An industrial company needs liquidity without stopping production, and a fund or a leasing company is willing to buy its machinery and lease it straight back for a rent. That is the logic of a sale & leaseback (SLB): the sale of an asset followed by its lease to the same seller, who keeps using it without interruption. The purchase price and the rent depend on a single central piece, the independent valuation of the asset. This article explains which basis of value the fund buys on, which factors move the price and the rent, and what the accounting rules require from the seller.
What is a sale & leaseback of machinery?
A sale & leaseback has two legs signed at the same time. First, the company sells an asset (a production line, a fleet of machines, a fleet of mobile equipment) to an investment fund, a leasing company or a specialist bank. Second, in the same act, the buyer leases that asset back to the seller, who keeps operating it in the same plant and the same production process, with no physical interruption of activity.
The difference with an ordinary sale is that the seller does not give up use, only title. The difference with a secured loan (an Asset-Based Lending facility) is subtler but decisive: in an SLB the asset changes owner, while in an ABL it stays on the borrower’s balance sheet and is only pledged. That difference in title determines how each party values the asset and which risk each one carries.
Why does an industrial company turn to a sale & leaseback?
The reason is almost always liquidity: turning into cash an asset that is already depreciated or represents a significant share of fixed assets, without stopping the production that same asset supports. It is a common route to fund working capital, an expansion or a debt restructuring, provided the asset has a secondary market liquid enough for a fund to accept it as an object of purchase, not only as collateral.
Compared with a straight sale, an SLB avoids losing use of the asset. Compared with a secured loan, it changes the seller’s risk profile: there is no longer a financial liability with a bank, but a rent commitment to the new owner. Which factors move the advance percentage when the route chosen is a secured loan instead of a sale is developed in our article on ABL advance rates by asset type.
On which basis of value does the fund buy the asset?
The fund needs two figures, not one. The first is market value in continued use (Fair Market Value), reflecting what the asset is worth installed, operating and with the seller as a solvent tenant throughout the term. That figure sets the purchase price and, together with the term and the implicit interest rate, the periodic rent.
The second is orderly liquidation value: if the tenant defaults and the fund has to recover the asset and sell it to a third party, how much would it obtain within a reasonable period? This figure does not set the purchase price, but it does set the fund’s safety cushion against the tenant’s credit risk. The three bases of value and their implicit timeframes are developed in our article on OLV, FMV and FLV.
A fund that only looked at value in continued use would be exposed if the seller stops paying; one that only looked at liquidation value would underpay for an asset that, operating in its original location, is worth considerably more.
Which factors determine the purchase price and the rent?
Two assets with the same book value can be worth very different prices and rents. Four factors almost always explain the difference.
Remaining technical life against the contract term
The leaseback term must fit, with margin, within the technical life left in the asset. A ten-year contract on a machine with eight years of remaining life leaves the fund with an asset worth nothing at maturity, which is reflected in a lower price or a higher rent from day one.
Secondary market liquidity for the asset
If the seller defaults, the fund needs to be able to place the asset with third-party buyers. Standard machining and processing machinery, from brands with a European footprint and an active second-hand market, offers that exit easily. A line designed to measure for one very specific process reduces potential buyers to practically one, or to a sale for components.
Mobility and reinstallation cost
Handling and lifting equipment and industrial fleets are removed and relocated in hours, which lowers the fund’s risk. A line mounted on a bed frame or integrated into the plant structure requires specialist dismantling and special transport if the fund has to recover it, a cost deducted from the price paid upfront.
Technological and regulatory obsolescence
An asset can work perfectly and still lose market value because the sector standard has changed, because its energy consumption has made it uncompetitive, or because a new rule restricts its use. The shorter the expected commercial life against the technical life, the lower the price and the more conservative the residual value assumed when setting the rent.
How is the leaseback rent set?
The rent is calculated so that, over the contract term, it amortises the purchase price and gives the fund the financial return it requires for the risk taken, accounting for the residual value estimated at the end of the term. The higher that projected residual, the lower the rent needed for the deal to work for the fund, and vice versa.
That is why the initial valuation is not a one-off formality: it sets the price, shapes the rent and determines the repurchase or renewal option usually included at the end of the contract. Underestimating residual value makes the rent unnecessarily expensive; overestimating it leaves the fund exposed to an asset worth less than expected at maturity.
What does accounting standards require from the seller-lessee?
Under IFRS 16, the transaction is only accounted for as a genuine sale if the transfer meets the IFRS 15 requirements for revenue recognition. When it does, the seller derecognises the asset, recognises the gain on sale in proportion to the rights transferred, and recognises a right-of-use asset together with a lease liability for the portion it keeps using. If it does not meet those requirements, the transaction is treated as financing secured by the asset, which stays on the seller’s balance sheet.
That classification depends on the price and the rent reflecting market conditions: an artificially low rent or a repurchase price well below the expected value can lead the auditor to reclassify the transaction as financing. The IFRS 16 leases standard sets out these criteria; an independent, documented valuation is the evidence that the agreed price is a market one.
What monitoring does the fund require during the contract?
The fund keeps an ongoing interest in the condition and value of the asset, because it is both its collateral and its source of income. Periodic inspections, maintenance obligations on the lessee and sufficient insurance cover on the asset are common terms, a point that connects with the correct valuation of insured capital described in our article on industrial underinsurance. The frequency of revaluations depends on how volatile the asset type is: assets with a narrower market and greater technological exposure are reviewed more often than standard machinery.
How does it differ from an ABL financing transaction?
Both structures turn industrial assets into liquidity, but they allocate risk differently. In an ABL, the asset remains company property and is only pledged; the lender calculates an advance rate on orderly liquidation value and takes the risk of enforcing the security if there is a default. In an SLB, title passes to the fund from day one, and its risk is not enforcement but non-payment of a rent on an asset it already owns.
That difference usually translates into more liquidity available under an SLB, because the fund pays value in continued use adjusted for credit risk, without the advance discount typical of an ABL. In exchange, the company loses title to the asset. Which banking and financing profiles work with both structures is described on our banking and financing page.
How Capital Appraisal works
As an RICS-regulated firm and an associate member of Leaseurope, the European federation of the leasing and automotive rental industries, we value industrial assets for sale & leaseback transactions under the RICS Red Book, issuing both value in continued use and orderly liquidation value, and documenting the remaining-life and residual-value assumptions that underpin the price and the rent. We provide this service both at closing and in the periodic reviews funds and leasing companies need throughout the contract, within our industrial asset valuation service.
The operational conclusion is simple: in a sale & leaseback, the purchase price and the rent are not negotiated apart from the asset’s value: they are two consequences of the same independent valuation.