Chelsea Mandel and her company, Ascension Advisory, are on a mission to help small business buyers borrow $17 billion a year from a private equity strategy known as sales-leaseback. But finding a good deal is nearly impossible.
by Brandon KochikodinForbes staff
aAccording to the U.S. Small Business Administration (SBA), the last week of April is National Small Business Week. It's a time to celebrate the role of America's 33 million small businesses. Despite the “small” tag, these businesses are a big deal. They account for about 40% of the United States' $27 trillion gross domestic product and, more importantly, a significant part of the American Dream. Just look at his success on ABC's Shark Tank, now in its 16th season, as proof of that. In fact, his 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. I found out that
According to Incfile research, the major barrier to entry is money. Finding funding to start or acquire a business was shown to be the biggest challenge for half of those surveyed.
Chelsea Mandel, founder and managing director of Ascension Advisory, believes she has a novel solution to the seemingly insurmountable challenge of financing small businesses. Mr. Mandel attracted a lot of social media attention by preaching the benefits of “sale-leasebacks,” a sophisticated financing technique commonly used by sophisticated institutional investors in multibillion-dollar deals. Mandel has more than 27,000 followers on LinkedIn and an additional 8,000 followers on X. Her company, Ascension, not only hosts podcasts focused on leasebacks, but also offers email crash courses like “102: Financing Acquisitions with Sale-Her Leasebacks.''
In a sale-leaseback, a company sells some of its assets, such as real estate or equipment, and then rents or leases it back so it can continue operating as before. It is similar in some ways to a home equity loan in that it effectively frees up potential cash tied to the value of the asset that can be used for growth or other investments. It also provides tax benefits, including certain deductions, to sellers who are effectively renting out the business they just sold. Mandel's strategy is simple. If timed well, a business buyer can leverage the real estate attached to the business to finance the purchase through a sale-leaseback. In this way, a new buyer acquires a company and at the same time sells the real estate owned by that company to an investor, who receives rent from the buyer and does not invest any initial capital, Mandel said. The entire transaction will be undertaken.
Brian Dennis, founder of Dennis & Co., is one of Mandel's success stories. Dennis & Company owns 15 dealerships, including Chevrolet, Dodge, Chrysler, Infiniti and Kia, primarily in the New York City area, and last year completed a sales-leaseback with assistance from Ascension Advisory. So I added a new location to my portfolio without investing any money.
Dennis purchased the dealership, which was worth $20 million in real estate alone. The entire package, including real estate, dealership operations, and other assets, was sold for just $17 million. By arranging a sale-leaseback, Dennis was able to cover all costs of the acquisition. “We were able to finance a large portion of the acquisition just by leveraging that real estate,” says Brian Dennis. “Using a sale-leaseback offers the lowest cost of capital.When you close a deal, you inevitably look for sale-leaseback opportunities, of which he has executed three so far. Did.”
SYale leasebacks are nothing new. These are commonly used by commercial real estate and private equity firms. According to SLB Capital Advisors in New York, real estate-based leaseback transactions in the U.S. exceeded $17 billion in 2023. VICI Properties, a real estate investor focused on “experiential” real estate, invested $776 million in leases in the fourth quarter of 2023 alone. His bowling alleys include Manhattan's Chelsea Pier and his 38 locations Bowlero.
“If you look back 20 years ago, sales-leasebacks were primarily done by real estate investment trusts. They were buying leases on commercial properties,” said Scott, managing partner at SLB Capital Advisors.・Mr. Markle says. “However, over the past five years, the sales-leaseback market has been driven by private equity funds operating in the middle and lower middle markets. It tends to occur in cities and towns.”
Mandel says aspiring small business owners, sometimes referred to as “acquisition entrepreneurs” or “explorers,” should consider this creative no-down payment financing option to jump into business ownership. That's what I think. But she warns that finding target companies that will pay for themselves is not easy. “We say finding a deal that allows you to finance the entire acquisition through a sale-leaseback of the target's properties is like finding a needle in a haystack,” Mandel says. “But the opportunity is there.”
Mandel should know. Since he graduated from Dartmouth College with a degree in economics in 2015, Mr. Mandel's career has been focused on real estate finance. She started as an acquisitions analyst at real estate billionaire Barry Sternlicht's Starwood Capital Group before joining New Mountain Capital where she helped develop and lead sale-leaseback strategies. and executed over $400 million in transactions. She then joined a sale-leaseback advisory firm where she structured over $1 billion in transactions. Mandel said she launched her Ascension advisory in 2022. Since its founding, her company has secured her $700 million in leaseback sales.
Despite the potential for using sale-leasebacks to finance acquisitions, Mundell cautions against chasing leasebacks for the wrong reasons. “If you buy a business just because you can finance it with a sale-leaseback, but you have people who don’t know how to actually run a company, that’s even worse than if you did nothing at all. They are currently tied to a lease and will struggle to pay rent if they are unable to run the business.If we can help them acquire a business with zero capital through a sale-leaseback, that is a win. “It should not be the only search criteria,” she says.
