Sale Leasebacks in M&A

Typically, a vast amount of a business owner’s net worth is tied up in their company, particularly if related real estate is owned by the company or a related entity. When transitioning ownership of your business, you must decide whether to keep the real estate or sell it. Common scenarios include selling the real estate with the business, retaining ownership and leasing the real estate to the buyer, or selling the real estate to an investor who enters into a lease with the buyer (sale-leaseback).

Sale-leasebacks are becoming more common to unlock additional value for a seller. In fact, there are investment firms focusing exclusively on these transactions. Below is a simplified example: Assume your business owns facilities at two locations and generates $10 million annually in earnings before interest, taxes, depreciation, and amortization (EBITDA). If your company sells for 8x EBITDA, the value of your business (including owned real estate) would be $80 million.

How might that compare with the inclusion of a sale-leaseback transaction? If we assume your company rented the two facilities for $2 million, the EBITDA of your business would be reduced to $8 million. At the same EBITDA multiple, your business’s value (excluding real estate) would be $64 million ($8 million x 8). Selling the real estate at a 7.5% cap rate would generate an additional $26.7 million ($2 million divided by 7.5%), for a total value of $90.7 million. The sale-leaseback in this simple scenario generates additional proceeds of $10.7 million.

The potential value of a sale-leaseback will vary depending on specific circumstances, and it does add some complexities, so consulting your business, tax, and legal advisors is recommended before deciding whether this approach is right for you.