Have you come across ‘sale and leaseback’ in a company’s financial statements? Here’s what it means

Julie Brownlee, Fsp Invest, 11 Dec. 2014

Tags: sale and leaseback, what is sale and leaseback, investing, risks of sale and leaseback, why companies sale and leaseback,

When you start delving through company accounts, you’ll no doubt come across a few terms you’re not familiar with.

One of these terms might be ‘sale and leaseback’.

So what does sale and leaseback mean? And how should you interpret it?

Read on to find out…

What is a sale and leaseback?

A sale and leaseback is when the seller of an asset agrees to lease it back, or rent it, from the buyer. As soon as the sale goes through, the terms and length of the lease are determined.

So why do companies opt for a sale and leaseback?

They’re a useful way for companies to raise money to invest in other projects without losing the use of the asset.

This is quite a popular practice in the supermarket sector. For example, a large retailer sells one or more of its supermarkets to a property company then continues to use the property under a long-term rental agreement.

Some also believe that a sale and leaseback is a way for investors to realise some of the value in a company’s assets.

What to watch for with a sale and leaseback

As an investor, you need to understand that a sale and leaseback can increase a company’s financial risk. This is because as the company no longer owns the asset, it has a long-term agreement to pay rent to the new owners of the property.

Due to this, you should view a sale and leaseback as a form of debt. But you won’t find a sale and leaseback on a company’s balance sheet.

To find out what a company is due to pay on a sale and leaseback, you’ll need to have a look through the notes in a company’s annual accounts.

When times are tough, rent for a sale and leaseback will increase a company’s fixed cash costs. And this can impact profits when sales drop.

So there you have it, what a sale and leaseback is.

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