Sale & Leasebacks in the European Market

The sale and leaseback (S&LB) strategy has seen growing popularity across Europe, becoming a critical tool for private equity firms and businesses 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. This article explores why European private equity firms and businesses should consider leveraging sale and leasebacks.

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 liquid 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 expansion, debt reduction, or acquisitions. For private equity firms, S&LBs can be particularly advantageous during the bidding process, providing a competitive edge by offering innovative financing solutions.

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 typically finance 100% of the sale price, whereas traditional bank financing usually covers only 50-75% of the property value. This higher leverage allows businesses to unlock more capital. Additionally, traditional financing is based on the 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 versus bank financed value.

Secondly, the cap rate of a S&LB serves as the inverse of the EBITDA multiple. For example, the average cap rate for industrial facilities ranges between 7-9%, translating to an EBITDA multiple of approximately 11-14x. In contrast, the average industrial lower middle-market company typically sell at multiples in the lower to upper single digits, showcasing the significant potential gains available through a well-structured sale and leaseback transaction. Learn more about this in detail in our prior article “The Art of the Freeroll” https://ascensionadvisory.com/ascension-advisory-blog/free-roll-europe

A Strategic Financing Partner and Retaining Operational Control

Sale and leasebacks can also offer companies a strategic financing tool. By partnering with S&LB investors, firms can finance acquisitions, expansions, or even enhance portfolio companies’ 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 their operational facilities through a lease agreement. This 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 years, with multiple options to extend depending on the companies’ preferences. This longer-term control aligns with the typical sale & leaseback buyers’ preference, as longer term leases typically sell for more competitive cap rates for the long term passive income value and therefore it ends up being a win-win solution 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 increase the overall value of their investments. The ability to leverage S&LBs during M&A transactions can also make PE firms more competitive, enabling them to outbid rivals and close deals more efficiently. The Ascension team has executed on over $400M in acquisition financing structures across Europe and North America, helping clients optimize their capital stack, closing simultaneously to the business acquisition. It is becoming an increasingly popular tool as private equity firms and businesses are learning more about the strategy, and may lead to a disadvantage for the firms not aware of the option when competing with others that has learned to incorporate it into their financial engineering and analysis.

Why European Firms Should Consider S&LBs

For European private equity firms and businesses alike, sale and leasebacks represent a versatile and powerful financial tool. Whether the goal is to unlock capital, enhance competitiveness, or finance expansion, S&LBs provide the flexibility to achieve a range of strategic objectives, typically at more attractive rates, as well as business terms and financial covenants than other options.

If you would like to learn more about the options suitable for your company’s specific situation, do not hesitate to reach out to the team for a complimentary consultation.