Last Updated on
January 19, 2023
By
Excedr
A sale-leaseback (SLB), also known as a sale-leaseback transaction, sale-and-leaseback, or leaseback, is well-known for being an effective financial tool used in commercial real estate and real estate investment to reallocate capital. It’s also commonly used in the transportation, construction, and aerospace sectors.
However, it has its place in equipment financing as well, and is useful in life sciences and biotechnology due to the high costs of analytical lab equipment.
When you conduct a sale-leaseback transaction, or arrangement, you sell lab equipment you recently purchased to a leasing company or lender, get back what you paid for the instrument in full, and then lease that equipment back from the company, paying for it over multiple years through flexible lease payments, rather than paying for it all up front (which can negatively impact your cash flows).
In other words, a typical sale-leaseback allows you to raise capital from the sale of a recently purchased instrument and continue to use the equipment in your lab for the long-term. Because you can get cash and the equipment needed to progress R&D and commercialization, sale-leasebacks can be highly useful to laboratories that rely on high-cost, cutting-edge instrumentation in an equally cutting-edge, competitive, and risky industry.
A sale-leaseback transaction can be complicated when it comes to aspects of the arrangement, like title transfer, but the concept itself is straightforward.
Once you, the seller/lessee, have purchased a piece of equipment and paid for it in full, you can then sell the equipment to a leasing company or lender, the buyer/lessor, within a certain period after the purchase date, and earn back what you spent on the instrument. After the sale, you sign a lease agreement with the buyer/lessor and lease back the instrument.
The terms of the lease are generally the same as if you were leasing with the lessor right away and financing your equipment purchase that way. Depending on the leases the lessor offers, you will enter into a sale-leaseback arrangement that can last between two and five years depending on your company’s financial creditworthiness, with lease payments factoring in precise service costs in some cases.
Sale-leasebacks are a creative solution for companies who need to free the capital tied up in fixed assets/capital equipment, allowing the business to potentially expand and reduce the volatility risks of owning equipment (and other fixed assets).
They are especially helpful when money is tight. During a downturn in the economy, when capital markets tighten and it becomes harder to secure financing through investors and lenders, sale-leaseback transactions can make it easier for business owners to recoup capital, reinvest that cash wisely, and weather the downturn by turning a fixed asset into a long-term lease.
This can be an attractive option to founders and CEOs when they are less willing or unable to raise capital through equity financing or a loan. Because you are neither increasing debt nor diluting shareholders’ equity, the sale-leaseback acts as a type of hybrid debt product that can potentially increase your company’s balance sheet health.
Furthermore, sale-leasebacks can potentially provide additional tax deductions. In the same way that operating lease payments are 100% tax-deductible, so are sale-leaseback payments. That‘s because the rental payments are considered operating expenses.
Generally speaking, a laboratory will approach us with a request for a sale-leaseback. They’ve recently purchased an instrument, and want to lease it instead so they can recoup some of the capital used to purchase, reinvesting a portion of it to fund other areas of business.
In some cases, someone will speak with us about leasing a piece of equipment, learn about the sale-leaseback option, and request to arrange a sale-leaseback for a separate instrument they purchased a few months ago.
This can be harder to complete, due to the time that has passed since the instrument was delivered. Ideally, it was delivered within the last 90 days. If it was delivered more than 90 days ago, the sale-leaseback process becomes much more difficult.
After we learn about the company’s needs, there are a couple things that have to happen to determine if we can execute a sale-leaseback.
First, we have to collect documentation that allows us to underwrite the company to better understand its financials and determine its creditworthiness. Simultaneously, we have to collect information regarding the equipment, including when the instrument was purchased, proof of payment, the manufacturer quote, and the purchase order (PO).
The underwriting and instrument documentation help us determine if we can go through with the sale-leaseback, and, if so, put together an initial lease estimate.
If the interested lessee approves the lease estimate, we can move forward with the sale-leaseback agreement, which is typically very similar to a “normal” lease agreement. The closing steps include finalizing the lease and collecting any closing documentation we’ll need, such as landlord waivers.
