Why Should My Business Consider A Sale-Leaseback With Bartlett Capital Group
When Preparing a Business for Sale
Most buyers of businesses are not in the business of owning and managing real estate. Often, a savvy business owner who is contemplating selling his company can benefit by taking the real estate out of the company sales transaction and, by doing so, maximize the value of the real estate and increase the overall gross sale proceeds. If the real estate is left in the transaction, the full value is seldom realized as the EBITDA multiple often does not value the company’s real estate at its true fair market value. At Bartlett Capital Group, we purchase real estate based on an appraisal, extensive real estate market study, and a review of comparable market lease rates. The seller can complete a sale-leaseback and negotiate a long-term lease, and pull out the real estate sale proceeds or repay corporate debt before the sale of the business.
| Sale Including Real Estate | ||
| EBITDA | $1,000,000 | |
| EBITDA Multiple | 5.0x | |
| Purchase Price | $5,000,000 | |
| Amount Allocated to Operating Company | 70% | $3,500,000 |
| Amount Allocated to Real Estate | 30% | $1,500,000 |
| Operating Company Sale After Sale-Leaseback | ||
| EBITDA | $1,000,000 | |
| Rent Payment | $150,000 | |
| EBITDA (Net of Rent) | $850,000 | |
| EBITDA Multiple | 5x | |
| Operating Company Purchase Price | $4,250,000 | |
| Real Estate Property Value | ||
| Rent Payment | $150,000 | |
| CapRate paid on Rent | 10% | |
| Equivalent Multiple Paid on Rent | 10x | |
| Real Estate Purchase Price | $1,500,000 | |
| Total Purchase Price (Operating Company and Real Estate) | ||
| Operating Company Purchase Price | $4,250,000 | |
| Real Estate Purchase Price | $1,500,000 | |
| $5,750,000 | ||
| Sellers Advantage | ||
| Increase in Total Purchase Price | $750,000 | |
| Effective EBITDA Multiple | 5.75x |
Maintain Control of the Real Estate
Most sale-leaseback agreements are structured as triple-net leases, so you will be responsible for the taxes, insurance, and common area maintenance. A long-term, ‘hands-off’ lease from the Bartlett Capital Group provides you with similar control over the property as was the case when you owned the property. We are happy to work with you to include options that will provide for future expansion and sublease of the property. In addition, we can provide a gross-lease in which you are only responsible for the monthly rent – we take care of the taxes, insurance and maintenance. Because you are the seller and the lessee, you have significant influence over structuring the property lease. In addition to realizing their investment in the real estate, you have the opportunity to negotiate an acceptable lease agreement with the investor acquiring the property. Many leases run 5 to 15 years with options. We can also include extension options after the lease expiration, and include terms for early lease termination if you see a need for more flexibility.
Property Acquisition
A sale-leaseback is an arrangement in which a business owner sells real estate they own outright, then leases all or a portion of it back from the buyer. Some of the main reasons business owners undertake a sale-leaseback are:
Capital Needed for Growth
A sale-leaseback can be used to free up cash to grow a business through acquisition or to acquire growth capital, additional facilities, technology, and equipment. Many businesses do not have access to as much credit as they need to achieve their growth objectives; many are too close to their borrowing limit to consider expansion or make an acquisition of a competitor. Sale-leasebacks can be used as an off-balance-sheet financing structure that gives the seller the opportunity to turn a non-earning asset into growth capital. Additionally, a sale-leaseback agreement can often be structured to finance up to 100% of the appraised value, whereas traditional bank financing might be as low as 75% of the appraised value. The sale-leaseback allows the business owner to more efficiently use their capital and potentially preserve the available bank financing for acquisitions and growth opportunities in the future.
Capital Needed for Ownership Transition
The sale-leaseback proceeds could also be used for other corporate purchases like the buyout of a shareholder or a special cash distribution. The absence of covenants in sale-leaseback arrangements provides business owners with significant discretion in determining the best use of their company’s cash. Fewer covenants provide your company with greater control of the business and operations, and reduces the risk in difficult operating environments. We frequently see multi-generational companies utilize the sale lease-back to provide capital for the outgoing owner immediately, while the next-generation owner purchases the business over a few years.
