Why I Study Lease Agreements Carefully Before Buying a Business

When I buy a business that operates from physical space, whether it’s retail, industrial, or office, the lease agreement is one of the most important documents I review. Over time, I’ve learned that leases can carry hidden risks that make or break a deal.

Early on, I made the mistake of treating leases as a formality. I assumed that as long as the company was profitable, the lease would take care of itself. That mistake nearly cost me dearly. Now, I study every lease in detail, negotiate protections, and structure deals with a clear understanding of how real estate obligations affect the business.

Why Lease Agreements Matter

Leases matter because they tie directly into operating costs, stability, and flexibility. A bad lease can trap a business in an expensive or unsuitable location. A good lease can provide stability and bargaining power.

Lease terms affect:

• Monthly overhead and profitability
• The ability to relocate or expand
• Renewal risks if the landlord refuses or raises rent
• Transferability when ownership changes
• Valuation if rent is above or below the market

My Early Mistakes

In one deal, I assumed the lease would transfer automatically to me. After closing, I learned the landlord had the right to approve the new owner, and they refused. I had to renegotiate under worse terms.

In another acquisition, I ignored the fact that the lease had only six months left. After closing, the landlord doubled the rent. Profit margins evaporated.

Those painful lessons taught me to treat leases as critical due diligence items.

How I Evaluate Lease Agreements

When I review a lease, I focus on:

1. Term and Renewal
How much time is left, and are there renewal options?

2. Assignability
Can the lease be transferred to me without landlord approval?

3. Rent and Escalations
Is the rent at the market rate, and how quickly does it increase?

4. Additional Costs
Are there hidden expenses like CAM charges, insurance, or property taxes?

5. Termination Clauses
Can the landlord terminate early? Do I have exit options?

6. Personal Guarantees
Does the lease require me to personally guarantee payments?

Questions I Ask About Leases

• How long has the business been in this location?
• How critical is the location to customer traffic?
• What happens if the landlord sells the property?
• What are the average rents in the area compared to this lease?
• What’s the landlord’s reputation for working with tenants?

The answers help me decide whether the lease is an asset or a liability.

How I Protect Myself

When leases carry risk, I protect myself by:

• Negotiating assignment approvals in advance
• Asking sellers to extend leases before closing
• Building rent increases into my financial models
• Negotiating caps on escalations
• Avoiding personal guarantees whenever possible

Why Leases Impact Valuation

If a business is locked into an above-market lease, its valuation should be lower. If it enjoys a long-term below-market lease, valuation can be higher. That’s why lease diligence isn’t just legal, it’s financial.

Final Thoughts

I’ve learned that lease agreements are one of the most important documents in small business acquisitions. They affect profitability, flexibility, and risk. That’s why I study every term, negotiate protections, and never treat leases as an afterthought.

Because buying a business isn’t just about customers and revenue, it’s also about the foundation it operates on. And sometimes, that foundation is literally in the lease.

I continue sharing my acquisition frameworks, lessons, and strategies at DrConnorRobertson.com, where I document the playbook I’ve built deal by deal.