Sale and leaseback deals
Sunday, 16th September 2007 by Vicky Meek
Some key points of advice from FDs
Look at your options.
“Don’t look at sale and leaseback deals in isolation,” says Christopher Lewey of Close Brothers Corporate Finance.
“They should certainly not be your first port of call. There are plenty of alternatives, not least of which is debt financing. There’s something of a debt bubble at the moment.”
Leasebacks can also be expensive. “If you borrow £50m from a bank, you can swap into a fixed rate on a debt which does not grow,” Lewey adds.
“If you do a property sale and leaseback, you’re probably paying a bit more to start with and you’ll be subject to upward-only rent reviews – and you’re waving goodbye to any uplift in property values.”
Peter Ttofis, FD of Ricoh UK, agrees: “Do your own modelling and work out the cost of capital. I know the cost of financing every single machine.”
But don’t dismiss leasebacks.
“A lot of people don’t do these deals because they think there are obstacles in the way. Ours was reclamation of VAT,” says Kevin Geeson, FD of the RNIB.
“But if you go through the exercise, you may find that it’s more possible and cost-effective than you think.”
It’s not an accounting fiddle.
“Don’t do it purely to get assets off the balance sheet and improve your return on capital employed figures,” says Travelodge FD Jon Mortimore.
“The accounting treatment shouldn’t influence your decisions. In any case, the signs are that the standard is going to change in the next two or three years, forcing all leases to be on balance sheet.”
And it’s not for the desperate.
“We make sure that the company in question is not embarking on a pure fundraising exercise,” says Nick Egerton, head of sales in corporate finance at Siemens.
“There has to be a commercial explanation, such as investment in the company, an acquisition, or to return cash to shareholders. If it looks as though a business is selling off its equipment to get it out of trouble, we’ll walk away.”
Get the valuation right.
“It’s often difficult to determine the fair market value of equipment, so people tend to use the tax written down value,” says Egerton.
“Make sure you’re not creating book losses or profits. Have an open and honest discussion with your provider about the book value.”
If it’s a property deal, get advice. “Sort out the tax planning and structuring at an early stage,” says Michael Goldberg at SJ Berwin. “You can enhance the net price you achieve if you ensure you have a suitable tax structure.”
Don’t get trapped.
Property sale and leasebacks carry risks that you lose strategic control of important assets. Selling your best properties – the ones you won’t mind being committed to over the long term – is a good start, according to Mortimore.
You can also ensure there’s an option to sub-let. Beyond that, it’s all about picking the right partner.
“If you decide you want to re-configure or realign your property use in any way, you need to be comfortable dealing with your new landlord,” Goldberg says. “I’ve seen instances where they’ve made it very difficult for tenants to make changes.”
Get planning.
“Our planning took four months,” says Mortimore. “We asked ourselves: what will a standard lease look like? It meant there were no nasty surprises.”
Car fleets and equipment are much simpler deals, but you still need to prepare. “Get the leasing company to come into your offices,” says Ttofis.
“They can go through your systems and explain their data requirements. That way, you can ensure your systems will provide the data quickly, and the deal will run more smoothly as a result.”
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