Many business owners and financial managers are often faced with the consideration of using a leaseback sale to generate cash. This strategy has become much more popular over the past year as bank and credit liquidity scenarios have deteriorated.
The overall strategy can be seen as granting some operational flexibility to the company. The end result, of course, is that it brings additional cash to the company at a time when ash is king. The customer, of course, is essentially ‘leveraging equity’ that the company has accumulated in the asset. What is that asset?
Typically, the assets given up in exchange for a sale and leaseback are manufacturing equipment, computers, and even business real estate.
Sale-leasebacks have to make sense to both the landlord and the tenant. We believe the biggest ‘negative’ aspect of such a transaction is the potential perception by the landlord or other lenders that the business is making one last ‘cash grab’. There has to be, as mentioned above, an agreement that the transaction will work for both parties.
By looking at a typical example of a transaction, we hope to get a better idea of why this strategy may be a common sense financing alternative. Company Has manufacturing assets, which are shown as fixed assets on the balance sheet. In the sale-leaseback scenario, the assets, of course, stay with the company, not move. The company receives cash from the sale of the asset to the leasing company. Frankly, clients considering this transaction have explored other traditional options at this point, such as discussing additional financing with their bank or other senior lenders. Naturally, the equipment is used on a daily basis to continue generating sales (and hopefully profit) for the company.
In certain cases, sale-leaseback may actually improve a customer’s balance sheet. An additional important flexibility is that the new sale-leaseback financing can, in fact, be used to create additional flexibility at the end of the lease, i.e. the customer can regain ownership of the asset if it has an economic value, or it can choose to negotiate an upgrade return with the seller or landlord.
In summary, does a sale and leaseback of assets make sense? The answer as we have seen is ‘yes’ if in fact it is done for the right reasons and it makes sense to the client and the lender.