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How to Increase the Value of Your Business by Paying Off Equipment Leases
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:
- 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.
- 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.