Lease to Own Business: How Does it Work (2023)

Armin Laidre

Selling a Business > Closing the Deal

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.

Related Legal Documents:

  • Business Lease Agreement Template
  • Full Package of Sales Paperwork

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.

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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.

(Video) How Lease-to-Own Works in Real Estate (Commercial and Residential)

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.

Letter of Intent Template

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.

(Video) Buyers: How does our Rent-to-Own Program Work?

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.

(Video) The Dangers of Rent-to-Own Agreements

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

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FAQs

What are the advantages of leasing in business? ›

Advantages of Leasing Equipment
  • Less initial expense. ...
  • Tax deductible. ...
  • Flexible terms. ...
  • Easier to upgrade equipment. ...
  • Higher overall cost. ...
  • You don't own it. ...
  • Obligation to pay for entire lease term. ...
  • Ownership.

What are the disadvantages of leasing in business? ›

Disadvantages of leasing or renting equipment

you may have to put down a deposit or make some payments in advance. it can work out to be more expensive than if you buy the assets outright. your business can be locked into inflexible medium or long-term agreements, which may be difficult to terminate.

How does business leasehold work? ›

If you purchase Leasehold you will own the business and fixtures and fittings and the right, usually for a given period, to occupy the business premises for an agreed rent.

What are the basic elements in successful leasing? ›

Assuming that any subject conditions have been satisfied, an offer will generally be binding provided these four essential elements have been settled: parties, premises, rent and term. 1. Parties: The parties to the lease must be clearly identified.

Why is leasing better than buying? ›

Benefits of leasing usually include a lower upfront cost, lower monthly payments, and no resale hassle. Benefits of buying usually mean car ownership, complete control over mileage, and a firm idea of costs.

Why is leasing better than financing? ›

Lease payments are almost always lower than loan payments because you're paying only for the vehicle's depreciation during the lease term, plus interest charges (called rent charges), taxes, and fees. You can sell or trade in your vehicle at any time.

What are 3 advantages of a lease? ›

This type of arrangement has several benefits that could make leasing a much better deal for you.
  • Lower monthly payments. ...
  • Less cash required at drive off. ...
  • Lower repair costs. ...
  • You don't have to worry about reselling it. ...
  • You can get a new car every few years hassle-free. ...
  • More vehicles to choose from.

What are three disadvantages of leasing? ›

Disadvantages
  • No equity/ownership in the vehicle.
  • Potential early termination liability.
  • Potential end-of-lease costs like excess wear and tear and additional.
  • Mileage charge.

What are the pros and cons of leasing? ›

Pros and cons of leasing a car
Pros:Cons:
No or low down paymentExcess mileage penalties
Usually covered by warrantyFees for excessive wear and tear
Lower monthly paymentsEarly lease termination fees
No upfront sales tax feesGenerally higher insurance premiums
1 more row
28 Feb 2020

Who pays for the lease agreement? ›

In terms of who pays for a commercial lease agreement, it's usually the tenant who covers the cost of drawing up the lease document, but this can be agreed by the lawyers of the two parties.

How does lease agreement work? ›

A lease agreement is an accord where the tenant is given the right to live in a dwelling for a definite time-frame (often for 12 months). The stretch of the tenure may vary depending on the tenant's preference and owner's will. Typically, a lease binds the tenant and the landlord for a longer span of time.

What is the normal term for a commercial lease? ›

How long is a typical commercial lease? Commercial leases are typically three to five years. That guarantees enough rental income for the landlords to recoup their investment.

Is buying a leasehold business a good idea? ›

A leasehold business can bring huge benefits from reduced responsibility, far less capital outlay and much less stress. It is a prudent option to choose if you are just starting out in business and are planning to have multiple satellite locations of your business.

Do you have to pay rent on a leasehold business? ›

The Basics

Leases also spell out what the landlord must do for you. Your leasehold lasts for as long as your lease specifies or until you violate its terms by, for instance, not paying your rent.

