord. Of course, the landlord's "will" can quickly become focused in favor of a tenant like the rapidly expanding video store that can afford to pay premium rent and remodel the premises.

Month-to-month leases, or tenancies at will, cut both ways. Yes, you can leave the rented space with only one month's notice, but you can also be kicked out just as quickly. This is what happened to Mary. Since she could not find other suitable premises for her restaurant in so short a time, she ended up with "de nada." Her staff went intact to another establishment that changed from a lunch-dinner sports bar to a three-meal-a-day place. To compound Mary's misery, her clientele essentially moved in toto with the staff.

What is the moral to be learned from Mary's Morass? Look at your lease! If you, or a client, have a business that caters to car or foot traffic (and is growing), you should check the lease, long before it becomes month-to-month.

What is best for a business depends on the vagaries of the particular landlord and the particular tenant. Many businesses have been at the same location on a month-to-month basis for a long time and seldom give a second thought to vacating. But written leases are an important way to ensure business succession at a location. Alternatively, if you can't get a lease that provides adequate long-term protection, then an orderly retreat to new premises may be wise.

Many leases have automatic options to renew that have to be exercised in writing several months before a lease is due to expire. It is a good idea to check the renewal provisions in a lease before the right to renew expires and Mary's Morass arises for you, or a client.

In our next issue, we will deal with a different problem -- an associate or employee leaving your business, and what you can do to protect your business.

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