Chelsea Mandel and her firm Ascension Advisory are on a mission to help small business buyers borrow a $17 billion a year tactic from private equity’s playbook known as sales leasebacks. But finding the right deal is nearly impossible.
By Brandon Kochkodin, Forbes Staff
According to the U.S. Small Business Administration (SBA), the final week of April marks National Small Business Week. It’s a time to celebrate the role of small businesses in the U.S.—all 33 million of them. Despite the “small” tag, these businesses are a big deal. They account for about 40% of the U.S.’ $27 trillion gross domestic product and, even more importantly, are an essential part of the American Dream. For proof one only need consider the success of ABC’s Shark Tank, now entering its 16th season. In fact, a 2023 survey by Incfile, found that 90% of Americans dream of being their own boss, and three-quarters already have a business idea they’re itching to start.
Money is the big barrier to entry according to Incfile’s survey which shows that finding the funds to kickstart or buy a business is the top challenge for half of those surveyed.
Chelsea Mandel, the founder and managing director of Ascension Advisory, believes she has a novel solution to the seemingly insurmountable challenge of funding small businesses. Mandel has gathered a sizable social media following preaching the virtues of “sale leasebacks,” a clever financing technique typically used by sophisticated institutional investors in billion dollar transactions. On LinkedIn Mandel has more than 27,000 followers and on X another 8,000-plus. Her firm, Ascension, not only hosts a podcast devoted to leasebacks, but also offers email crash courses like “102: Acquisition Financing Utilizing Sale Leasebacks.”
In a sale leaseback, a business sells some of its assets, like property or equipment, and then rents or leases it back so that it can continue operating as it did before. In some ways it’s similar to a home equity loan, in that it effectively unlocks potential cash tied up in the value of the assets that can be used for growth or other investments. It also offers tax benefits, including certain deductions for the seller who is now effectively renting the business it just sold. Mandel’s strategy is simple: time it right and a business buyer can use a sale leaseback to finance the purchase by leveraging the property that comes with the business. In this way, according to Mandel, a new buyer is simultaneously acquiring a business and selling the property it owns to an investor who will receive rent from the buyer, who embarked on the entire transaction without putting up any initial capital.
Brian Dennis, the founder of Dennis & Co., is one of Mandel’s success stories. Dennis & Co., which owns 15 dealerships including Chevrolet, Dodge, Chrysler, Infiniti and Kia mostly around New York City, added a new location to its portfolio last year without putting any money down by executing a sales leaseback with Ascension Advisory’s help.
Dennis purchased a dealership where just the real estate was valued at $20 million. The whole package—real estate, dealership operations, and other assets—was being sold for just $17 million. By arranging a sale leaseback, Dennis managed to cover this entire cost of the acquisition. “We were able to cover the lion’s share of the acquisition just by leveraging the property,” Brian Dennis says. “Using sales leasebacks provides the lowest cost of capital. When you go into a deal, it’s inherent that you look for sales leaseback opportunities. We’ve done three of them so far.”
Sale-leasebacks are nothing new. They are commonly used in commercial real estate and by private equity firms. According to New York’s SLB Capital Advisors there were more than $17 billion in real estate-based leaseback transactions in the U.S. in 2023. VICI Properties, a real estate investor focusing on “experiential” properties, laid out $776 million in Q4 2023 alone for leases including Manhattan’s Chelsea Piers and 38 Bowlero bowling alleys.
“Looking back twenty years ago, sales leasebacks were mostly driven by real estate investment trusts. They were buying the leases on retail properties,” says Scott Merkle, the managing partner SLB Capital Advisors. “But over the past five years, the sales leaseback market has been driven by private equity funds that operate in the middle and lower middle market. The median deal size is less than $10 million and they tend to happen in smaller cities and towns.”
Mandel believes wannabe small business owners, sometimes called “acquisition entrepreneurs” or “searchers” should be considering this creative no-money down financing to leap into business ownership. She warns though that finding a target company that will pay for itself isn’t easy. “We say finding a deal where you can finance the whole acquisition through a sale leaseback of the target’s real estate is like finding a needle in a haystack,” says Mandel. “But the opportunities are out there.”
Mandel ought to know. Since graduating from Dartmouth in 2015 with a degree in economics, Mandel’s career has been dedicated to real estate finance. She got her start as an acquisitions analyst for real estate billionaire Barry Sternlicht’s Starwood Capital Group and later joined New Mountain Capital, where she developed and helped lead their sale leaseback strategy, executing over $400 million in transactions. She then joined a sale leaseback advisory firm, where she structured deals exceeding $1 billion. Mandel launched Ascension Advisory in 2022. Since its inception, her firm has sealed $700 million in sale leasebacks.
Despite the potential to use sale leasebacks to finance acquisitions, Mandel cautions against chasing them for the wrong reasons. “If someone buys a business just because they can finance it with a sale leaseback, but they don’t actually know how to run the company, it’s actually worse for them than if they hadn’t done anything at all. They’re now locked into a lease agreement and if they can’t run the business, they’re going to struggle to pay their rent. If we’re able to help you acquire a business with zero equity through a sale leaseback, that should be an outcome, it should not be your only search criteria.” she says.
