Managing Numerous Buyers Negotiating with Multiple Landlords
For Immediate Release | March 20, 2019
It can be difficult or impossible to conduct a going concern auction while lease negotiations are ongoing, particularly if you want to make bids irrevocable and contingency free – but it can be done. You may wonder, “How do bidders value the business if they don’t know what a major expense item (lease costs) will be?” Additionally, “How can you control the process if multiple prospective bidders want to negotiate with landlords?” The answers lie in the interplay between the bid procedures, the M&A advisor’s discussions with buyers, and ongoing lease negotiations – and how those are planned for and managed by the debtor’s professionals.
Equity Partners was engaged to sell 30 Kentucky Fried Chicken franchises operating in chapter 11, located in three Mid-Western states. Four locations were owned by the debtor and the rest were leased from nine different landlords – all priced significantly over-market. While some landlords had one or two locations, several had master leases controlling up to 10 locations. Prior to our engagement, the debtor hired a firm specializing in lease negotiations to determine what the market lease rates should be, and the debtor’s bankruptcy counsel took on the role of trying to negotiate each lease. The goal was to negotiate market value leases to effectuate a plan of reorganization or increase the sale value of the businesses. You might think that the landlords would be very willing to negotiate facing lease rejections, lost tenants, and empty buildings. While some landlords were willing to bring their leases closer to market rate, the process was extremely slow, and some landlords preferred to “play chicken” with debtor’s counsel. At the same time, the debtor could not afford to stall its sale process while it awaited the outcome of these negotiations. Yet, the debtor’s professionals were having some success negotiating improved leases and cures with most of the landlords and wanted to continue that effort while we conducted the sale process.
Issues arose when the prospects identified in our sale process wanted to either hire a professional lease negotiator or attempt to negotiate their own leases with the landlords. The debtor’s fear was that having numerous potential tenants contacting landlords would be too confusing for them and negate the progress already made. We also did not want to risk a landlord “falling in love “with a buyer/tenant and refusing to work with any other buyers, therefore making it impossible for others to bid on the business. To resolve these potential conflicts, we required potential bidders to provide some form of adequate assurance of future performance and to make their purchase offers based on the current revised lease rates and cures, BEFORE allowing them to contact landlords directly. They also had to agree that if their effort to negotiate with a landlord resulted in an increased to the negotiated cure cost, the buyer would agree to increase their purchase price by that amount. This solution allowed the debtor to continue to negotiate leases, bidders to formulate firm bids based on a known lease expense, the opportunity for qualified bidders to improve their lease terms, and us to keep moving forward with a sale process that assured a fair and level playing field. These are answers you should consider addressing in your bid procedures in any case in which the unresolved lease issues are substantial and likely to wreak havoc.
The bid procedures in this case were mostly silent on these issues, but we were able to get three buyers to submit offers under these terms, which allowed us to proceed to auction and get the business sold in a competive process, and without contingencies. The take away is this: In a situation where there are multiple leases with multiple landlords, consider negotiating the best lease and cure you can with each landlord, then have offers based on those terms prior to allowing buyers to attempt to negotiate on their own. The same can apply to franchise agreements and other executory contracts. If bidders are successful in obtaining better terms, that will allow them to bid more aggressively, and if they are unsuccessful, the bid they make based on then current terms is at least firm, having been based on a lease that you know you can deliver.