The Stimulus is coming!
Get ready, the market is vibrating with electricity as the first wave of stimulus checks hits the street/wall street this week, ushering in a new era of Mergers, Acquisitions and Divestitures as companies gear up for the post-Covid sprint. The fundamentals of financial performance are what is driving this activity as many on the sideline are waiting for moratoriums lift, which will ignite a wave of evictions, bankruptcies, and the acquisition of many poorly performing companies to be acquired for pennies on the dollar.
Lease Compliance as a service: Private Equities Dream is a reminder to all as to the importance of having a lease accounting – ASC842/IFRS16/GASB87 compliance program in place, and are either in the process of gaining compliance or on their way to at the minimal – formalizing a path forward. The reason lease compliance as a service is trending currently, is because it’s a simple, consolidated solution that does not require a massive RFP process, full of vendor panel interviews, presentations, hardened – cross-departmental requirements, deep forensic audit analysis, or buying software. Get rid of the business distraction and move to a service, that can handle all this for you, and make it easy for the PE folks to say ‘yes’, to an exit/merger or some other flavor of opportunity.
If you want to raise the ire of your CEO, try and do-it-yourself (DIY), and soon you’ll be able to take the same approach to re-writing your resume. The last thing a Portfolio manager wants to do is to dig in and do due diligence on a value-less process that provides zero P/L benefits. The most mundane task an acquisition auditor will ever do is to painstakingly review leases, lease abstractions, controls, disclosure statements, and compliance test scripts. CFO’s at portfolio companies are not looking for a project, they are looking to buy cheap, strip costs, and flip for maximum profit. A compliant target makes it easy to establish valuation and provides the transactional agility they seek, as market conditions are unpredictable and can fluctuate wildly.
ASC842/IFRS16/GASB87 compliance is a big deal on both sides, as it’s also a very important component of a Divestiture, where companies are looking to strip out costs of non-performing LOB’s and reinvest cash back into their core operations. The same drill here, as again speed is the objective – both in establishing valuation, than in analyzing agility, as being bogged down in a lengthy compliance project will dilute the interest of the Portfolio companies, as well as underwhelm your investors.
Our friends at Deloitte are telling the same story to their PE folks, and have created a service around providing this type of guidance.
The team at Leaseology has a similar perspective on the importance of compliance, we just have extensive field experience in providing these types of solutions, and like any good group of former consultants, we only build solutions that we would want to use if we were in our customer’s shoes. When you know the content at the expert level, you know where to look for RISK, which manifests itself as: Evergreen leases (paying for property/equipment that you are no longer utilizing), Lost cash flow opportunities on the renegotiation and subletting of commercial real estate – Covid response, as well as EBITDA, balance sheet impact.
For more details on the impact of these scenarios, please check out our blog on cash preservation.
Sale and Leaseback, as a cash preservation Strategy
Having the acuity to respond proactively to market conditions will be a huge differentiator as we evolve out of the Covid market suppression. Companies with vision, and awareness of what is going on how the recovery will play out, are going to be the ultimate winners in the big fish eats small fish game. Cash is King, and few understand the importance of this statement, but Portfolio managers live by this rule, and the successful ones, have it embedded in their DNA.
Having the wisdom to remove balance sheet debt, and turn it into long-term liability expense, makes for a wise and aware P/L, which will get the attention during the coming consolidation frenzy. Understanding the expedients, relief, and EBITDA impact will make or break firms looking to acquire or divest, as the portfolio managers are experts at finding the hidden business benefits, (Bottom line Profits) – and understanding the available options are key to attracting buyers as well as maximizing profits/valuation.
Lessee benefits include (Journal of Accountancy):
- Cash Inflow, providing runway to negotiate without desperation
- Better Financing – Lessor has skin in the game, so ultimately would prefer you to be successful
Lessor benefits include:
- Reduced risk – via credit application process (increased visibility)
- More control over contract termination process
- Depreciation – added tax benefit of owning
Guaranteed residual value at lease termination, predictability, and agility to control future lease conditions.
The other opportunity here is in the management of expedients, as a cash preservation technique. Achieving compliance is complicated, but with proper guidance around
Expedients, it can pay for themselves – as the options, if properly orchestrated, can lead to improved terms, IBR’s, taxation, depreciation, and most important of all EBITDA representation on the balance sheet. The KPMG diagram below refers to opportunities to leverage expedients to optimize agility and profit.
What is the COVID impact on Lease Accounting Transformation?
Agility is a by-product of COVID, which will create unparalleled opportunities for financial expansion, as the weak are consumed by the profitable. Leadership is key, as those that see the opportunity now, are busy building strategies to expand current revenues, by leveraging under-valued assets from poorly performing targets. Compliance is a highly underestimated business complexity, understanding the value of a compliant target, will enable those looking to divest or diverse.
Lease Compliance as a Service: Private Equities Dream
Key Takeaways
- Manual Lease Accounting guarantees risk– leverage a Lease Managed Service provider
- Auditors will set up camp if they believe you are running your lease portfolio/accounting– and they will find risk items
- Lease Accounting subscriptions enable customers to avoid death by audit fees while providing a comprehensive service, experts to advise and a solution that is void of any peripheral IT support or maintenance costs.
Leaseology understands what internal lease accounting teams are up against, and has built an end-to-end solution that allows customers to divert resources, remove cost, increase accuracy/locate cost savings opportunities – all while achieving compliance via an outsourced lease management process. The following six pillars of success are the core of the Leaseology service offering, and we are confident that our combination of industry expertise in lease accounting, compliance, reporting, and automation can help you meet the ASC842 compliance requirements.
Ken Royce * Leaseology Inc * Board of Directors
Leaseology, Inc is a North America-based business advisory services firm committed to accelerated marketplace adoption of digital technology, financial management innovation, and business operations practice excellence. These core competencies apply to real estate and equipment portfolios.