When we buy the equipment from you, we pay you in full, meaning we pay you the same amount of money you spent on the equipment. This also involves a title transfer, as we become the new owners of the equipment.
If someone reaches out after 90 days of purchasing equipment, it’s much harder to execute a sale-leaseback transaction.
The time that has passed means the equipment may be considered “used,” making assessing the condition and value of the equipment more complicated. Ideally, you’ve recently purchased the equipment and it can still be considered new.
There are exceptions to this time window, however, it completely depends on a number of factors, and is treated differently from use case to use case.
Ideally, the PO does not include service coverage. If it does, it can be more complicated to complete the sale-leaseback transaction.
This is due to issues that can arise with the manufacturer, because the manufacturer may or may not “transfer the rights of the service contract” upon the sale-leaseback. The sale of equipment and corresponding transfer of the rights to ownership of equipment is clear cut per federal and state laws. But, the service contract is not.
Instead of purchasing the coverage yourself, we would buy the service contracts once the sale-leaseback transaction is complete so that the equipment is fully covered for the lease term. This just means we pay two parties—the company and the vendor. The company we pay for the equipment and the vendor we pay for the service contract.
Considering the difficulties that can come up when service coverage is part of the PO, we recommend opting out of the service contract with the equipment if you plan on doing a sale-leaseback. We can handle the service contract purchase when the sale-leaseback transaction is executed, and include it in the lease just like our “normal” leases.
Clients have sometimes asked us about PO swaps, which involve Excedr exchanging our PO for the one issued by the client to the manufacturer. However, this isn’t ideal, due to the complications that can arise when working with manufacturers to complete the PO swap. The ideal sale-leaseback involves Excedr buying the equipment directly from the client after they’ve purchased it.
For example, one client who wanted to do a PO swap ended up having their purchase order delayed by some months because the manufacturer wasn’t able to perform the swap. Ideally, you are able to get the lab equipment you need as soon as possible. We know how important it can be to your work, and do our best to speed up the process.
If the equipment you want to buy hasn’t been ordered, and you’re now considering a sale-leaseback for the instrument, you might be wondering if you can start the sale-leaseback process despite the equipment not being ordered.
You can start the sale-leaseback process before you buy the equipment by sending the manufacturer instrument quote to Excedr so that we can push it through to our underwriters. They will be able to start the underwriting process quickly and create an initial lease estimate for you while your PO is being processed.
If you approve the lease estimate, you can go ahead and buy the equipment without service coverage. When the equipment is delivered and fully paid for, and all verifying documents are provided to Excedr, we can finalize the sale-leaseback agreement with the precise service costs from the manufacturer, and then buy the equipment from you.
There are numerous examples of leasebacks that can make it easier to understand this financial transaction. However, many of the examples online include real estate assets and real estate transactions.
To keep it relevant, and simple, here’s a brief example of a sale-leaseback we’ve closed in the past.
An early-stage biotech startup requested a sale-leaseback for two RT-PCRs they had purchased through Bio-Rad. At the time, the company had only had them for a month, and had decided they would rather recoup the capital spent on the instruments, reallocate some of the capital to other areas of business, and lease the instruments back from a leasing company.
The startup had heard of Excedr, and reached out with their request. We were able to quickly underwrite the company, provide a lease estimate, and agree on the terms, and the lab was soon paying for the instruments through our operating lease, which included manageable, fixed monthly lease payments including service coverage on the equipment.
Sale-leasebacks are an effective tool for reallocating capital while holding onto equipment or property you still need to operate when other financing options don’t make sense.
If you’re interested in freeing up cash you spent on buying an instrument, Excedr can help you with a sale-and-leaseback transaction for the recently purchased lab equipment, allowing you to reinvest your capital in other areas or spend the cash you recoup more prudently.
Our leasing program provides operating leases with flexible and founder-friendly terms that are helping biotech startups, middle market, and enterprise companies get more out of their cash and their lab. Let us know if we can put a lease estimate together for you.