When acquiring a business that owns real estate, one financing option that often comes up is a sale-leaseback. This strategy allows the business to sell its property and lease it back immediately, unlocking cash while continuing to operate from the same location. Sounds great, right? Sometimes it is—but sometimes it’s a terrible move. Let’s break down why sale-leasebacks can be a smart financing tool—or a costly mistake.

Why Sale-Leasebacks Are Great 1. Unlocks Capital Without Debt – Instead of taking on more loans or diluting equity, a sale-leaseback provides immediate cash that can be used for an acquisition, growth, or paying down debt. This can reduce financial strain while keeping ownership intact. 2. Increases Business Valuation – Businesses are valued differently than real estate. If you separate the two, you may get a higher total valuation, since real estate investors often pay a higher multiple for properties with a long-term corporate tenant. 3. Improves Cash Flow – Many companies, from AT&T to fast-food franchises, have used sale-leasebacks to free up liquidity. Search fund entrepreneurs have even acquired companies with no outside investors by leveraging a sale-leaseback to fund a large portion of the purchase price. 4. Tax Benefits – Rent is always fully deductible as a business expense, potentially offering a better tax shield than interest payments on debt would be. 5. Focus on Core Business – By shedding real estate ownership, the company can reinvest capital where it earns higher returns, expanding operations, improving technology, or acquiring other companies.

Why Sale-Leasebacks Can Be a Bad Idea 1. Long-Term Rent Commitment – Once you sign a lease, you’re locked in. If business conditions change, you still owe rent, which can become a burden. Mervyn’s, a department store chain, collapsed partly because of aggressive sale-leaseback deals that saddled it with unmanageable rent payments. 2. Potentially Higher Costs – Over time, rent payments may exceed the cost of owning. If real estate values soar, you lose out on future appreciation, while still paying rising lease costs. 3. Loss of Flexibility – You no longer control the property. Expanding, remodeling, or exiting becomes dependent on the landlord. If you outgrow the space or market conditions shift, breaking a lease can be expensive. 4. Risk of Poor Lease Terms – A bad lease structure (e.g., excessive rent increases, triple-net lease obligations) can create hidden financial strain. If the rent is too high relative to revenue growth, profitability takes a hit.
Example:
I worked with a searcher who had a gap in equity but the business owned real estate. We worked with him to structure a sale-leaseback that had a###-###-#### cap rate, $270k annually in rent payments, and roughly $3mm in financing for the property which closed the gap and increased the amount of working capital that lived inside the business.
Bottom Line A sale-leaseback can be a powerful tool or a major liability. It’s ideal when a business needs capital, can afford the rent, and has strong future growth. But it’s risky if the rent obligation becomes unsustainable or the business needs flexibility.

Thinking about using a sale-leaseback in your next acquisition? Let’s talk. Email me at --@----.com to explore whether this strategy makes sense for you.