Lease With Option To Buy Business
Maybe you leased some space that didn't work for your business because you felt like you couldn't afford an upgrade. The forgone gain might be the equity you would have built in the property if you owned the space. Or it could be the negative impact on top-line growth, either through operational inefficiencies resulting from your real estate, or space challenges hindering scaling your business.
lease with option to buy business
But all this doesn't mean there aren't solutions. In fact, a lesser-known and often belittled tactic, a lease-to-own contract, is an arrangement that offers an alternative solution to the problems many small businesses face.
A lease-to-own contract is a type of commercial real estate transaction where a tenant commits to renting property for a predetermined amount of time, with the option to purchase it at the end of the lease.
Your strategy for acquiring a business without buying it outright can result in affordable terms, but you need to structure your offer carefully. Your success depends upon the goodwill of the current owner who needs to not only agree but also assist with the transition.
Your first written contact with a business owner whose business you wish to acquire should be a letter of intent. In this letter, you explain your plan to purchase their business and how the lease is intended to work regarding your desire to purchase the business assets. It should also include a timeline for your plan showing how you will finance the purchase later on.
This research should be started as soon as the seller signs the letter of intent. Based on your research, you will be able to create a binding agreement with a purchase price. You need to consider the business' current value, its position within the market, its potential for future growth, and other factors.
This contract needs to identify exactly what it is intended to be: an option to purchase business assets or the business' real estate. All basic terms must be fully laid out, and both parties must sign it. It's best to hire an attorney during this process to make sure there are no mistakes that could cost you money in the future.
Unless the business owner agrees to the contract as originally written, you will need to negotiate the terms. After you present your contract for purchase, lease, and option to purchase to the business owner, they must either accept your proposal, reject it, or make a counteroffer.
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Leasing offers advantages that owning does not, including lower monthly payments typically spread over months or years rather than delivered in a lump sum. Many commercial equipment leases also include service agreements or service add-ons, which offer peace of mind for business users and negate the need for in-house technicians.
Equipment leasing is a type of financing in which you rent equipment rather than purchase it outright. You can lease expensive equipment for your business, such as machinery, vehicles or computers. The equipment is leased for a specific period; once the contract is up, you may return the equipment, renew the lease or buy it.
Be sure to get expert business tax advice if taking a tax deduction is a driving factor in your decision to lease equipment. The IRS can deny the deductions if it views the lease as an installment sale.
Leasing equipment offers many benefits to cash-strapped small businesses. While not all equipment leases are the same, and there are many ways to finance a lease, here are some advantages to leasing your equipment:
Additionally, some lenders enforce a certain term length and mandatory service packages. This can add to the overall cost if the lease term extends beyond how long you need the equipment. In this scenario, you could get stuck with a monthly payment and storage costs associated with unused equipment.
Like a purchase, business loans provide more ownership of the equipment. With a lease, the lessor holds the title to any equipment and offers you the option to buy it when the lease concludes. A loan enables you to retain the title to any of the items you purchase, securing the purchase against existing assets.
Funding is usually available in a matter of days. This makes factoring a popular resource for smaller manufacturing operations, the transportation industry and businesses that routinely handle contracts with a fast turnaround.
An operating lease allows a company to use an asset for a specific period of time without ownership. The lease period is usually shorter than the economic life of the equipment. At the end of the lease, the lessor can recoup additional costs through resale.
A lease broker serves as an intermediary between you and any prospective lessors. The broker will present you with the offers and submit your requests for financing, handling much of the paperwork for you.
An independent lessor encompasses all third-party lease providers. Independent lessors include banks, lease specialists and diversified financial companies that provide equipment leases directly to your business. They differ from leasing companies in that they typically specialize in equipment remarketing, a skill that enables them to group products from multiple manufacturers and offer more competitive APRs.
The best advice for choosing a quality lessor is to examine the company with the same level of scrutiny with which you and your company are being scrutinized. Give preference to those willing to partner with your firm. This may be represented in the level of background and experience they have in relation to your line of business or their willingness to work with you on certain terms.
Before you choose a lessor, make sure it has experience in your line of business and will negotiate terms with you. Find out if the company has any pending litigation and offers an easy payment system.
You must first determine whether your agreement is a lease or a conditional sales contract. If the agreement is a lease, you may deduct the payments as rent. If the agreement is a conditional sales contract, you consider yourself as the outright purchaser of the equipment. You may generally recover the cost of such property used in a trade or business through depreciation deductions.
A lease with an option to buy can be a powerful purchasing strategy for someone on a budget who is looking to acquire an existing business. Start-up capital is a barrier that plagues many would-be entrepreneurs, but you can overcome this problem with creative negotiating. Utilizing a lease to own strategy for all or a portion of your deal can help you to get what you need, with terms that you can afford. The strategy will help you to extend your resources while securing the facilities, equipment and, in some cases, the established book of business and goodwill of the previous owner. How you put your offer, however can mean the difference between your success and failure.
Initiate your first written contact with the business owner with a letter of intent, in which you spell out your desire to purchase the business utilizing a lease with an option to purchase all or a portion of the assets of the business. The letter should detail your proposed terms, that you will lease certain assets, option the right to buy the assets at a certain price by a certain date and how you intend to eventually finance the purchase. Offer your letter of intent with a fully refundable good faith deposit that is commensurate with the value of the business. The letter is a non-binding agreement, but it establishes specific performance dates, first of which is a due diligence period in which you must do your research on the business.
Begin performing your due diligence once your letter of intent to purchase the business is signed by the seller. The research you do here will directly support your efforts to write your option to purchase. Your conclusions, including your valuation of the business, become the basis for the purchase price in your option to purchase. Determining the value of the business, the business's market position, potential growth any other intangibles will have a profound affect on your success.
Agree with the seller on or before the due diligence deadline that you both intend to move to contract or end the deal. Your letter of intent will have outlined a deadline to finish the contract, as well as a date for closing. Your deal may include the outright purchase of a portion of the business, such as inventory and fixtures, along with a lease and option to purchase specific real estate and equipment. When utilizing a lease with option to purchase, you will likely use two separate agreements: a lease agreement and an option to purchase contract. If you are purchasing a portion of the business outright, a third document, a purchase contract, will be needed.
Draft your option to purchase agreement carefully. The contract must adhere to the principles of the statute of frauds so that your agreement will legally hold up if challenged. Your contract must be in written form. The agreement must be identified for what it is, an option to purchase real estate or business assets. The elemental terms of the agreement must be spelled out, and it must have the signature of both parties. Consult with an attorney to be sure that your contract is written to cover your best interests.
Negotiate with the seller to finalize your deal. This is done by presenting your purchase contract, lease and option to purchase to the seller. They will accept, counter offer or reject your proposal. They will expect the deal to be essentially the same as you had outlined in your letter of intent, and if terms have changed substantially, they will expect justification through documentation uncovered during your due diligence. It is helpful to have the opinion of your CPA in writing to back your claims regarding specific detail. Once the seller agrees to terms by signing your option to purchase agreement,and purchase agreement, if applicable, you are ready to move to closing. 041b061a72