Two prospective buyers negotiate a lease to buy arrangement with a seller

Lease-to-Buy: Could It Work for Your Acquisition?

There are lots of ways to finance a business acquisition. Few prospective business owners consider lease-to-buy, an option that can allow you to run an existing business without paying a large upfront cost.

In a lease-to-buy arrangement, the seller of a business will let you run a business for a predetermined amount of time in exchange for regular financial payments. During this time, you can evaluate how the business fits with your long-term goals and gain the hands-on experience you need to make a venture a success. At the end of your lease, you have three options:

Buy the business outright for a predetermined price.

Negotiate with the seller to extend the lease or establish a new one.

Return control of the business to its owner without any further financial obligation.

 

Many buyers like the low-risk aspect of lease-to-buy arrangements. And, often, sellers do, too.

 

Are sellers open to lease-to-buy arrangements?

Some sellers aren't keen on these arrangements for a simple reason. They don't want to retain ownership of a business they’ve already committed to selling. Further, many aren't eager to accept a deal that would keep them from accepting other offers for purchase.

Other sellers are more open to the idea. Those who are might see the value in the steady cash flow they could realize from regular lease payments. Others accept simply because they have trouble finding sellers for their business.

 

How do I pitch this arrangement?

You can run this idea to a seller by drafting a nonbinding letter of intent (LOI) that lays out your plan. This approach works best when you include three pieces of information:

  1. A statement of your intention to lease the business.
  2. Your plan to set up an option to buy it or specific assets at a predetermined cost at a specified future date.
The date you select should be far enough into the future that it’ll give you a chance to settle into your role as its manager and evaluate the inner workings of the business.
  1. Your plan for covering the costs of acquisition in the event one would occur.

 

Along with your LOI, you should offer a good-faith deposit to the seller. This will be fully refundable if the seller refuses your offer. If your offer is accepted, the seller may apply the deposit to your first lease payment or the future purchase of the business.

 

What happens if the seller agrees?

After accepting your LOI, the seller should have an attorney draft a lease agreement. You should review this agreement with your own attorney to ensure you understand and are willing to abide by the terms of the arrangement. Specifically, you should make sure that there are clear, fair terms for three scenarios:

  1. Buying the business at a specified future date
  2. Extending or renegotiating the lease
  3. Exiting the agreement without purchasing the business

 

You don't have to accept the lease agreement outright. Your attorney can help you negotiate the terms and present a counteroffer. But, because this arrangement is likely more favorable to you (the buyer) than the seller, you may not have much success in attaining more favorable terms.

 

How can I access the money I'll need to purchase the business later?

There are lots of ways to cover the full purchase price at the end of your lease. In our article, Your Go-to Guide to Financing an Acquisition, you can learn about seller financing, loan options, and other arrangements that can help you secure the capital you need to purchase the business.

 

What's next?

If you decide to proceed, you’ll need to start thinking about how you’ll run your new, leased business. Log into your owner’s portal for free articles and advice that’ll help you take on these challenges and determine whether you’ll want to proceed with your purchase when your lease expires.

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