What is a Sale Leaseback

provided by AIC Ventures

Despite not being in the business of owning real estate, many companies find themselves having substantial equity tied-up in their real estate. By exchanging that illiquid equity for cash and entering into a long-term structured lease agreement, a business can free up the equity held in its property while continuing to benefit from the use of the assets.

In simplest terms, a real estate leaseback (often called a triple-net lease ) is the process of selling real estate while simultaneously entering into a long-term lease for the same real estate. The maximum possible value is extracted and there is no disruption to operations. A sale leaseback transaction has a number of benefits for mid-market companies: Retain Control of Real Estate

AIC Ventures structures our leases on an absolute net basis. A lease is structured so that the business continues to operate as though they own the property. For the duration of the lease, the company remains responsible for utilities, insurance, maintenance, repairs and property taxes. The company is also free to use the interior of the structure with few or no restrictions.

Tax Benefits

As a lessee companies are able to write off their entire lease payment. By contrast, a property owner can only deduct interest and depreciation expenses.

Extract More Value

A mortgage is limited by a lender’s loan-to-value requirements that reduce the amount of equity available to the company, currently 60-70% of the property value. A sale-leaseback provides 100% of the Fair Market Value of a business’s real estate.

No Financial Covenants

A company can remain more independent in its operations because a sale leaseback does not require any financial covenants. Banks and other lenders often have multiple financial covenant restrictions.

Attractive Financing

When compared to expensive mezzanine financing a sale-leaseback and cost of rent payments is often cheaper and does not require any collateral to secure the funding.

Record Keeping Before Selling My Company

They say hindsight is 20/20.  Well, when it came to selling my company, it was certainly true.  There are a few things I wish I had known even before I decided to sell my company, that’s for sure.

I wish I had known that the buyer’s financial team were going to dig that deep into my financial records and statements.  It’s not that I had anything to hide, it was just a messy and embarrassing.  Continue…

There’s a Perfect Storm Approaching for Exiting Business Owners

By Gary Ampulski , April 8, 2015  (with permission)

On January 1, 2011 about 8,000 Baby Boomers (people born between 1946 – 1964) turned 65 years of age. Every day for the next 18 years, others will turn 65 at the same rate. While many may know about this trend, a lesser known fact is that, according to the US Census Bureau, 70% of all businesses (with more than 1 person on the payroll) or 4.2 million businesses are owned by people over 53 years old.Continue…

Ideas for Improved Cash Flow Prior to Selling Your Business

One of the most important things for any business owner considering a sale of his or her business is to prove the success and sustainability of his operations. There are a number of financial metrics one can use to do so, but in almost every case it is essential that a business owner presents a strong picture of a company’s cash flow. For investors, particularly, this is an important measure as it represents the “excess” cash a business has after paying all of its expenses and meeting commitments to employees, and eventually represents what is left over to pay to investors or back to the owner.Continue…

Why Business Owners Don’t Focus on Exit Planning

According to recent studies, 60% of business owners do not currently have or plan to develop an exit strategy. Because business owners spend a large majority of their time running the business, it’s not surprising that little attention is given to thinking about exit planning: what will happen to both the business and to them personally once they are ready to move on.[1]Continue…

Planning for the Sale of a Business is Not the End

Most business owner’s view planning for the sale of a Business as an event they need to deal with only when the time comes. After all, who wants to think about “going out to pasture” before you need to? The term “Retire” is usually a mental symbol to a business owner as being a member of the “Over the Hill Gang” or a one-way ticket to the Assisted Living Complex.   No one wants to view themselves that way, especially baby boomers. And they are right. It’s not the end; it’s really the beginning of the next act in their life.Continue…

When Selling a Business, Create a Transition Plan

Most business owners are familiar with the idea of exit planning, but if a departing CEO truly wants to ensure the best outcome when selling a business, developing an effective entry plan commonly known as a “Transition Plan”, with the new owner-operator in mind is vital. By preparing his business and the eventual buyer for the transition, an owner can paint an attractive picture of his business, not only helping to obtain fair value in a sale, but also leave it in new hands with peace of mind.Continue…

Confidentiality

Confidentiality when selling our business is a dual edge sword; that special something that makes a business valuable and attractive to investors is also a matter of utmost secrecy. As a seller or buyer looking to take a business to the next level, how do you share and scrutinize the inner workings while keeping things under wraps? Integrity and trust go a long way, but sometimes are not enough to keep a prospective deal confidential.

For selling our businesses, Confidentiality is key —because the leak of proprietary and non-public information can be devastating for a business. It’s not simply about protecting trade secrets or data on profit margins; the mere rumor that a business is on the block can have vast repercussions. Creditors, customers, employees and suppliers all get uneasy at word of a sale. It is also emboldens competitors to poach talent as well as clients.

Plus, confidentiality is not strictly about maintaining secrecy. It signals that a sale is sophisticated and professional, where the process is controlled, the outcome more assured.

