Lease Purchase: How To Get Your Deal Done When More Conventional Financing Is Just Not Available.
If you find yourself where you have tried everything else, take a look at lease purchase. Although unconventional in selling/buying businesses, it is quite common in other aspects of business and life. In fact it has long been a very big business in the United Kingdom. Particularly in the consumer hard goods area.
Something very similar to lease purchase is used in financing equipment and machinery purchases all the time. If you know anyone selling machine tools or metal fabricating equipment, they will tell you that most of their sales have been financed this way. The buyer leases the equipment, with an option to purchase at the end of the term. The exact structure of the lease agreement is frequently tax driven.
Tax driven largely refers to the tax treatment of the lease payment by the lessee, or buyer. The monthly lease payment is usually classified as an expense to the business, and therefore is deducted from revenue before tax. You may already be getting a few ideas about how to use lease purchase in selling your own business. Particularly if usual methods of financing are not available to a prospective buyer.
If your business uses machinery, and it has no debt attached to it, could you lease it to the prospective buyer? If so, you will need to get expert tax advice, so you don't end up with a large, unexpected tax bill. Your reaction to that may be lackluster. Your business may not be capital equipment intensive. Or there may be other reasons why this would not work for you.
Don't quit yet. Consider another application of lease purchase. What would prevent you from actually leasing the entire business to a prospective purchaser? You may have lots of reasons for caution, but I am talking about something external that would actually prevent it. If there is no external reason, it makes sense to learn more. This is another situation where you will probably need experienced legal advice. Again, don't let your attorney confuse you with business advice masquerading as legal advice.
A lease purchase will operate much like the type of lease you are probably familiar with. The purchaser/lessee will make a stream of fixed monthly payments. At the end of the term, he will be able to buy the business, either for a nominal sum, or for some larger, known amount. But during the term of the agreement the lessee will operate the business.
This type of transaction will involve cooperation and good will on your part and that of the buyer. It will take effort from both of you to arrive at a structure and formula that works for both of you. You want to get paid for your business. He wants to operate and eventually own the business. Neither of you want any tax surprises.
You may consider including a non compete agreement as a separate part of this. This may or may not have tax advantages. But that is the reason for considering it. You may need to have a balloon payment at the end of the term of the lease, as the purchase part of lease purchase. The specifics will depend on tax considerations, and what the business can bear as a monthly payment.
Clearly you don't want to turn control of your business to any Tom, Dick, or Harry. You will need to know a lot about them. And they must have some skin in the game. Good character not withstanding, having nothing at risk changes behavior. Drive down any residential street. You can always tell the difference between a house that is owner occupied, and one that is tenanted. The owner occupied homes are almost always better kept, with neater yards, etc.
Skin in the lease purchase game, from a prospective lessee is cash. Your prospective buyer must make you comfortable with the initial cash payment, or by providing property acceptable to you as his entry fee. If he has an airplane, boat, or?? and you want one, that might work. But little works as well as cash.
Skin in the game shouldn't be sufficient for you. It is necessary, but not sufficient. You will need to be very comfortable with the character, and with the management skills of your buyer. You will be turning over operation and control of your business to him. Control in a lease purchase situation does not necessarily mean ownership. That will come at the end. But he will be in effective control of its destiny. You must consider that you might have to take it back. When you get it back you don't want to find your new Mercedes has turned into an old, battered Yugo.
Creative financing techniques, and this is one of them, should only be used in extraordinary circumstances. When the economy and financial markets are in such chaos that ordinary financing is not available. And even then, you must be in a great hurry to get a deal done. Otherwise, it is wiser to wait it out, until the return to normalcy.
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