Lease to Own Business: Everything You Need to Know
A lease to own business could be the solution if you want to run your own business but lack the start-up capital needed to build it from the ground up.3 min read
Updated November 11, 2020:
How to Offer a Lease to Own Plan to a Business Owner
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.
The letter of intent should be accompanied by a good-faith deposit calculated according to the business' value. The deposit is intended to be fully refundable if the business owner refuses your offer. This letter is not a binding contract but is a written document in which details are established, including a period of time during which you will research the business.
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.
In your letter of intent, you should include a provision stating that when the due diligence or research deadline comes, you will either sign a binding contract or terminate the deal.
Writing the Option to Purchase Contract
An option to purchase contract should be written carefully and must not violate any laws governing fraud. If it does not adhere to these principles, it might not be upheld in court should be challenged. Such a contract must be in writing; a verbal agreement will not suffice.
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.
Negotiating with the Seller
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.
The offer spelled out in the contract should be the same as the one given in your letter of intent. If there are major changes made, you will need to explain them thoroughly and provide justification for those changes. This explanation will likely involve documentation that outlines information you discovered during your due diligence research. Hiring a CPA to assist with these alterations is helpful.
Suggestions for Success
The following tips should help the drafting and negotiation process go more smoothly:
- The option to purchase agreement should include a detailed description about everything involved in the purchase and all payment information for the terms of the lease. This could be a monthly payment or a percentage of sales. It should also include any additional terms that are relevant to the agreement such as extensions, penalties, and deadlines.
- Keep in mind that the business owner might not be willing to share financial information about the business until they sign the letter of intent.
- When determining the value of the business' inventory, make sure to consider expiration dates or any other conditions that cause items to lose value.
- As part of your lease to own agreement, you may wish to include consulting services to aid in the transition.
- Since these agreements can get complicated, it's best to hire an attorney to look over all documents before signing.
If you need more information or help with a lease to own business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.