Three Strategic Uses of Sale-leaseback Capital for CFOs
Finance M&A, counteract inflation and fund business growth with this alternative financing method
By: Jason Patterson | Investments
There are several reasons businesses of all sizes may choose to monetize their owned real estate through a sale-leaseback. A sale-leaseback is an effective financing tool to unlock seemingly illiquid capital that can be reinvested into a company’s core business to fund both internal and external growth. It can be a particularly useful tool when traditional debt financing is difficult to secure or available at less attractive terms. Another key benefit is that the proceeds from a sale-leaseback can be used for essentially anything – from improving a company’s cost of capital to paying off debt. This flexibility enables CFOs to allocate sale-leaseback proceeds to the areas where their business needs it most at any given time.
In today’s economic environment, CFOs can strategically leverage sale-leaseback capital to address several of the biggest concerns – and opportunities – that businesses are currently facing, including M&A, inflation and capital raising. Here’s how:
In an M&A market that remains highly competitive, sale-leasebacks can be a useful tool to give companies an edge against their peers. Sale-leasebacks are an attractive means to finance M&A by enabling companies to take advantage of the value arbitrage between their real estate valuation and EBITDA multiple. When completing a sale-leaseback concurrently with an acquisition, the proceeds can effectively “buy down” the acquisition multiple and boost returns. In addition, leveraging sale-leaseback capital enables companies to avoid many traditional debt challenges like refinancing risk and balloon payments. By pursuing a sale-leaseback now, companies can also lock in an attractive rental rate for the long-term while cap rates remain low and before interest rates rise significantly.
Inflation continues to surge at its fastest pace in 40 years. In April, the Consumer Price Index continued its upward trajectory, increasing 8.3% from one year ago. While the Fed has made some efforts to fight inflation, there is still a lot to be done to get prices down to more normal and stable levels.
This is bad news for businesses, who are dealing with dwindling cash flows as costs continue to rise for raw materials, manufacturing and overhead. However, savvy CFOs can leverage sale-leaseback capital to help fund initiatives to mitigate the negative impacts of sustained high inflation. Sale-leaseback capital can be invested into automation equipment, new production lines or other areas with return on capital in excess of cap rates to increase production line efficiency and maintain operating margins despite increased pressure on costs.
Unlock Illiquid Capital to Fund Internal Business Growth
In today’s more volatile environment, having access to capital is critical to not only expanding externally through M&A, but also to investing in existing business lines. By pursuing a sale-leaseback, CFOs can unlock liquidity on a business’s balance sheet and reinvest those proceeds back into the core business, all while maintaining long-term occupancy and operational control of the real estate. Companies can launch new products, acquire additional equipment, fund R&D and grow their market share in existing business lines. This organic growth can in turn help attract top talent, particularly in the current tight labor market.
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