Raising cash for your small business through a sale and lease back agreement
If your business owns some large and valuable assets, such as a piece of land, the freehold property or a significant piece of plant and machinery it may be able to raise some additional capital under a sale and lease back agreement.
A sale and lease back agreement is an agreement whereby the business sells a piece of land, the freehold property or a significant piece of plant and equipment to a third party, hence realising some cash, and leases the asset back so it can continue to be used in the business.
A sale and lease back agreement is often a complex legal document and there will be protection clauses of all parties. The business will want to ensure it can still use the asset for business purposes, can adjust and change the asset as necessary to ensure it remains up to date and have use of the asset for the foreseeable future. The new owner will want protection and warranties the rental payments will be made and that the business will adequately insure the asset, maintain the asset and keep it in a good state of repair. Each party to a sale and lease back agreement stands to lose a lot, therefore the lawyers will be crawling all over the document to ensure all parties are happy. As we all know, lawyers are expensive and the fees incurred in drafting a sale and lease back agreement are going to be high.
The main problem with sale and lease back agreements is finding the right person to buy the asset and lease it back to the business. Many people will want to buy business premises but are highly unlikely to want to lease them back to the seller. Fortunately, there are companies out there who specialise in sale and lease back agreements and these companies are only too willing to buy the property, or the large piece of machinery, and then lease it back to the business. If you use one of these specialist companies you will not get the full market value of the asset so you need to keep this in mind.
As you can see, a sale and lease back agreement can only be used to raise money when the business owns a significant asset. Where the business leases its premises from the director or another third party, and only owns small assets, such as computer equipment or fixtures and fittings a sale and lease back agreement is not a viable option.