Many business owners and financial managers are often faced with the consideration of utilizing a sale – leaseback to generate cash. This strategy became much more popular over the last year or so as banking and credit liquidity scenarios deteriorated.The overall strategy can be viewed as giving some operational flexibility to the business. The bottom line of course is that it brings additional cash into the company at a time when ash is king. The customer is of course, essentially ‘tapping into equity ‘that the firm has built up in the asset. What is that asset?Typically assets given up for consideration in sale leasebacks are manufacturing equipment, computers, and even a firm’s real estate.Sale-leasebacks have to make sense to both the lessor and the lessee. We view the largest ‘ negative ‘ aspect to such a transaction being the potential perception by the lessor, or other lenders that the firm is making a last ditch ‘ cash grab ‘. There has to be, as referenced above, an agreement that the transaction works for both parties.If we analyze a typical example of a transaction we will hopefully get a better sense of why this strategy can in fact be a common sense financing alternative. Company A has manufacturing assets, shown as fixed assets on the balance sheet. In the sale – leaseback scenario the assets of course remain at the company – they do not move. The company receives cash for the sale of the asset to the lease firm. Quite frankly customers who consider this transaction have explored other traditional options by this time, such as reviewing additional financing with their bank or other senior lenders. Naturally the equipment is used on a daily basis to continue to generate sales, (and hopefully profits) for the firm.In certain instances the sale-leaseback can in fact enhance the customer’s balance sheet. One additional major flexibility is that the new sale-leaseback financing can in fact be used to generate additional flexibility at the end of the lease – i.e. the customer can again regain ownership of the asset if it will have economic value, or might choose to negotiate a return of upgrade with the vendor or lessor.In summary, does a sale-leaseback of assets make sense? The answer as we have seen is ‘ yes ‘ if in fact it is done for the right reasons and makes sense for the customer and the lender.
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