Leasing a business reduces many of the downsides associated with buying or starting a company. One of the main benefits is the “try before you buy” factor that lets you get a better feel for whether or not you want to invest significant amounts of money. Understanding the basics of leasing a business will help you make a more informed decision about this process and protect your interests.
Perform Due Diligence
The first step in leasing a business is to perform due diligence and research the business’s history. You most likely will need to sign a non-disclosure agreement and might need to pay a fee for getting access to these documents. Ask for the company balance sheet, profit-and-loss statement, tax returns, accounts receivables and payables aging reports, detailed sales reports, annual company and departmental budgets, bank statements, cash flow statements, ownership papers, patents, trademarks, copyrights, licenses, contracts and list of assets. If possible, get three years’ worth of documents to determine if the business is growing, stagnant or declining.
Compare Lease vs. Buy
Once you have the financial data of the business, run a comparison of your cost to lease the business vs. buying it. While you might not have the money or desire to buy the business, running this scenario can help you negotiate better. Telling a business owner, “If I buy the business, I can make this much…” or “My expenses would only be this much...” can help the owner see your point and might persuade him to give some ground. This also can help you determine whether you want to create a lease-to-buy situation.
Analyze Different Types of Leases
Some leases require you to pay a percentage of your gross or net income. This benefits you if sales are bad but requires you to pay more of your profits to the landlord if you do well. Other leases require you to pay a set monthly fee, or rent. These rent-based leases can remain fixed over the term of the lease or escalate, allowing you to spend less money at the start of the term when you might have lower sales.
Consider Leasing to Buy
If you do well with the business, it might make sense to buy out the owner so you can keep more of the profits for yourself and avoid having the owner take the business back once you turn it around. Try to negotiate a clause that allows you to purchase the business at your discretion, but does not require you to do so. For example, you might negotiate a deal that lets you apply your first year’s lease payments toward the purchase price. Clearly set the cost and terms for a buyout.
Once you know how the business is performing and your different lease options, begin to negotiate to determine what assets, terms and other considerations the owner is willing to include in the lease. For example, ask if the owner is willing to serve as a consultant or if key team members will stay on if you run the business. Determine if the owner will leave all tangible assets in the business, such as computers and other equipment, maintain all leases and service contracts, or add you to his insurance policies.
Set the Terms
Once you have a feel for the viability of the business, know what the owner is willing to lease you and your ability to run the business, write the lease, setting the terms you want. This should include a start and end date, when lease payments are due, penalties for late payments, the terms under which each party can end the lease, who owns what assets, who maintains the property and who has what legal liabilities. Discuss who will finance the business, which might require the owner to pay the rent on buildings, payments on equipment and prior taxes. Determine who will carry insurance on tangible items and who will pay for other types of insurance, such as that covering premises liability.
Ensure the Legality of the Lease
Just because you and another small-business owner agree to the terms of a lease doesn’t mean the lease is legal. You might have local, state and federal rules, regulations and laws that supersede your agreement. These can saddle you with liability you didn’t know you had, and allow the landlord to break the lease early or refuse to sell you the business. Work with a business broker and an attorney who are familiar with the legalities of business leases. Ask them to explain to you not only your rights, but also your obligations. Look into a non-compete clause that prevents the landlord from opening a competing business, and a clause that allows you to sublet if you want to leave the business early.