The sale and leaseback (S&LB) strategy has seen growing popularity across Europe, becoming a critical tool for private equity firms and business owners alike. This financial strategy, which allows companies to unlock the value tied up in their real estate assets, offers a myriad of advantages that can support expansion, enhance competitiveness, and provide long-term financial flexibility for an operating company. This article explores why European private equity firms and businesses should consider leveraging sale and leasebacks as part of their corporate finance strategy.
The Value Proposition of Sale & Leasebacks
Sale and leasebacks are a powerful financial strategy that enable companies to sell their real estate assets and immediately lease them back from the buyer. This transaction converts an illiquid asset into non-dilutive capital while allowing the seller to retain operational control over the facility. The capital generated can then be deployed towards higher-return activities such as funding business expansion, debt reduction, or financing acquisitions. For private equity firms, S&LBs can be particularly advantageous during the bidding process in an M&A deal, providing a competitive edge for the investor by offering innovative financing solutions that often allow an investor to pay more for the same business.
Multiple Arbitrage Opportunities
Sale and leasebacks offer compelling opportunities for arbitrage, providing business owners with two key avenues to explore. The first is financing arbitrage, comparing the S&LB financing with conventional bank financing. The second involves evaluating the cap rate multiple against the EV to EBITDA multiple.
Firstly, S&LB transactions will provide 100% of the market value of the real estate, whereas traditional bank financing usually provides proceeds equal to about 50-75% of the property value. This higher leverage allows businesses to unlock more capital through S&LBs. Additionally, traditional financing will be based on an appraised value, while the S&LB is based on market value including the value of the lease, which is generally higher, further increasing the S&LB value versus traditional financing sources.
Secondly, the cap rate of a S&LB can be compared to the inverse of the business’s EBITDA multiple. For example, if the average cap rate for industrial facilities ranges between 7-9%, this would translate to an EBITDA multiple between 11-14x. In contrast, if an average industrial middle-market company sells at multiples in the lower to upper single digits (say 5-7x for example), this showcases the significant arbitrage available through leveraging a well-structured sale and leaseback transaction. Learn more about how to leverage this arbitrage in M&A transactions by reading our article “The Art of the Free Roll: Sale & Leaseback Edition”.
A Strategic Financing Partner While Retaining Operational Control
Sale and leasebacks can also offer companies a strategic financing tool for existing owned real estate. By partnering with S&LB investors, companies can enhance their balance sheets without diluting equity. This approach not only preserves ownership but also provides the financial flexibility needed to pursue long-term growth strategies.
Despite selling the real estate, companies maintain control over these operational facilities through a long-term, net lease agreement. This structure ensures business continuity while freeing up capital that would otherwise remain tied up in property. For companies looking to expand, innovate, or enter new markets, the ability to redirect capital towards these initiatives can be a game-changer. These leases can be as long as 20-25 years, with multiple options to extend depending on the company’s preferences. The leases are “triple net” in nature, and the landlords are passive, not interfering with the day-to-day operations of the business. This long-term operational control aligns with the typical sale & leaseback buyer’s preference as well, as investors are looking for long-term secured income with these passive investments. Therefore this arrangement ends up being a win-win for all parties involved.
Enhancing Competitiveness in M&A and Beyond
In the competitive landscape of mergers and acquisitions, sale and leasebacks offer private equity firms a unique edge. By incorporating S&LBs into their financing strategy, firms can offer more attractive bids, secure better financing terms, and bridge valuation gaps in competitive M&A processes. The ability to leverage S&LBs during M&A transactions can make PE firms more competitive, enabling them to outbid rivals and close deals more efficiently. The Ascension team has executed almost 700 million in sale and leasebacks used as acquisition financing across Europe and North America, helping clients optimize their capital stack and closing the sale and leaseback simultaneous with the business acquisition. The strategy is becoming an increasingly popular tool as private equity firms and businesses are learning more about the benefits of sale and leasebacks.
Conclusion: Why European Firms Should Consider S&LBs
For European private equity firms and business owners alike, sale and leasebacks represent a versatile and powerful financial tool. Whether the goal is to unlock capital, enhance competitiveness in M&A processes, or create liquidity to finance expansions, S&LBs provide the flexibility to achieve a range of strategic objectives, typically at more attractive terms than traditional forms of financing.
If you would like to learn more about the options available for your company’s specific situation, please reach out to the team for a complimentary consultation.