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Legal contract for option to purchase with assignment clause

Discussion in 'Asset Protection/Taxes/Legal' started by Dennis Kaiyer, Mar 15, 2019 at 2:30 AM.

  1. Dennis Kaiyer
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    Dennis Kaiyer New Contributor

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    I see this all the time with people "wholesaling real estate", they find an undervalued house and they tie up the rights of the contract. The "option to purchase" contract allowing them to purchase the real estate by some point in the future. Then they then either find someone to sell it on to (using an "assignment clause") by selling the contract itself to someone else that is interested. Or they add value to it by improving the real estate and then selling it off.

    My question is not about real estate though ... My question is, can this be done with businesses? Both online or offline? What about just with assets? (say for example a restaurant goes out of business and has $100,000 worth of equipment they need to sell fast and would take $80,000. Could that be tied up with an option to purchase and an assignment clause?)

    Also I'm no expert obviously, it might not be called an "option to purchase" or "assignment clause" outside of real estate, but it's the concept and function I'm talking about more than anything more than the terminology, so if I am saying it wrong please feel free to correct me so I know.

    Not sure also if this can be done individually or has to be done under a business entity.

    My goal is to sit down with a lawyer soon enough, but I want to know this is even a possibility legally before spending the money booking 30 mins or so to just find out it's not legal like with real estate.

    I want to say thank you in advance to any reasonable responses, I really appreciate your time and help.
     
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  2. Jechua
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    Jechua New Contributor FASTLANE INSIDER

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    First, buying a business as a going concern is a lot more complex than buying real estate. So whether it is feasible goes beyond legal constraints.

    That said, what you are describing is basically trying to flip businesses without upfront capital. There are many ways to do this but it usually comes down to creative transaction structures (put-call options, financing from banks/investors/sellers, earn-outs etc.) However, in almost all of these cases you would bear some risk; why would a business owner provide you with upside potential and optionality (read: zero downside)?
     
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  3. Michael Burgess
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    Michael Burgess Bronze Contributor Speedway Pass

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    I'd second what @Jechua said...

    When wholesaling real estate, you're usually dealing with a "product" that is somewhat of a commodity; people value multifamily real estate based on a function of what it will produce in income, and what it costs to operate. Single family homes are likely based on comparative homes in the neighbourhood. There's a fair number of buyer for these properties, and they're accessible to find.

    Two other things with wholesaling real estate: usually somebody getting a property under contract will put down earnest money (their deposit). Wholesalers often get a contract with somebody in either an ignorant or weak (or both!) position; think people living paycheck to paycheck with a roof leaking, or pipes bursting.

    I don't think wholesaling businesses is a question of whether or not you can *legally*, but whether or not it will work *functionally*. Business people are generally more sophisticated than the average layperson selling their home to a wholesaler, and they'll ask a lot more questions. That said, if you can bring value to the table by determining a sellers true needs, and arrange a buyer that's looking for the same thing, you could definitely get paid for it!

    Let us know how the deal hunting goes :thumbsup:
     
  4. Rabby
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    Rabby Silver Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    The short answer is yes.

    Now, two points.

    First, that's what stock options are. They are options to purchase shares of a business. If you could buy options on all the outstanding shares, you would by definition have an option to purchase the business. Public companies make great use of these, but non-public companies use them for various reasons too (employee retention, etc).

    Second, 'wholesaling' real estate (or anything else) does not require option contracts. All you need are contracts. Caveat: check whatever I say with lawyers (I'm not one) who know what they are talking about (not the other kind of lawyers) in your jurisdiction. But a contract for purchase is simply a contract. If a contract does not say it can't be sold or transferred, then it may be sold or transferred. Or if you're worried about technicalities, you can make the contract between your trust/corporation and the seller, and transfer the trust beneficiary or corporate shares to the person who is buying the contract. There's no reason why you can't do this with businesses. In fact, similar things are done, probably in various better or more or less complex ways.

    One key concept would be that you probably want to transfer beneficiary status or buying-entity-ownership before the closing, otherwise you could be hit with the same tax multiple times for a single transaction. In other words, sell the contract rather than actually buying and re-selling the property/shares.

    Ok, and actually there is a 3rd point. And a 4th.

    Point 3! Legality. Contracts are just agreements. It's legal to make agreements unless some specific law has been written against a type of agreement. You don't need permission to make option contracts, or to sell contracts you've made. It just has to be permissible within the contract (no clause barring transfer). Now, to avoid any surprises or hurt feelings maybe you will make what you're doing more explicit, but following an agreement is just following an agreement... what's illegal about it?

    Point 4. Ethics. People who tie up real estate with no chance of buying it, or selling the contract to someone else, are jerks. Beginners can be forgiven for not knowing their chances, of course. But if you put something under contract, you should fully intend to, and reasonably believe that you can, see it through to closing. Don't tie up someone's asset and then sit on it. If you find it can't be sold and it is therefore not suitable for you under the terms of inspection in your professionally written contract, let them out of the contract. Or re-negotiate, letting them know there was a problem in due diligence.

    And a 5th!

    You'll have to convince a business owner or shareholders that you can see an acquisition through. They generally don't expect you to use your own money, at least not for the whole purchase price. But they are doing diligence on you from the moment you make contact. So keep that in mind if you're making offers to businesses. It might help to have some capital that you can show, or bank relationships or something, because there is a chance they will ask to see your financial position, or that of your partners, etc., before opening their books and telling you how they run the business.
     
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  5. Rabby
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    Rabby Silver Contributor Read Millionaire Fastlane I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass

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    Side note, I recommend a lady by the name of Vena Jones-Cox if you're interested in wholesaling. Her marketing is funny and over the top, but when you get to the content you'll see she knows exactly what she's talking about, and she cooks with the same recipes she gives you. Her area is real estate wholesaling, but the abstract concept applies to just about anything.
     

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