Can I sell my business lease? ›

Can you sell a leasehold business? A leasehold business can be sold, however, to ensure that the commercial lease survives the business sale, you must meet landlord expectations and respect any restrictions set out in the tenancy agreement to allow for the successful assignment of the commercial lease.

Is it cheaper to lease or finance? ›

In general, leasing payments are lower than finance payments. When you lease, you're not paying for the entire vehicle but rather the value you use up for the time you're driving it. In the short term, based solely on monthly payments, it's typically cheaper to lease than to finance.

Why are leases so expensive right now? ›

New car leases are more expensive due to a significant change in market conditions. An inventory shortage is making it harder to find popular vehicles, and manufacturer incentives are down. In some cases, automakers aren't even bothering to advertise lease deals because cars are so hard to find at dealers.

Is leasing cheaper than buying? ›

ADVANTAGES. Leasing a car is much cheaper than buying it outright, because you're only paying a percentage of the total price. You won't have to worry about fetching a good price or finding a buyer for it when you're done, as the dealership will take it back from you.

What is the difference between a lease and a loan? ›

What are the differences in a loan vs. lease? A loan is the borrowing of money while a lease is a term rental agreement for the use of specific equipment. As a means of financing, loans and leases have different benefits.

What is the difference between leasing and finance? ›

When you lease a vehicle, you do not own the car. Instead, you pay to use it for a specified period. Once your lease ends, you either renew the lease, return the car, or buy it. With financing, you own the vehicle outright.

What's the difference between leasing and renting? ›

In short, a lease is a contract to grant someone the use of an asset, like a house or apartment, for a specified period of time, typically in exchange for regular payments. Renting involves a tenant periodically paying a property owner (often referred to as a landlord) money to live in a house or apartment.

What are the pros and cons of leasing a commercial property? ›

Pros and Cons of Leasing Commercial Real Estate
Pros of leasing commercial propertyCons of leasing commercial property
Access to more liquidityNo equity or benefits from appreciation
Fixed monthly costUnable to collect passive income
Tax breaks for property expensesHigh rent expenses
1 more row
16 Aug 2022

What is the purpose of a lease? ›

A lease is a legal, binding contract outlining the terms under which one party agrees to rent property owned by another party. It guarantees the tenant or lessee use of the property and guarantees the property owner or landlord regular payments for a specified period in exchange.

Why is leasing important? ›

An important benefit of leasing is that it offers a business an alternative source for finance. You can just lease the necessary equipment without the hassle of depreciation. Your borrowing power remains intact because you have not borrowed any money. The existing line of credit is still open for any further use.

Does lease provide 100 percent financing? ›

Leasing provides a number of benefits that can be used to attract customers: Payment schedules are more flexible than loan contracts. After-tax costs are lower because tax rates are different for the lessor and the lessee. Leasing involves 100% financing of the price of the asset.

What does a business lease mean? ›

A business lease is a contract between the owner of a property (lessor) and a business (lessee) who wants to use it for their operations. The lessee pays rent to the lessor, who in turn agrees to allow them exclusive possession of the premises for a set period.

What are the limitations of lease financing? ›

Limitations of Lease Finance

There are chances that a lease arrangement might impose certain restrictions on the use of assets. For example, it may not allow the lessee to make any alteration or modification in the asset. The lessee never becomes the owner of the asset. It denies him of the residual value of the asset.

What are the economic advantage of leasing? ›

A major economic advantage of leasing, depending on the lease structure, is that the monthly payments may be treated as a tax deductible business expense. Companies that rely upon cutting-edge technology such as communication devices, vehicles, or other equipment will find a big economic advantage to leasing.

What are the advantages of finance lease? ›

Advantages of Finance Lease
  • Finance Lease gives business customers use of an asset of newer, higher specification than the could otherwise buy outright.
  • The cost of the asset is paid by monthly instalments rather than a large upfront investment.

What are the impact of leasing for the lessee? ›

(i) Avoidance of Initial Cash Outlay:

Leasing enables a firm to acquire the use of an asset without making capital investment in buying the asset. The lessee may avail 100% finance from lease financing and avoid even initial investment in margin money as required under loan financing.

