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.
By Staff
Other Factors Must Be Considered
Other factors must be considered in determining when a sale/leaseback arrangement is in the company's best interest.
Administrative. The larger the fleet, the bigger the issue. Vehicles are being sold. They must be retitled and re-registered to the new owner (lessor). These tasks entail not only a great deal of administrative paperwork, but also some level of expense, not to mention the possibility the former lessor may not be entirely anxious to cooperate in a timely fashion. The expense can be significant, too. If the average cost for retitling and re-registering each vehicle is a mere $50, the total expense is $50,000 for a 1,000 vehicle fleet.
Sales Tax. No matter what the reason, this mass sale of vehicles from one owner to another will incur sales taxes. Using the previous example, if the average fleet vehicle "book value" is $12,000 and the fleet numbers 1,000 vehicles, the total value would be $12 million. With an average sales tax of 5 percent, $600,000 is added to the cost of the transaction (or from another perspective, the cash infusion is reduced by $600,000).
The sales tax problem can be dealt with one of two ways: either the tax is paid separately or it can be capped into the cost of the vehicle. The former impacts the cash flow immediately; the latter entails payment of fees (interest, leasing administration, etc.) on the tax. Those fees can add up to tens of thousands of dollars in additional expense, reducing (over time) the ultimate net cash flow effect of the sale/leaseback. Either way, sales tax can put a noticeable crimp in the positive impact of using a sale/leaseback to generate cash.
Ultimately, no matter how administrative and sales task expenses are addressed, the cash generated by a sale/leaseback transaction will be not be equal to the sum total of the asset values.
However, some lessors help reduce these burdens. "We take care of license and title services for most of our clients to alleviate the hassles and reduce overall costs," explains Singer of Merchants Leasing. "We find providing these types of services makes the transition easier for our clients."
Review Factors Thoroughly
Before embarking on a sale/leaseback arrangement, a company should thoroughly review the circumstances, the benefits, and the costs.
- Will the cash generated by the sale be material, given the negative considerations?
- Similarly, will any desired balance sheet effect be material to a company that counts its assets and liabilities in the billions of dollars?
- How cooperative will an existing lessor be - the lessor who is losing the company's business? Will the exiting lessor promptly provide endorsed titles and other necessary paperwork attendant to the sale of a vehicle?
- How will the company handle sales tax and administrative costs?
Not surprisingly, most often the company initially does not raise the possibility of a sale/leaseback. The circumstances usually surround the award of the business to a new supplier who encourages the sale/leaseback to quickly implement the supplier change. Less often, the company, in a search for cash, "notices" its fleet is worth millions and subsequently seeks a buyer.
In either case, the fleet manager must make certain everyone involved in the decision understands the costs attendant to the move and, equally important, the administrative and fleet management issues that will need resolution.
Changing lessors is a difficult and time-consuming process under any circumstances. Doing so via a sale/leaseback can address two needs at once: the company's need for cash and the fleet's need to complete a difficult change quickly. Selling a company-owned fleet and leasing it back is no less advantageous. However, the transaction involves a sea change in procedures and processes with which both the fleet manager and drivers must become familiar.
Whatever the reason for the change, as with most every fleet management decision, a carefully thought-out implementation plan is the quickest road to success. The company needs cash, it is willing to bear the sales tax and administrative costs that go along with it, so the fleet manager must be prepared.
If an existing lessor is involved, obtain in writing and by name its commitment to cooperate fully with the replacement. Without that cooperation, the process can drag out far longer than necessary, incurring additional costs.
All fleet stakeholders must be fully informed before the first steps are taken. Management, drivers, HR, legal, and risk should all be included. Drivers and their immediate supervisors, in particular, need to know exactly what will happen, how it will happen, and when. If possible, they should know specifically who may be contacting them and who they should contact if confusion or problems arise.
Each of these points should be part of a well thought-out project plan; a timeline, individual and group responsibilities, and lines of communication, if outlined in advance, will keep the process moving smoothly.
Sale/leasebacks have a place in the fleet world. However, the timing of instituting such an arrangement must be carefully reviewed. If such an arrangement is undertaken, the fleet manager must plan how the process will proceed.