Lewis Roca Blog

From a business perspective, many factors must be considered when growing a business to multiple locations, and this will vary based on the product or service being provided. Let’s assume that your business expansion includes leasing brick and mortar sites. We all know the most critical factor: location, location, location. But, stop for a moment to consider the legal implications of growing your business to multiple locations and leasing multiple properties. How will you structure that growth in a manner that will protect your business, create consistency and allow for flexibility as your concept matures? In order to streamline the legal process —to grow smart—consider three simple rules:

1. Determine your structure
2. Identify key terms for your leases
3. Establish a communication process among your business and legal leasing team

Rule 1 – Determine Your Structure

Determining your business structure is critical to your growth process. If you are a sole proprietor, you will want to consider forming an entity. If your business is already an entity, you will want to consider whether the entity structure suits your desires for growth.

Choosing the right entity requires considering the jurisdictions in which you are located or plan to be located, the statutory schemes in each jurisdiction and the protections provided in each of the jurisdictions. For example, many businesses located in multiple jurisdictions choose to become Delaware entities because of the depth of Delaware law. The law is well-established and leads to definitive answers to questions such as “Can I do this?” “What happens if I do this?” Multiple jurisdictions also require state-specific qualifications and filings. On the other hand, if your business growth and leased locations will be contained within one jurisdiction, it may be best for your business to be organized in that particular state.

It is not only important to determine jurisdictional issues, but the form of your entity. Should your business be organized as a limited liability company, partnership or a corporation? The answer to this question will depend on the business plan. Do you plan to grow your business using private equity or institutional debt? You may also want to evaluate founder control issues, the exit strategy for initial investors, buy-out opportunities and franchising possibilities.

Before expanding and signing leases for new locations, consider whether each location will be leased and operated by a parent or subsidiary holding company. While this type of layered organization can enhance single-site liability protections, you should also balance the value of these protections against the costs of such complexities and the requirements for parent guaranties, at least for a period of time.

Additionally, when making decisions about the entity structure, consider the tax issues that may be involved. Your accountant and tax lawyer can help you work through the pros and cons of different entity types and specific jurisdictional tax issues that may apply, such as transactional privilege taxes and rent taxes.

So, at this point, you may wonder, with all of these issues to consider, how exactly is the legal process being streamlined? The answer is that these preliminary steps provide consistency and simplicity. Once you determine the organizational structure of your business, the process for each new location can be simplified. For example, when negotiating with a landlord, you can articulate your organizational structure, allowing for the early and smart negotiation regarding guaranties. If you have chosen to move forward with single-site subsidiaries, the formation process will become routine since you will already have determined the jurisdiction, filing process and organizational documents. If your business will grow using private equity, debt or perhaps through a future public offering, the clean, consistent and organized structure will eliminate many of the obstacles that can prove time-consuming and costly down the road.

Rule 2 - Identify Key Terms for Your Leases

While all leases contain the same basic elements, not all businesses have the same basic needs. Evaluating and prioritizing your business needs with respect to real estate is critical. More often than not, landlords require tenants to use the landlord’s form of lease. Negotiating the form of lease to address your most important business needs can be overwhelming and time-consuming. However, taking the time to identify your priorities before the leasing process begins helps your negotiations to remain focused and efficient.

Most leases begin with a term sheet or letter of intent. The term sheet is short-form document outlining the material terms and conditions of the business agreement. After a term sheet has been signed by both the landlord (the owner of the property) and the tenant (the business that desires to lease the property), those material terms and conditions are incorporated into the lease. Consider the term sheet like a road map for the lease transaction. Ensuring that your term sheet contains your most critical priorities can streamline the lease negotiation process.

There are many items that a business should consider when determining the critical priorities. These can vary greatly depending on the type of business. Typical concerns include parking, signage, construction, exit strategies, guarantees, use provisions, environmental concerns, costs and repairs, to name a few. We could dedicate an entire article to this topic alone, but here we will simply highlight a few ideas.

For example, restaurants and retailers need to analyze parking needs. What kind of parking is required? Do you need valet parking? Will your customers object to paying for parking? Do you need short-term or to-go spaces? Do you require a drive-through or pick-up window? Do you have peak hours when parking is critical? Does your desired commercial center have a tenant mix that will interfere with your parking needs? Are there other high-traffic tenants located in the center?

Assignment and subleasing provisions are often hotly negotiated. If your business plan is to grow to a certain number of locations and then be bought-out, you must consider the ability to assign the lease as a part of the larger future business deal without interference from your landlord. Assignment and subleasing terms serve as important exit strategies. If the business does not succeed in a particular market and you no longer want to operate in that location, your lease will not terminate. Leases are long-term arrangements and therefore you will need to be flexible and prepared to find a new operator for your space if you choose to exit that location before the completion of the full leasing term.

By identifying in advance the key issues for multiple locations, lawyers can better guide negotiations to achieve your goals. Clearly prioritizing key terms will empower your lawyers to strike compromises on terms that are less important to you and hold firm on those that are critical to your business success. Further, identifying important issues will provide consistency in your leases and make administration of your leases easier to manage over the long term, from an operational point of view. Creating a list of the key issues and drafting standard “wish-list” provisions for each of these can add a level of efficiency to the leasing process that not only focuses the negotiations, but drives costs down.

Rule 3 - Establish a Communication Process with Your Business and Legal Leasing Team

Finally, communication is key. Every business has its own style of communication and each business person has a preferred method of communicating. The business team should be clear about the preferred communication process and the legal team must understand the desires of the business team. As a business grows to multiple locations, constant and clear communication is crucial. No matter the mode of communication, it’s important that all members of the team be on the same page. Some businesses prefer regular calls, conference calls or status memos. Some value in-person meetings over digital communication. Whatever the method, regular and constant communication will help to eliminate misunderstanding and increase the likelihood of identifying solutions to challenges more quickly. Regular communication helps the entire team understand the pace of transactions and the evolving needs of the business.

Remember: structure growth to protect your business, determine key lease terms to facilitate your highest performance and establish communication processes to create positive efficiencies. With these three rules, you will be equipped to grow multiple locations, lease multiple properties and position your growing business for success when opportunities present themselves.

For more information please contact Amy Altshuler at AAltshuler@lrrc.com.