Being in business is fraught at the best of times. The current impact of COVID and uncertainty as to what comes next are making this challenge all the more onerous. This short post lays out some of the possible issues that Businesses are likely to be faced with and one option to help Businesses to cope.

Impact of COVID

Government financial packages are limited and will only help businesses so far. To make matters worse the likely impending recession will only make matters worse.

The trend towards home working likely to reduce demand for offices, especially larger ones. Even for those who own their properties, cash flow will have come under pressure

Looking at options to take greater control of their finances tied up in what is probably their biggest asset. One way to achieve this is through a Sale and Leaseback deal.

What is a Sale and Leaseback?

Per Wikipedia, it is a “financial transaction in which one sells an asset and leases it back for the long term;therefore, one continues to be able to use the asset but no longer owns it”

A fuller explanation could be that:

1.      Business A sells their property to Business B

2.      Business B (acting as a Landlord) then rents the business to Business A

The net effect is that Business A continues with their business as before but now with a cash injection but a long-term rent commitment.

ADVANTAGES

A substantial cash inflow without the need of the occupier to lose access to the building they occupy

It avoids common costs associated with conventional debt financing for property transactions such as valuation, brokerage etc

The cash can be realised far quicker than through a conventional property sale

Rental payments are tax-deductible

If there is debt secured against the asset, it will be removed from the balance sheet and improve the business’s debt to equity ratios

Owners may be able to include a repurchase option in the leaseback.

DISADVANTAGES

At the end of a lease term, the seller may have to negotiate an extension at current market rent or may be forced to relocate its business.

Loss of Flexibility. The seller may lose the flexibility associated with property ownership, such as changing or discontinuing the use of the property or modifying a building.

Buyer Bankruptcy. If the buyer files for bankruptcy, the trustee in bankruptcy may reject any agreement to renew the leaseback or the seller's option to purchase the property. This should be addressed in the terms of the sale.

Fixed commitment: The rental payments will become a fixed cost in the businesses cash-flow.

The benefit of any future increase in the property value is no longer to the benefit of the seller

So, that’s a brief overview. The rest of this year will require all businesses to pay particular attention to their cashflow. For some a sale and leaseback may be the right option to help them weather the storm. For an informed view, call Ron for a chat.

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