In a competitive mergers and acquisitions (M&A) environment, sellers and their advisors are constantly seeking innovative ways to maximize valuation and structure deals that appeal to the broadest pool of buyers. One of the most overlooked but highly impactful strategies is the use of a sale leaseback (SLB) on owned real estate assets.
This mechanism is particularly powerful when there's a value arbitrage between the EBITDA multiple used in business valuation and the cap rate used in real estate valuation. Beyond that, SLBs can also provide strategic advantages for buyers by serving as a source of covenant-free equity financing. This article explores the rationale, mechanics, and benefits of implementing SLBs in sell-side M&A transactions, and why both sellers and buyers should take note.
What is a Sale Leaseback?
A sale leaseback is a financial transaction in which the owner of a property sells the real estate to a third party, typically an institutional investor or REIT, and simultaneously enters into a long-term lease to remain in the space. This allows the business to convert an illiquid asset into cash while maintaining full operational control of the premises.
The Value Arbitrage: EBITDA Multiple vs. Cap Rate
In most M&A processes, businesses are valued based on a multiple of EBITDA. For example, a mid-market company might command a 7x EBITDA multiple. Meanwhile, its owned real estate could be valued using a cap rate of 6%, which equates to a 16.7x multiple on net operating income (NOI). This discrepancy creates an opportunity for value arbitrage.
Without a sale leaseback, the real estate is bundled into the business and implicitly valued at the lower EBITDA multiple. With a sale leaseback, the real estate is extracted and sold separately at a higher valuation multiple, unlocking trapped value and maximizing proceeds, whether for shareholders or to reinvest in the business.
Real Estate as Covenant-Free Equity for Buyers
From the buyer’s perspective, particularly for financial sponsors and private equity firms, owned real estate in a target company can be monetized post-acquisition via an SLB to help fund the purchase.
Here’s how it works:
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SLB at Close: The buyer executes a sale leaseback at the time of closing or shortly afterward.
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Use of Proceeds: The capital raised is used to offset the equity required to fund the deal.
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No Operating Covenants: Unlike traditional debt or mezzanine financing, SLB proceeds come without restrictive covenants tied to operating performance. It’s effectively non-dilutive, non-recourse capital, especially useful in leveraged buyouts.
Enhancing Marketability of the Deal
A properly structured SLB can also expand the buyer universe. Not all buyers have the appetite or infrastructure to acquire and manage real estate as part of a business transaction. Including real estate in the deal can introduce added complexity during diligence, increase capital requirements, and add operational burden post-close.
By completing an SLB before or concurrently with the M&A process, the company can be marketed as an “asset-light” business, which is often more attractive to both financial and strategic buyers. This broader appeal can lead to more competitive bidding and stronger overall outcomes.
Key Considerations When Structuring the SLB
While SLBs can be highly accretive to an M&A outcome, they must be carefully structured in alignment with broader deal objectives. Key considerations include:
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Lease Terms: Length, rent escalations, and renewal options must align with buyer expectations.
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Counterparty Credibility: The buyer of the real estate should be a reputable investor, ensuring smooth diligence and closing.
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Timing: The SLB should not delay or complicate the main M&A process.
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Tax Implications: Tax treatment of proceeds and potential lease deductibility must be reviewed in advance.
Engaging real estate advisors and legal counsel early in the process helps ensure the SLB is accretive, not disruptive, to the transaction.
Real-World Example
Consider a family-owned industrial company with $10 million in EBITDA and real estate carried at $12 million (book value). If sold as a combined entity at a 7x EBITDA multiple, the business might fetch $70 million, with the real estate included in that total. However, if the company conducts a sale leaseback before going to market, the real estate could be sold separately for $18 million at a 6% cap rate. Even if the lease-encumbered business now trades at a slightly lower multiple, the combined proceeds from the SLB and the business sale could exceed $85 million, significantly improving shareholder value.
Conclusion: A Strategic Lever in Maximizing Value
Incorporating a sale leaseback into a sell-side M&A process is a strategic way to unlock hidden value and optimize outcomes for all stakeholders.
Sellers benefit by realizing higher proceeds through the arbitrage between business and real estate valuation methods. Buyers gain access to covenant-free capital that enhances deal flexibility and return profiles. Advisors can market a more streamlined, asset-light business that appeals to a wider range of buyers.
SLBs are not just a financial engineering tactic. They are a value creation lever. When thoughtfully executed, they can be the difference between a good deal and a great one.
At Ascension Advisory, we’ve helped business owners across sectors structure sale leaseback transactions that maximize value, preserve operating flexibility, and drive stronger exit outcomes. If you're preparing for a transaction or simply exploring your options, we’d welcome the opportunity to share how a sale leaseback could strengthen your next move.
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