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.
The option to purchase agreement should include a detailed description of what is being optioned for purchased, consideration, or a fee, that is being offered for the option, terms, which could include a flat monthly payment or a percentage of the gross and any credit being offered back to you, and additional terms, such as option extensions, penalties, or terms of default and finally an option deadline.
The seller may be reluctant to "open their books" until they have signed your letter of intent.
Be careful when valuing inventory, especially inventory that can expire or become obsolete.
Negotiate specific consulting services, for a specified time period, from the seller as part of your lease to own agreement.
Have an attorney review your lease to own deal before moving forward.
Give yourself an out in the agreement based on your inspection of the real estate, equipment or other assets.
Give yourself plenty of time on the lease portion of the agreement, especially if the agreement calls for you to raise additional financing.
Time kills deals.
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