Multi-unit operators typically refers to a business that maintains multiple locations for their operations - whether that be restaurants, car washes, healthcare clinics, fitness centers, gas stations, etc. This term is used across many industries. For example, in the restaurant industry, a multi-unit operator might own and manage several franchises or independently operated restaurants. Their role involves overseeing the operations, ensuring consistency, and optimizing performance across all of their locations.
For these types of operators, footprint expansion is typically a key element of their growth strategy. One increasingly popular strategy to help fuel this type of expansion is the sale leaseback (SLB). This financial tool allows operators to unlock the value of current or future real estate, providing capital that can be reinvested into their core business operations and used to fund expansions. Sale leasebacks can apply to all business industries ranging from industrial manufacturers, to medical providers, retail and restaurant operators, and other sectors that are more real estate intensive. This article provides a look into why the sale leaseback is a beneficial tool for these operators and in what areas it can be most valuable.
Build to Suits
For multi-unit operators looking to expand their footprint, build to suit arrangements offer a significant advantage. In this scenario, the real estate capital provider finances the acquisition of the land upon which the new facility will sit, as well as 100% of the construction costs. This arrangement allows operators to tailor the property to their specific needs without tying up substantial capital. Once the construction is complete, the operator signs a long-term lease, committing to the site and remaining in control of the operations for the long-run. This strategy not only preserves cash but also ensures that the property meets the exact specifications required for optimal operation by the operator. Read more about how this strategy can be applied in detail in our recent article.
M&A Financing
Mergers and acquisitions (M&A) is a common strategy for growing multi-unit operations, but they often require substantial capital in order to execute. This strategy involves acquiring existing operations from a seller, either a single site or a chain of multiple locations. Sale leasebacks can play a pivotal role in financing these transactions as often times, the seller wants to include the owned real estate in the transaction. By leveraging the SLB strategy, operators can help finance the acquisition by structuring a sale leaseback of the target's owned real estate, and using potential spread created by the sale leaseback to help cover the acquisition cost. In some cases, this spread is so substantial that the sale leaseback proceeds can even cover the entirety of the acquisition price. This approach reduces the equity and/or debt needed to fund the new acquisition, thereby helping facilitate the acquisition without the operator having to take on dilutive capital. The Ascension team has closed on over $350 million in sale leasebacks that were used to fund M&A transactions over the last couple years. These transactions have helped operators grow their footprints more efficiently than other methods, underlining the effectiveness of the sale leaseback strategy across various business sectors.
SLBs of Current Sites
SLB’s are not only useful for growth initiatives for new sites, but operators can also exercise the strategy for their existing locations, using the sale leaseback proceeds to acquire new operations or fund expansions and upgrades of existing sites. This is particularly beneficial when combined with the IRS 1031 rule, which allows the deferral of capital gains taxes on the sale of the property. The proceeds from the SLB can in this case be reinvested into new like-kind properties, fueling further growth while deferring the tax burden. Alternatively, the capital can also be used to upgrade current sites, increasing throughput and productivity of an operator's locations and improving the customer experience, driving higher returns for the business.
The Right Time for a Sale Leaseback? Always!
One of the most compelling aspects of the sale leaseback is its versatility. There is no single “right” time to engage in a SLB; it can be beneficial at various stages of a business's lifecycle. Whether it is to spur growth and expand into new locations through a build-to-suit project or an M&A transaction, or to take advantage of the equity tied up in an existing site to generate non-dilutive capital for reinvestment - sale leasebacks provide the financial flexibility needed to support both needs and can be tailored to meet the unique requirements and strategic goals of multi-unit operators as they expand and improve their operations.
If you are curious to learn more about how you can grow your footprint through the sale leaseback strategy, reach out to our team today!
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