A sale-leaseback deal is what is it?
A sale-leaseback is a method for a business to obtain money by leveraging an owned asset.
The asset owner gets into a two-part agreement, agreeing to 1) sell the asset to a buyer and 2) lease the asset back from the buyer for a predetermined time.
Sound perplexing? Let’s dissect it.
How do selling leasebacks operate?
A sale-leaseback transaction has a common definition across all sectors. The initial owner of the asset, also known as the “seller,” becomes the lessee, and the financing firm, also known as the “purchaser,” becomes the lessor.
Both sides agree on the lease’s duration. The lessee may use the equipment as long as they are still paying lease payments on the asset. Additionally, they have received a robust capital infusion to support other investments.
What advantages do selling leasebacks offer?
Sale leasebacks have several advantages for businesses in the life sciences. Raising capital, using capital for other company purposes, and modifying lease terms are some of the options we’ll discuss in this article.
raising money
A business can sell an asset to generate money and then lease it back from the buyer. A company can acquire the resources and cash it needs to operate in this manner.
For example, if a business owner already owns a piece of lab equipment, they can work with a financing company to buy it and then lease it back to them. It gives you cash immediately; when the term is over, you own the equipment again.
Redirect funds to other company operations.
Many life sciences firms use leaseback transactions to turn an asset into capital that can be invested in business expansion. It could involve new product introductions, company growth, and other things. It can be appealing to use the money that was once put in an asset for other things while still having access to it.
Flexible contract conditions
In a sale-leaseback deal, both parties work together to develop fair and reasonable lease terms. The lessee and the lessor usually desire the monthly lease rates to be at or below the market. The lease’s length and options for renewal meet operational needs.
What is a sell leaseback scenario in the context of analytical instrumentation?
Let’s examine a sale-leaseback scenario and the potential workflow:
To invest in a growth plan, a company owner requires money. They recently purchased a $200K analytical instrument, and money is limited.
Deal Score: Bold View Capital pays a predetermined sum to buy the asset. Bold View Capital, a biotech company, initiates a three-year sale-leaseback agreement.
Terms: Bold View Capital’s acquisition of the instrument results in an immediate capital infusion for the biotech business. Even though Bold View Capital is now the asset’s owner, the Biotech firm still uses the instrument as usual in their lab.
For 36 months, the biotech firm will pay a predetermined monthly lease payment.
When the Lease Period Is Over: The Biotech Company Retains Ownership of the Asset After the Lease Term Is Over.
Why does a sale-leaseback in this situation make sense?
This biotech business was able to use an asset they already owned as collateral for more capital rather than diluting equity or taking out onerous bank loans. The asset remains in the lab environment, so regular lab activities are not interrupted. The ownership of assets is the only thing that moves.
Final thoughts on selling leasebacks
In other words, when it comes to alternative sources of money, sale-leasebacks open up a whole new world of possibilities. Using an existing asset to access liquid cash can be a huge asset for businesses in the life sciences and biotech sectors where expensive analytical instrumentation is the norm – both for your business objectives and your financial sheet.
FAQ
Q: What is a sale-leaseback?
A: A sale-leaseback is a financial transaction in which a company sells its property, such as a building or equipment. The buyer then leases the property back for a specified period.
Q: Why would a company do a sale-leaseback?
A: A company may choose to do a sale-leaseback to raise cash while still retaining the use of the property. It can be useful for companies that need cash to finance operations or expansion but do not want to take out a loan or sell off assets they still need to operate.
Q: What types of property can be sold in a sale-leaseback?
A: Almost any property can be sold in a sale-leaseback, including buildings, equipment, and land.
Q: Who can participate in a sale-leaseback?
A: Both the seller and the buyer can be any type of entity, such as a corporation, LLC, partnership, or individual.
Q: What are the benefits of a sale leaseback for the seller?
A: The seller can raise cash while still retaining the use of the property. The seller does not have to worry about maintaining or repairing the property, as those responsibilities typically fall on the buyer/landlord.
Q: What are the benefits of a sale leaseback for the buyer?
A: The buyer can earn income from leasing the property to the seller. The buyer also owns a tangible asset that can appreciate over time.
Q: How is the lease term and rent determined in a sale-leaseback?
A: Before the sale is finalized, the buyer and seller usually discuss the lease length and rent. The lease term and rent may be affected by the property’s value, the market’s state, and both parties financial needs.
Q: Are there any risks involved in a sale-leaseback?
A: As with any financial transaction, there are risks involved. If the lease payments are not affordable, the seller may default and lose the property. If the seller defaults on the lease, the buyer may have a difficult property to lease or sell.
Q: Can a sale leaseback have tax implications?
A: Yes, a sale leaseback can have tax implications for both the seller and the buyer. It is important to consult a tax professional to understand the tax implications of a sale-leaseback.
