Prospective buyers, particularly financial buyers, generally prefer to buy a business free of operating assets, including real estate. Prospective buyers in most cases are focused on growing the business and not on property management, which also has a capital requirement associated with it.
At the same time, especially given the current real estate market, real estate has added value for sellers when the market value has increased over the past few years and the mortgage obligation has decreased.
But how should this be looked at from an M&A perspective when a prospective buyer has no interest in the real estate? Or what if a prospective buyer does have an interest in the property and the seller wants to maximize the market value? This is where the fictitious sale-and-lease-back construction comes in.
Sale-and-lease-back construction (schematic)
Why a (notional) sale-and-lease back construction?
This is due to a mismatch between the valuation of the business as a whole (and all of its associated assets) and the valuation of assets individually. In most cases, the (operational) value of a company (including associated assets) is calculated on the basis of its future cash flows.
In this case, there will be relatively little implied value attributed to individual assets (e.g., real estate), since their value is incorporated into the operational value of the business. Separately, if the property is sold to a third party, it may be more valuable to a seller if the appraisal value exceeds the value implied in the operating value of a business.
Example scenario
In the chart above, we assume that in this particular case, the business incl. real estate would generate EUR 12 million in a combined sale. This is based on an annual perpetual EBITDA of EUR 2 million times a multiple of 6.
When raising a sale-and-lease-back, the costs (rent) within the business increase by EUR 300k, making the annual perpetual EBITDA EUR 1.7 million. De ondernemingswaarde of the company is now (excluding OG) EUR 10.2 million instead of EUR 12 million. However, by selling the property separately, at a market factor of 15x, the seller generates gross sales proceeds of EUR 4.5 million. In this particular example, the sale-and-leaseback created EUR 2.7 million higher revenue for seller.
Fictitious sale-and-lease-back construction
Of course, it is also possible that a prospective buyer is interested in the real estate, but determines de ondernemingswaarde based on future cash flows. If prospective buyer does not take into account the property's hidden reserve, a mismatch may arise where seller is disadvantaged.
Let's use the above scenario again as an example. Candidate buyer offers EUR 12 million for the company incl. real estate. In its preparation, the seller has not properly examined the role and impact of the real estate within the transaction and agrees to the candidate buyer's proposal. After closing, the buyer then sells the real estate through a sale-and-lease-back construction, creating a gain of EUR 2.7 million.
By understanding the value and impact of real estate in preparation for a sales process, this discrepancy can be avoided in advance. By staging fictitious sale-and-lease back construction where the created value of the real estate is presented as a cash item to Candiaat-buyer.
