Should I pay off my equipment lease before putting my business on the market?

Deciding to pay off your equipment lease before selling your business is primarily a mathematical decision with one unknown variable, the multiple. Let's look at a quick example to illustrate the math:

Example:

  • Asking price of business is $250,000.
  • Annual adjusted profit of business is $100,000.
  • Current business value = $100,000 x 2.5 = $250,000.
  • Equipment lease payment is $2,000 per month.
  • Paying off the lease will save the buyer $24,000 per year ($2,000 per month x 12 = $24,000 per year).
  • Annual profit will increase from $100,000 to $124,000.
  • New business value will be $310,000 ($124,000 x 2.5).
  • Difference between business values = $61,000.

Conclusion:

  • If the payoff is less than $61,000, then it would be wise to pay off the lease.
  • The example above assumes the multiple will be 2.5. If the multiple is less or more, than the formula will be different. Be conservative in choosing your multiple.
  • Don’t pay off your equipment lease until closing. Have this handled at escrow. You don’t want to pay off the lease and then not sell your business.
  • You must normalize or adjust your financial statements to determine the “annual profit."
  • Consult your CPA to take the tax implications into consideration.