A lease-purchase is one of the most unique ways of selling a business to an interested buyer who might not have the means to buy at the moment but looking to own an existing investment. Most people today are plagued by lack of sufficient start-up capital but a well-done and shrewdly negotiated lease-purchase can help mitigate the situation.
In the lease-to-own arrangement, the lessee (would be buyer/user) is able to extend their resources while at the same time tapping into the established goodwill and name of the seller (lessor) and securing equipment, facilities and other business assets. Even so, like in many other legal agreements, the devil is in the details considering lease-purchases are never the same. How the seller puts the offer on the table does matter a lot.
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Works both ways
In the arrangement, the lessee is allowed to run the business, which they intend to buy, for a specific period clearly indicated in the lease-purchase agreement. For a lessee seeking to own a business without having to risk a bad business purchase mistake, this form of contract is a wonderful choice. After the end of the lease, a lessee can easily purchase the business for a specific set cost or offer the lessor a financial deal, extend or seek a new lease, leave the business without buying it or return the control of the investment to the lessor.
No matter how you look at it, lease-purchase has something for both parties involved. To be thoroughly protected, considering the long term nature of the agreement and other legal matters, the seller (lessor) has no choice but seek the help of a good attorney to review the contracts and comb through the details. In the process, the lawyer will be able to inform and advice the seller whether the terms should be renegotiated, signed as they are or any other proper course.
What exactly is a lease-purchase?
Essentially, a lease-purchase (lease-to-own arrangement) has both the seller and buyer (lessee and lessor) entering into a contractual agreement with the lessee being allowed to lease the business of the lessor for an agreed, predetermined set period after which the lessee could fully own the business. Lease-purchase contractual relationships are diverse and unique. In some, the seller could have it that the buyer doesn’t have any obligation to close the purchase of the business if they decide not to after the end of the lease-purchase contract. Others have clear terms that the lessee must set apart a deposit that in case of any reason the purchase isn’t closed within the agreed set time the deposit will be forfeited to the lessor.
How it works
The first thing is for the seller to receive a letter of intent from the prospective buyer. In the letter, the desire to buy the business should be well spelled out, indicating clear intentions such as purchase option after the end of the lease or even purchase of specific assets of the business.
The lessee’s proposed terms should be detailed succinctly, assets that the buyer intends to lease, desire for an option to purchase the business or specific assets at a specified cost after a specific time frame or a certain date, including how the lessee intends to complete the final financing of the business purchase.
Letter of intent nonbinding
Even so, it’s important for the buyer to remember the intent is non-binding though it plainly offers information to the seller on specific dates that certain matters will be performed, such as due diligence or when the lessee intends to carry out proper research about the business.
Once the seller has signed the business purchase letter of intent the due diligence period kicks in. it’s through the research carried out that the potential lessee will have proper information to craft an option to buy if that’s what they want and the seller has no problem with it.
Once all the conclusions are done, which include the business valuation, the potential lessee can then use the information to come up with option to purchase or other options. The business value will be determined, including market position of the business, intangibles such as potential growth, among others.
The seller need to agree with the potential lessee prior to or on the deadline of the due diligence period on the intention to either bring the deal to an end or move into coming up with a binding contract. Note that, in the letter of intent the deadline on when the contract will come to end will be well articulated, including the closing date.
Within the deal the lessee could indicate willingness to purchase directly a part of the business like fixtures, including a purchase option and lease for certain business equipment or property. In a lease-purchase agreement other separate agreements might also be included, essentially option to buy contracts and lease agreements. In case the seller might be after an outright purchase of the seller’s business a purchase contract could also be a document required in the process.
Legal protection
For the protection of parties involved, especially the seller, the lease-purchase agreement need to be approached and written carefully, especially where option to purchase is involved. Fundamentally, the seller should ensure all the fraud statutes and principles are adhered to so that the agreement isn’t just legally binding, but also capable of holding up and protecting them if ever challenged.
Lease to own defined
The written contract should be identifiable without contradictions for what it’s with the basic agreement terms well indicated; both lessor and lessee have to sign it. The lessor’s lawyer should be able to ensure that the contract covers their own best interests.
The seller should expect the lessee to negotiate the lease-purchase heavily before it’s finalized. Once the agreement or contract, including any other related to the lease-purchase, have been presented to the seller then the request can be rejected, offer countered or accepted.
It’s important for a seller to ensure that the deal provided is largely similar to what the letter of intent had with documentation offered to justify any substantial changes that a due diligence by the buyer might have unearthed. After the terms have been agreed and the lessor signed the contract(s), the move towards closing can begin.
Pros
- Offers some financial certainty and gets the business off the market
- A better choice than having to wait for ages for quick-closing business buyers
- Abandonment of the lease-purchase by a lessee could be lucrative
- Best choice when a seller desperately wants a person to take over the business fast
- Perfect way of increasing cash flow from assets difficult to rent or sell
Cons
- Even if the market improves and better deals come seller cannot forfeit the lease-purchase agreement
- Leased assets might not be maintained well
- The 1-5 years waiting period can be long
- It can hit a seller hard if the deadlines, penalties and extensions aren’t well spelled out
Lease-purchase agreements need to be reviewed with care before the seller puts a signature on them. The agreement is long-term (anything between 1 and 5 years) and expensive. As such, it makes perfect sense to diligently review it. In the process, both parties can benefit from the agreement where the seller is able to sell a business that may have been hard to sell while the buyer benefits from business ownership. In every part of the process talking to a diligent lawyer is highly advised.
Keywords: rent to own business, lease to own business, leasing a business, lease-purchase method
