Businesses that come out of the observation period with a court-approved plan often face the same problem. Their debts have been rescheduled, but there is not enough cash to deliver the plan. The existing banks have cut their exposure, and new lenders look first at the ratios, which are still weak.
In that situation, the assets the business already owns become something to build on. Sale and leaseback is one way to use them: the business sells an asset it uses, then keeps operating it by leasing it back from the funder.
The idea: release the value of an asset and keep using it
The deal turns a fixed asset into cash. The funder buys the asset at market value, usually less a discount, then leases it to the business for a fixed term, often with an option to buy it back at the end.
It can apply to three broad types of asset:
production machinery and equipment;
vehicle fleets, plant and mobile equipment;
operating property: factories, warehouses, logistics hubs and shops.
The business gains twice over. It receives cash straight away, in line with the value of the asset, and it swaps a fixed asset for a predictable rent that fits the plan’s repayment schedule.
Why this option is still open under a plan
A sale and leaseback funder relies first on the asset, which it will own. Its main question is not “does this business have good ratios?” but “what is this asset worth, and could I sell it if I had to?”
That is why the deal can work for a business under a continuation plan, provided it can show three things:
the asset has a genuine market value, whatever happens to the business;
it can be resold: there is a second-hand market and the asset is not too specialised;
the business can afford the rent on its cash flow forecast, on top of the plan instalments.
Points to watch under a plan
The legal framework
Selling a major asset while a plan is being carried out is not a minor step. The judgment approving the plan may have declared certain assets essential to the business and barred their sale for a period it sets, and any substantial change to the way the plan is delivered is a matter for the court. During the observation period, anything outside the ordinary course of business requires the approval of the supervising judge (juge-commissaire).
The deal must therefore be prepared with the plan supervisor (commissaire à l’exécution du plan) and the company’s lawyers before any discussion with a funder.
Existing security
An asset that is already pledged or mortgaged can only be sold once that security has been dealt with. You need to know exactly which creditors are involved, how much is still owed and how the sale proceeds will be shared out.
How much value can really be released
Book value is not the value a funder will lend against. A fully depreciated machine may be worth more on the open market, while recent but highly specialised equipment may be worth far less. An independent valuation is almost always needed to give the discussion a credible starting point.
The cost over time
Sale and leaseback is not free: the rent includes the funder’s return. It should be compared with the other options, and the rent must remain affordable even if trading turns out weaker than planned.
How to prepare the file
A specialist funder will soon ask for:
a list of the assets in question, with proof of ownership, original invoices and age;
details of existing security and financing;
an estimate of value, ideally a recent independent valuation;
the judgment approving the plan and its repayment schedule;
a cash flow forecast that includes the future rent and the plan instalments.
The sooner this is pulled together, the more funders can take part, and the better the terms.
To find out more, see our page Sale and leaseback and our page Funding a continuation plan.
In short
Sale and leaseback is not right for every situation. But for a business under a continuation plan that owns valuable equipment or property, it can provide cash that conventional lenders no longer offer, as long as it is prepared carefully and fits within the constraints of the plan.
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