A sale-leaseback is exactly what it sounds like with some additional details to keep in mind. Discover how sale-leaseback agreements work with EasyKnock.
You’re looking at your company’s balance sheets and it’s clear that you need some cash. You’ve got expenses on the horizon, and while there’s money coming in, it won’t be enough to cover what will be going out.
You have assets, of course. But whether those assets consist of a vehicle fleet, heavy machinery, or just your home office, the problem is the same—there’s value there, but you can’t pay your bills with it
There is a solution you can consider. It’s called a sale-leaseback.
What Is a Leaseback?
As you might guess, a sale-leaseback agreement involves selling your assets to a company that then leases them back to you. It’s a concept that’s been around for a long time in industries like trucking, farming, manufacturing, or real estate investment, where high-value assets are a core component of operations. The transaction allows asset owners to recover their costs without losing the use of the asset. But how does a sale-leaseback work?
How Does a Sale-Leaseback Work?
A sale-leaseback will work as an agreement between two parties.
- Company A decides to sell a high-value asset (such as a real estate asset or machinery) to Company B, which agrees to rent the sold assets back to Company A.
- The two parties draw up and sign a rent-back agreement that specifies the purchase price, lease term, costs of rental, and repurchase conditions.
- Company B pays Company A the agreed-upon sale price, which Company A then uses to fund its daily operations and/or growth.
- Company A begins making monthly payments to Company B, possibly working toward a repurchase of the assets or investment in newer versions of those assets.
The process of how a sale-leaseback will work is the same across any asset class, from machinery to office space. It can even work for small business owners who have equity in their private homes. Whatever the scenario, though, you have to assess carefully whether it makes sense for you.
Pros and Cons of the Sale-Leaseback Agreement
Pro #1: You Make Your Asset’s Value Work for You
If your non-liquid assets aren’t appreciating in value, or if they’re not appreciating fast enough, they might work more for you if you choose a sale-leaseback. You sell your house and lease it back instead of owning it. Then you get their full value in cash and can budget it appropriately, some of the money going toward the rental costs and the rest used to drive your company’s growth.
Pro #2: You Can Take Advantage of a Market Boom
Every asset class has its ups and downs. If you have an asset type that’s been increasing in value and you think the fair market value will peak soon, you can sell it and benefit from the higher price. And by setting up a sale-leaseback arrangement, you can continue to work in your office space or stay in your home.
Pro #3: Upgrades Become Easier and Safer
When you need to update critical assets but can’t afford to be without them, a sale-leaseback may work as a solution. The sale helps you to get the capital necessary for the newer version of the asset, whether that’s a bigger physical space or newer features. You keep renting the old ones until the new versions are ready for use, then you simply stop renting without worrying about the time a transaction would take.
Con #1: You Lose Ownership Control
The way a sale-leaseback will work is that someone else owns your assets, meaning you don’t have sole decision-making when it comes to improvements. This can be a particular concern if you have real estate assets that you might want to renovate or redecorate. Even if your buyer allows you to make these improvements, the process of getting it done is longer and more complicated.
Con #2: Some Assets Don’t Have Enough Value
Maybe your home is old enough that the purchase price wouldn’t bring in enough money, or maybe you haven’t built up enough equity in your real property. Either way, a sale-leaseback might not be useful because the purchase price would be too low.
This is a particular concern for any real estate asset, which appreciates in strong market conditions. It may be best in some cases to hold onto a real property until you’ve built up more equity.
Examples of Common Sale-Leaseback Scenarios
The way a sale-leaseback process will work is similar across industries, but the details differ. Here’s what it might look like in trucking, commercial real estate, and small business funding.
Example #1: A Vehicle Sale-Leaseback
A logistics company needs capital, so it finds a truck rental company that will buy and then lease back vehicles from its fleet. The purchasing company determines that the seller’s newer vehicles will be best for sale-leaseback. Because these vehicles are new, they’ll provide a higher return for the buyer and seller.
The process will work by two companies signing a sale-leaseback agreement and the seller receives the agreed-upon amount. The seller then uses that financing to fund its expansion, which ultimately generates the income to purchase an updated fleet.
Example #2: A Commercial Real Estate Sale-Leaseback
A dental care company is looking to open new locations in nearby towns. The practice is building equity in its office, but the property owner predicts that they could grow their total net worth faster if they expand. They decide to sell their office to a real estate investor and lease it back from them.
With the money the practice property owners receive from the real estate transaction sale, they can lease back their original office and rent a second one nearby. If the sale-leaseback goes as planned, it can work in their favor to add a third office within a few years.
Example #3: A Residential Real Estate Sale-Leaseback for an Entrepreneur
A small business owner needs to invest in marketing and equipment, but his current revenue stream won’t support that yet. He owns a home and has built up about $150,000 in equity. By arranging for a sale-leaseback of his home, he is able to tap his equity and invest in his business.
This arrangement is one of the newest in the world of sale-leaseback as a business strategy. It’s possible thanks to EasyKnock’s Sell & Stay program. This allows homeowners to sell their homes without moving through a residential sale-leaseback that will work by enabling the sellers to stay in control of their living situations, enabling them to keep paying rent until they are ready to repurchase their homes or relocate.
The qualification process is straightforward and accessible, relying on your home equity and value rather than your personal or business assets.
If you own a home, a sale-leaseback could work for you. That’s especially true in the world of entrepreneurship, where you routinely invest your personal time and funds in keeping things going. Talk to a financial advisor about how a sale-leaseback arrangement could benefit you.