January 2010, Automotive Fleet - Feature
When's the Right Time for a Sale/Leaseback?
In a tough economy, cash is king, and one way a company can create cash is by selling a fleet and leasing it back. The timing of such an arrangement must be carefully considered.
Cash is king" goes the old saw in business, and it never has been more applicable than today. In an environment in which credit is difficult to find, companies are squeezing every possible nickel of cash from operations - turning inventory, tightening up accounts receivable, floating accounts payable.
One tempting source of cash can be the company fleet. Depending on its size, fleet can represent tens of millions of dollars of ready cash, and with the economy in the doldrums, selling the fleet and leasing it back from a fleet lessor is garnering more attention every day. Though it sounds like a simple decision, the question of when to use this financial tool must be carefully considered.
Concept Similar to Home Equity
The sale/leaseback is a relatively simple concept. The company has an asset of some value, sells it, then leases it back from the buyer - not unlike tapping the equity in a home. The buyer owns the asset (the fleet), and the seller pays the buyer for its use.
How much cash can be generated? Let's assume the fleet consists of 1,000 cars and trucks at various points in their respective service lives. Some are new, some near replacement, and the remaining at various points in their lifecycles. If we also assume the average net value of each vehicle (using the unamortized capitalized cost) is $12,000, the sale would gross $12 million in cash for the company. Of course, the leaseback would entail provisions for the cost of funds and some administrative fees, but the primary issue is looking at the generation of cash, not comparative cost.
Sale/leasebacks can be done with either a company-owned or leased fleet (where the fleet is purchased from one lessor by another). The transactions are often used to quickly transition fleet vehicles from one lessor to another (rather than through attrition). However, turning a company fleet asset into cash is the most common purpose of this process.