Matt and Liz Raad

Leasing A Business -An Alternative Exit Strategy

Leasing a business as part of your exit strategy can be a powerful alternative when it comes time to sell your business. Did you know that just like in real estate you can lease your business out to a potential business buyer? There are many reasons why this may be a great exit strategy for you as the seller of your business as opposed to offering vendor finance, and if you are looking to buy a business this is an excellent business strategy.

Why Lease a business when it's time to sell up?…

Here are some of the main reasons why you should consider leasing a business when you wish to sell your business:

  • The most important reason; your business may difficult for you to get out of or sell any other way and leasing your business is the easiest way (and sometimes the only way!) to physically exit your business.
  • There are instances where even if you offer vendor finance it can still be challenging to sell your business. Your best buyer may be trying to buy a business without a deposit and leasing your business to them can be a simple alternative to vendor finance.
  • Business buyers may not initially have the money or typically like to buy a business with as little money down as possible and if your business has the cash-flow it is quite easy to get a business buyer over the line by negotiating to lease the business to them.
  • Leasing a business can be combined with an option to buy at the end of the lease period ( just like real estate) which can be a very effective way to sell your business.
  • Leasing a business is quite a profitable business idea if the vendor wishes to retain ownership of the property or real estate the business operates from
  • You may want to keep the business and still enjoy some of the cash-flow from it i.e. leasing can be a  great strategy for getting you out of the day to day running of your business and creating passive income from your business

The following real live case study will demonstrate what we mean about the advantages of leasing a business and where it may be used very effectively as a  business exit strategy.

Leasing A Business as an exit strategy – Real live case study:

To illustrate what we mean lets take a look at a business we were involved in the sale of that ended up by being leased out to the buyer. This particular business was a sand mine that we were trying to sell right in the middle of the global financial crisis (GFC) melt down.

Selling The Business…

This was extremely challenging business to sell -how do you sell a sand mine in the middle of the GFC? It's a property with 'allegedly' three million tons of sand under the ground. Sand mines are highly valuable assets going forward into the future because sand is a diminishing and somewhat rare resource so we had plenty of interested business buyers.

The Problem:

BUT in the middle of GFC, it was virtually impossible to find someone to buy a business who would pay or come up with the money the vendor wanted especially with the banks clamping up so tightly on credit. This business had a very high asking price (in the multi-millions $) because of its valuable resource yet did not produce much cashflow/profit. It was generating a very low income compared to the massive asset it had sitting under the ground and this was the problem with the banks. There was no cash flow in this business to help fund any loan. It was all tied up in the assets sitting under the ground.

The Solution -Leasing A Business!

In the end the only way it could be sold was by leasing the business to the buyer. Heres how the deal was structured: The business buyer pays a minumum monthly lease to the vendor plus a small royalty based on the amount of sand that comes out of the ground from the site. On top of this, in several years time the buyer had the option of purchasing the business at the agreed price.

Both parties win here -the owner gets his most important required outcome -an exit from the day to day runnning of the business -he earns good money from the lease and sand royalties and even if the purchaser does not proceed with the option to buy, he (vendor) still owns a highly valuable asset that he can sell off.

The buyer is not locked into vendor finance and gets to make money from the sand he mines without having to pay over a huge lump sum upfront (no big upfront debt) until he is ready to exercise the option. In this case there was provsion for the option to be exercised early if agreeable to both parties.

Why Not Consider Leasing A Business as part of your Exit Strategy?

So if you are finding it hard to sell your business or just can't seem to make the deal work when it comes time to exit your business due to financing troubles or an unusual business situation, maybe consider this interesting alternative of leasing your business to a potential business buyer.