Sale and leaseback allows companies to free up capital tied up in their movable and immovable assets. They can use the money to strengthen their balance sheet, repay debts or invest in further development of their core business.
Sale and leaseback is a leasing construction under which a company/lessee doubles as a supplier. A company sells plant, equipment or buildings purchased earlier to a leasing company and then immediately leases them back. Thee transaction involves only two parties instead of three. It gives the company access to capital for other investments, while still being able to use the leased goods.
The true value of goods lies in using them, not owning them. That is why sale and leaseback is becoming an increasingly popular form of financing.
Benefits
A sale and leaseback agreement gives a company liquidities from the sale of investment goods, plant (vehicles and machines), equipment (IT infrastructure and other equipment) or real estate like offices and business premises. At the same time, the company has all the advantages of leasing, including certain capital and tax advantages.
Sale and leaseback is a construction usable by large, medium-sized and small companies and also government authorities. This kind of financing is widely used in all sectors, including industry, transport, logistics, services and healthcare.
In principle, you can make all movable and immovable assets part of a sale and leaseback transaction.
Sale and leaseback has numerous advantages for the lessee. First of all, there are the typical benefits of a lease agreement, like:
- 100% financing, including VAT, etc;
- strengthening of the balance sheet;
- higher credit rating;
- retention of existing credit lines;
- fixed repayments that help a company plan its cashflow, budget and cyclical fluctuations;
- a lower Total Cost of Ownership thanks to a bespoke construction that fits the company's specific financial and technological needs.
On top of this, sale and leaseback has its own special advantages, like:
- freeing up capital for the longer term for investments;
- tax advantages;
- possibility in numerous countries to keep the transaction off the balance sheet;
- possibility to help finance mergers and acquisitions. Conversely, operating assets that include a lot of real estate can be attractive for buyers eyeing a takeover candidate;
- the usability of capital freed up in this way for leverage and management buy-outs;
- possibility of inclusion in a company restructuring, refinancing transaction, rescheduling of debts.
Solid preparations essential
A leasing company will not be interested in companies that hope to generate liquidity quickly through sale and leaseback. If you intend to enter into a sale and leaseback contract, there are some important matters you need to consider.
For one thing, the company must be the 100% owner of the assets that will be sold (bear in mind any pledges or collaterals that have been given). The assets must be of sound quality. Plant and equipment must have been properly maintained. Real estate must be in good condition (in terms of its intrinsic value, location, state of repair). Sale and leaseback operations that include real estate are usually undertaken with the exclusion of variable costs from agreement (like taxes, maintenance, insurance, etc.).
The movable or immovable goods will be valued at their going market value, which must be justifiable economically. A company cannot overvalue the goods in its books, for example. A higher or lower value on the sale will have accounting and fiscal implications. So it is wise to prepare properly and get everything right.
The way the company intends to use the new liquidity must be clear at the outset. It's not sufficient to keep the cash in the company for contingency purposes, for example. The leasing company will insist on being completely aware of the purpose for which the cash will be used.
The term of the lease agreement will be geared to the company's ability to make repayments.
Accounting and fiscal aspects
The accounting for sale and leaseback transactions is generally subject to IAS 17 (International Accountancy Standard) for listed companies (consolidated) and specifically to local accounting principles.
If a sale and leaseback transaction results in a financial lease, any extra value from the proceeds of the sale in relation to the book value must not immediately be presented as income in the seller's financial statements. Instead, the value must be deferred and written down over the term of the lease.
The fiscal consequences differ from country to country and, by consequence, so do VAT liability, registration fees and similar matters. The biggest financial advantages of sale and leaseback - like double tax deductibility - have effectively been ended Europe-wide. But the sale-and-rent-back operation can still be kept off the balance sheet in many countries.
A dynamic pan-European player with bespoke leasing products
Fortis Lease ranks among Europe's five largest cross-border leasing companies. You will find Fortis Lease in Belgium, Germany, France, Hungary, Italy, Luxembourg, the Netherlands, Poland, Portugal, Spain, the Czech Republic, the United Kingdom, Switzerland and Turkey.
Everywhere it operates Fortis offers you consistency in services, a distinct advantage for companies that operate internationally or want to expand their business activities to new areas.
