Deciding to Pay Off Equipment Leases
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 an example to illustrate the math behind the decision.
- Asking Price = $3,000,000
- EBITDA = $1,000,000
- Business Value = $3,000,000
- Equipment lease payment = $20,000 per month
- Paying off the lease will save the buyer $240,000 per year ($20,000 per month x 12 = $240,000 per year).
- EBITDA will increase to $1,240,000 from $1,000,000 if the lease is paid off.
- The value of the business will increase to $3,720,000 ($1,240,000 x 3.0) if the lease is paid off.
- The difference between the two business values is $720,000.
- If the payoff is less than $720,000, it will make economic sense to pay off the lease.
- The example above assumes the multiple will be 3.0. If the multiple is less or more, the formula will be different. Be conservative in choosing your multiple.
- Don’t pay off your equipment lease until closing. You don’t want to pay off the lease and then not sell your business.
- Consult your CPA to take the tax implications into consideration.
The bottom line is that if paying off your equipment leases will increase the value of your business by more than the current payoff of your leases, it makes sense to pay off the lease. The reverse is also true — it does not make sense to pay off the lease if paying off your equipment leases will increase the value of your business by less than the current payoff of your leases.