When everything falls into place, the payoff from a sales leaseback can be impressive. Mandel describes these moments on her blog as a “free roll”—occasions when her clients not only secure a business through the deal but sometimes even earn money in the process. She highlighted a standout scenario on X (formerly Twitter), involving a client acquiring 14 gas stations across four transactions for $54 million. While these purchases were underway, Ascension was already on the hunt, leveraging its network to identify investors interested in buying and then leasing back the properties. The negotiations demanded flexible closing dates and a bit of secrecy; the original owners were kept out of the loop to prevent them from attempting a sales leaseback on their own. The strategy was a success, netting Mandel’s client $69.3 million from the sales leasebacks—a $15.3 million profit over the initial investment in the businesses and their properties. Mandel’s firm Ascension charges fees of approximately 1 to 6% of the transaction cost, depending upon the size of the deal, she says.
Sale-leasebacks, used in this way, are actually a form of arbitrage. Often, the initial sellers, especially if they’re small businesses, might not realize there’s a strong market for sales leasebacks. Or, they might simply want to wrap up the sale quickly and smoothly, perhaps eager to retire without the hassle of going through multiple transactions.
But there’s more to it than just selling; figuring out how much rent your newly purchased business can afford is crucial. The higher the rent you agree to, the more an investor is willing to pay for the property. However, if you push the rent too high, you risk drowning a previously solvent business in unmanageable costs. So, the new buyer is essentially being compensated for assembling the deal and assuming the risk of paying rent on property the business used to own outright.
Ryan Holder is the managing director at Strategic M&A Advisors, a Little Rock, Arkansas based sell-side advisory firm. It’s his job to make sure sellers aren’t creating an arbitrage opportunity for the “sharks” out there. And Holder says there are certainly sharks in the M&A waters. “We try to take out that arbitrage opportunity to get the most value for our clients,” Holder says. “One of our jobs is to keep sophisticated buyers from taking advantage of an unsophisticated or poorly advised seller. Sellers need to know that there are sharks out there looking for these types of deals.”
If the “free rolls” are out there, they’re not commonplace.
Robert Dolan has been brokering small business deals in South Florida for over 45 years. He says that in that time he hasn’t done any deals where a sales leaseback was used to finance the entire transaction. “Not saying you can’t do it, but most of the time when you have a transaction like that there’s something kinky about it or the risk is too high,” he says. “Are these deals out there, yes, and there’s some merit to them, but it’s nothing that I’ve seen in person.”
That’s part of the reason why Mandel struck out on her own. She says the market for providing sale leaseback advisory services – especially to those acquiring small-to-medium size businesses – is largely untapped. “I don’t think we have a ton of competition, especially for sale leasebacks that are financing M&A deals,” she says. “These deals are higher risk given the uncertainty of the broader acquisition, and especially for smaller deals, these tend not to be interesting for the big one-stop-shop brokerages. It’s a game of expected value and maybe the expected value isn’t there to make it worth their while. But we feel like it’s an underserved part of the market and perhaps we have a different risk profile than our larger competitors.” Those larger competitors would be behemoths like CBRE Group, a member of the S&P 500 Index with a $30 billion market capitalization and $9 billion in annual revenue.
Leasebacks are not without their risks.
Consider the case of Art Van Furniture, a Detroit-based furniture retailer that opened its doors in 1959 and eventually expanded its footprint across the Midwest. In 2017 it was acquired by the Boston-based private equity firm Thomas H. Lee Partners LP for around $550 million. To cover the sale price, Lee opted for sale-leasebacks on Art Van’s properties.
However, that backfired, at least from the perspective of Art Van and its employees. Within three years, the sixty year old furniture store was bankrupt. A lawsuit by investors claimed that the new private equity owner over leveraged the company. They accused Thomas H. Lee of draining the company’s assets and burdening it with unmanageable debt. Before its private equity owners began their financial engineering, Art Van’s lease obligations were under $23 million annually, according to the lawsuit, with future lease commitments of $136.5 million. Post-transaction, these figures skyrocketed to $46 million per year and over $877 million in future lease obligations. The dispute ultimately settled for $8 million in August 2023.
Recently, Red Lobster also seems to have run into trouble. Back in 2014, the seafood chain entered a $1.5 billion sales leaseback deal (Golden Gate Capital used the money to buy the chain from Darden Restaurants) with American Realty Capital Properties for about 500 of its locations. Fast forward to April 2024, and reports from Bloomberg suggest that Red Lobster is contemplating bankruptcy. The reports point to “onerous leases” as a partial cause, noting they’ve hampered the restaurant’s cash flow.
“If you’re doing this haphazardly for the pure sake of financial engineering, it may be a good deal today, but an awful one five years from now,” insists Mandel. “The deal should be based on the merits of the real estate and the company you’re acquiring. This structure makes buying a business more accessible.”
If, of course, you can find the needle in the haystack.
MORE FROM FORBES
Read the full article here
