A large portion of baby boomers are business owners because the scarcity of jobs when they entered the workforce drove them to create their own jobs and become...
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.