Some claim that confidentiality can prove too much of a good thing, smothering the grapevine that helps create a more competitive market, driving up prices.  However, certain studies have shown otherwise, finding that leaked deals not only fail more often but that they also carry lower premiums.

Common Sense

For business owners, working with experienced intermediaries, such as an investment banker or M&A advisor will minimize our risks at the outset. Embracing advice and process rather than seeking shortcuts or fast-track outcomes can help ensure a sale runs properly from start to close, and advisors can help anticipate issues that may arise along the way. A deliberate process begins with a so-called teaser, a one or two page summary of our business that is substantive enough to attract serious buyers but opaque enough to safeguard our anonymity.

While it seems self-evident, some business owners need to be reminded to keep any talk of a potential deal hush-hush. Leaks are not always intentional or nefarious, but can happen by accident. The news should not extend beyond the inner circle: the spouse, the lynchpin executives, the attorney, the CPA.

NDA: The Foundation of a deal

No matter how decorous it seems, there is no implicit secrecy in deal negotiation. It must be formalized. Without a confidentiality agreement, or a non-disclosure agreement (NDA), disclosures made as part of the sales process are free for use. Ultimately, paperwork cannot itself prevent a breach, but at the very least it establishes accountability and forces all parties to take discretion seriously.

As a general rule, suitors should be screened in advance to streamline the sale, maximize resources and minimize the chance of an inadvertent leak. Once credible potential buyers emerge, out comes the NDA. The contract not only ensures that sensitive information disclosed by sellers — whether related to financials, intellectual property, workforce, customers and suppliers — will be kept secret, but also keeps the sale itself under wraps. That is perhaps the most important provision. It’s not a fail-safe precaution, but going without is naive and reckless — “This conversation never happened,” is not a winning strategy.

Keep It Privileged

Like most aspects of a deal, the NDA often involves some back-and-forth with a prospective buyer. Nobody wants to expose themselves to liability, assume onerous constraints or divulge more than is necessary. That being said, the contract should not be a major source of contention, more a deliberate procedural step.

We sellers often hold the pen on the NDA because we tend to be the ones laid bare, but it is not always a one-way street. Investors may well want to protect information they pass to a target and push for a more symmetrical contract, where both parties are restricted from disclosing particulars. However, before undertaking mutual obligations — and potential liability — sellers and buyers alike should determine whether the information in fact crosses into confidentiality. Is it proprietary and non-public? Information that is available to the public, even if little-known or arcane, does not qualify for protection.

Even with the confidentiality agreements inked, it is best not to reveal everything at once. Instead, stagger the disclosures as needed, withholding the more sensitive information until later in the process. Inexperienced sellers often divulge too much information prematurely, either to charm an investor or buyer, to create rapport or to keep pace with fast-moving negotiations. However, there is no advantage to this “open kimono” approach. The best approach is to make disclosures in a balanced and gradual way that will build towards a sale. For instance, hold back on the most significant disclosures until certain milestones, like a letter of intent or an offer is in play.

Of course, there are endless variations and customizations to any legal document, but sellers often include a provision to prevent would-be buyers from poaching employees in the wake of a failed buyout. It’s a nightmare scenario for us: Rather than a successful and rewarding sale, you are forced to get back to business without vital personnel. A so-called standstill provision helps preempt a talent raid by a competitor.

The NDA’s chief role is to establish confidentiality for a specific duration. However, an effective contract does more to establish the groundwork for a deal. Ultimately, an NDA can foster trust rather than merely outline liabilities, setting the right tone for a successful deal.

Virtual Deal-Rooms

The most effective way to maintain confidentiality is to control the flow of information. As a practical matter, limiting the dissemination of sensitive documents can be the best prophylactic. In this day and age, documents can proliferate and fly away at a keystroke.

It is standard practice for law firms, investment banks and M&A advisers to host sensitive information in virtual data rooms (VDRs). These online deposit boxes defend against hackers as well as human error by granting limited access to select individuals who can view but not copy documents. A secure dataroom also enables us to closely monitor each click, every turn of the page.

M&A deals are fast-moving and founded on trust, but that does not mean that certain measures should not be taken to ensure that closely guarded information stays secret. In fact, confidentiality need not encumber the process or breed suspicion. If anything, a mindful and straightforward approach will not only protect disclosures but ultimately facilitate a deal, bringing a heightened focus and calculation to the proceedings.

Quality of Earnings: A Critical Component of Due Diligence

By Mason Myers , | April 7, 2015 (with permission)

One of the most important steps of selling a business is when a buyer performs a “Quality of Earnings” review of the seller’s financial statements.  The idea is that the buyer will verify the earnings of the underlying business and any “add backs” that the seller added to the earnings as a representation of what a new owner could expect to receive in cash flow.

Below are the basics of a Quality of Earnings due diligence project:

Continue…

Purchase Agreement

Now it is time to get serious to close the deal. Expeditious action is required before time etches away healthy rapport, feelings of euphoria on all sides and basic understandings of agreements reached. To lose time now is to risk losing a successful transaction. The basic termsContinue…