What is a sale leaseback transaction?
A sale leaseback is a way for a company to leverage an owned asset in exchange for capital.
It is a two-part transaction where the asset owner enters into an agreement to 1) sell the asset to a buyer and 2) lease the asset back from the buyer for a set period.
Sound confusing? Let’s break it down.
How does a sale leaseback work?
Across all industries, a sale leaseback transaction has a shared definition. The first owner or “seller” of the asset becomes the lessee, and the financing company or “purchaser” becomes the lessor.
The duration of the lease is decided by both parties. While the lessee is making lease payments on the asset, they can continue to use the equipment. Plus, they now have a healthy infusion of capital to support other investments.
What are the benefits of sale leasebacks?
There are several benefits to sale leasebacks for life sciences companies. The few we’ll discuss here are raising capital, deploying capital to other business functions, and customizable lease terms.
A sale-leaseback enables a company to sell an asset to raise capital, then lets the company lease that asset back from the purchaser. In this way, a company can get both the cash and the assets it needs to run its business.
For example, if a business owner owns a piece of lab equipment outright, they can work with a financing company to buy the equipment and then lease it back to them. This results in an immediate cash infusion and then at the end of the term, you own your equipment outright again.
Redeploy capital to other business functions
Many life sciences companies use leaseback transactions to convert an asset into capital, so it can be invested in growth areas of the business. This might include business expansion, product launches, and more. Being able to use cash they previously invested in an asset for other purposes, while still being able to use the asset can be an attractive arrangement.
Customizable lease terms
In a sale-leaseback, both parties work together to achieve fair and reasonable lease terms. Both the lessee and the lessor typically want the monthly lease rates to be at or below market. Plus, the length of the lease, renewal options and other terms can be customized to meet operating needs.
What is an example of a sale leaseback in the analytical instrumentation industry?
Let’s explore an example of a sale leaseback and what the workflow might look like:
A business owner needs capital to invest in a growth strategy. Cash is tight, and they recently bought a $200K analytical instrument.
Deal Scope: Bold View Capital purchases the instrument for a set amount. Biotech company enters into a 3-year sale leaseback deal with Bold View Capital.
Terms: Biotech company gets an immediate infusion of capital from Bold View Capital’s purchase of the instrument. Bold View Capital is now the asset owner, but Biotech company continues to use the instrument in their lab as normal.
Monthly Payment: Biotech company makes set monthly lease payments for a 36-month term.
At the End of the Lease Term: After lease term concludes, biotech company is back to being the owner of the asset.
Why does a sale leaseback work in this scenario?
Rather than diluting equity or taking out burdensome bank loans, this biotech company was able to use an asset they already owned as collateral for more capital. Plus, there is no disruption to normal lab operations because the asset stays put in the lab environment. The only thing that changes is asset ownership.
Concluding remarks on sale leasebacks
In short, sale leasebacks open an entire world of possibilities when it comes to alternative sources of capital. For companies in the life sciences and biotech spaces, where costly analytical instrumentation is status quo, being able to leverage an existing asset to get access to liquid cash can be an incredible asset – to your business goals and your balance sheet.