What are the importance of leasing? ›

An important benefit of leasing is that it offers a business an alternative source for finance. You can just lease the necessary equipment without the hassle of depreciation. Your borrowing power remains intact because you have not borrowed any money. The existing line of credit is still open for any further use.

What are the pros and cons of leasing? ›

Pros and cons of leasing a car
Pros:Cons:
No or low down paymentExcess mileage penalties
Usually covered by warrantyFees for excessive wear and tear
Lower monthly paymentsEarly lease termination fees
No upfront sales tax feesGenerally higher insurance premiums
1 more row
28 Feb 2020

What are the advantages of leasing to the lessor? ›

Advantages of Leasing to the Lessor:
  • Higher Profits: The lessor acting prudently can make high profits from leasing of the asset. ...
  • Tax Benefits: The lessor being the owner of the asset can claim various tax benefits such as depreciation, investment allowance, etc. ...
  • Quick Returns: ...
  • Increased Sales:

What is lease finance its advantages and disadvantages? ›

Lease financing is a popular medium and long-term financing option in which the owner of an asset grant another person the right to use the asset in exchange for a periodic payment. The asset's owner is known as the lessor, and the user is known as the lessee.

What are the two types of lease financing? ›

Operating lease and Finance lease are the two kinds of accounting methods for leases. Both kinds of leases are used for different purposes and results in differing treatment in accounting.

Is lease an asset? ›

The lessor reports the lease as an asset on the balance sheet and individual lease payments as income on the income and cash flow statements. They must also account for the asset's depreciation over time.

What are the types of lease? ›

The three main types of leasing are finance leasing, operating leasing and contract hire.
  • Finance leasing. ...
  • Operating leasing. ...
  • Contract hire.

What are 3 advantages of a lease? ›

This type of arrangement has several benefits that could make leasing a much better deal for you.
  • Lower monthly payments. ...
  • Less cash required at drive off. ...
  • Lower repair costs. ...
  • You don't have to worry about reselling it. ...
  • You can get a new car every few years hassle-free. ...
  • More vehicles to choose from.

What are the pros and cons of leasing a commercial property? ›

Pros and Cons of Leasing Commercial Real Estate
Pros of leasing commercial propertyCons of leasing commercial property
Access to more liquidityNo equity or benefits from appreciation
Fixed monthly costUnable to collect passive income
Tax breaks for property expensesHigh rent expenses
1 more row
16 Aug 2022

What are the advantages of lease financing? ›

Conserves Cash: Leasing provides 100% financing. Capital can be conserved and used to finance other projects or activities. Access to Capital: Leasing does not impact existing credit lines – e.g. an existing bank operating line, thereby providing another source of capital.

What are three disadvantages of leasing? ›

Disadvantages
  • No equity/ownership in the vehicle.
  • Potential early termination liability.
  • Potential end-of-lease costs like excess wear and tear and additional.
  • Mileage charge.

Does lease provide 100 percent financing? ›

Leasing provides a number of benefits that can be used to attract customers: Payment schedules are more flexible than loan contracts. After-tax costs are lower because tax rates are different for the lessor and the lessee. Leasing involves 100% financing of the price of the asset.

What is a full payout lease? ›

Full-payout lease means a lease in which the national bank reasonably expects to realize the return of its full investment in the leased property, plus the estimated cost of financing the property over the term of the lease, from: (1) Rentals; (2) Estimated tax benefits; and.

What are the limitations of lease financing? ›

Limitations of Lease Finance

There are chances that a lease arrangement might impose certain restrictions on the use of assets. For example, it may not allow the lessee to make any alteration or modification in the asset. The lessee never becomes the owner of the asset. It denies him of the residual value of the asset.

Who owns the asset in a finance lease? ›

A finance lease, also referred to as a capital lease or sales lease, is a type of commercial lease in which a finance company is the legal owner of an asset, and the user rents the asset for an agreed-upon period of time.

What is lease financing in simple words? ›

Meaning of Lease Financing— Lease financing is a contractual agreement between the owner of the asset who grants the other party the right to use the asset in return for a periodic payment and the other party who is the user of such assets.

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