WIf all goes well, the profits from a sale-leaseback can be impressive. Mandel describes these moments on his blog as “freerolls.” This is the moment when clients not only secure business through trading, but sometimes even make money in the process. She highlighted notable scenarios involving client acquisitions on X (formerly Twitter). 14 gas stations $54 million in four deals. While these purchases were underway, Ascension was already conducting a search through its network to identify investors interested in purchasing and leasing back the properties. Negotiations called for flexible deadlines and a degree of confidentiality. The original owners were kept out of the loop to prevent them from attempting a sale-leaseback of their own. This strategy was successful, and Mandel's client received her $69.3 million profit from the sale-leaseback. This is a profit of $15.3 million that exceeds her initial investment in the business and its real estate. Mr. Mandel's firm, Ascension, charges a fee of about 1% to 6% of the transaction cost, depending on the size of the trade.
A sale-leaseback used in this way is actually a form of arbitrage. In many cases, the original seller may not be aware that there is a strong market for sale-leasebacks, especially for small businesses. Or maybe you simply want the sale to close quickly and smoothly and want to retire without the hassle of multiple transactions.
But it's not just about selling. It's important to know how much rent your newly purchased business can afford. The higher the rent you agree to, the more investors are willing to pay for the property. But if you charge too high a rent, you risk drowning a previously solvent business in unmanageable costs. So the new buyer is essentially being compensated by taking on the risk of closing the deal and paying the rent on the property that was wholly owned by the company.
Ryan Holder is a managing director at Strategic M&A Advisors, a sell-side advisory firm based in Little Rock, Arkansas. His job is to prevent sellers from creating arbitrage opportunities for the “sharks” of the world. And Holder says there are certainly sharks in the M&A space. “We try to take advantage of arbitrage opportunities to bring the most value to our clients,” Holder says. “Part of our job is to ensure that sophisticated buyers don't take advantage of unsophisticated or poorly advised sellers. Sellers are the sharks that prey on these types of transactions. You need to know that it exists.”
Even if “free rolls” exist, they are not common.
Robert Dolan has been brokering small business transactions in South Florida for over 45 years. During that time, he says, he hasn't done any transactions where a sale-leaseback was used to finance the entire transaction. “I'm not saying it can't be done, but almost always something is wrong or the risk is too high when you do a trade like that,” he says. “Are these deals actually happening? Yes, there's some merit to it, but nothing I've seen firsthand.”
That's part of the reason Mandel went independent. She says there is a largely untapped market for offering sale-leaseback advisory services, particularly to companies making acquisitions of small and medium-sized businesses. “I don't think there's a lot of competition, especially when it comes to sale-leasebacks, which are financing M&A transactions,” she says. “These deals are risky given the wide acquisition uncertainty and tend to be uninteresting to large one-stop-shop brokerages, especially for smaller deals. It's an important game, and perhaps the expected value isn't worth it. But we feel it's an underserved segment of the market, and perhaps ours. may have a different risk profile than its larger competitors.'' Those larger competitors have a market capitalization of $30 billion, annual sales of $9 billion, and are members of the S&P 500 Index. It will become a huge company like a group.
LEaseback is not without risks.
Consider the case of Art Van Furniture, a Detroit-based furniture retailer. The company opened in his 1959 and eventually expanded its footprint throughout the Midwest. It was acquired by Boston-based private equity firm Thomas H. Lee Partners LP in 2017 for approximately $550 million. To cover the sale price, Mr. Lee opted for a sale-leaseback of the Art Vann property.
But it backfired, at least from Art Vann and his employees' perspective. The 60-year-old furniture store went bankrupt within three years. A lawsuit brought by investors alleged that the new private equity owners overleveraged the company. They accused Thomas H. Lee of draining the company's assets and incurring unmanageable debt. Before the private equity owners began financial engineering, Art Vann's lease obligations were less than $23 million a year and future lease commitments were $136.5 million, according to the complaint. After the deal, those numbers jumped to $46 million per year, and his future lease obligations totaled more than $877 million. The dispute was ultimately settled in August 2023 for $8 million.
Red Lobster also seems to be in trouble lately. Back in 2014, the seafood chain signed a $1.5 billion revenue leaseback agreement for about 500 stores with American Realty Capital Properties (Golden Gate Capital used the funds to buy Darden acquired the chain from Restaurants). Fast forward to April 2024, and Red Lobster is considering bankruptcy, according to a report from Bloomberg. The report points to “onerous leases” as a partial cause, saying they are hampering restaurants' cash flow.
“If you're doing this haphazardly for pure financial engineering purposes, it might be a good deal now, but in five years it's going to be a terrible deal,” Mandel argues. “Transactions should be based on the merits of the property and the company being acquired. This structure makes acquiring companies easier.”
If you can find the needle in the haystack, of course.
