Hidden Treasure

Your search for capital should start in the nooks, crannies, equipment and real estate your business already has.
Magazine Contributor
6 min read

This story appears in the February 2002 issue of Entrepreneur. Subscribe »

In a cash-starved economy, many entrepreneurs are in the unenviable position of trying to improve cash flow while maintaining and even expanding market share. One way to alleviate the cash crunch brought on by lower-than-expected sales in a down economy is to sell your business's assets. It may be a quick way to raise capital and sustain cash flow, but experts caution against the dangers of the quick cash fix.

"It's important to understand the various alternatives, then survey your company [to determine] the most valuable and most liquid assets," advises William E. Swart, a Dallas attorney with Bell, Nunnally & Martin LLP who counsels entrepreneurs wishing to sell assets. According to Swart, most entrepreneurs can generate income from assets in three basic ways: sale/lease-backs of equipment or real estate, factoring of accounts receivable and licensing of a product or name. While each may provide the entrepreneur with a quick fix, each also has its own land mines.

  • Sale/lease-backs: To raise money without losing an important piece of equipment, you might try a sale/lease-back. Sale/lease-backs are generally structured to unlock the equity a business has in its assets, such as machinery and equipment. Generally, you may sell title to your company's assets at their fair market value to a financial institution for a lump-sum payment. The new owner then leases the equipment back to you.

"Sale/lease-backs are a good alternative, but you have to be very careful in structuring the transaction to take maximum advantage of the tax code," advises Swart. "A good tax advisor is essential."

of fast-growth companies say they have not been affected by the U.S. economic downturn.
SOURCE: PricewaterhouseCoopers

One tax advantage a sale/lease-back offers is the ability to structure the transaction as a taxable sale, which can be offset by net operating losses that may otherwise expire unused. But also realize that the transaction offers the potential to change which company is the "owner" for tax purposes and therefore who is entitled to depreciation benefits.

Companies with real estate can also get quick cash without sacrificing the benefits of land ownership. "I've had a number of companies wanting to downsize but not give up their current space," says Russell Appel, president of New York City-based The Praedium Group, a firm that specializes in real estate sale/lease-backs. "It offers entrepreneurs the flexibility of leasing as much or as little space as they need without the risks of subletting or the burdens of property ownership."

The danger lurking in a real estate sale/lease-back deal is the long-term lease obligation that typically accompanies the transaction. "Don't sign on to the first deal that crosses your desk," cautions Swart. Most sale/lease-back transactions are done with buyers already connected to the company in some way. That way, the length of the lease agreement, the rent payments, who pays for expenses and other items in the lease are usually negotiable.

  • Factoring of accounts receivable: "Factoring services provide a business with immediate cash for accounts receivable because a business can sell receivables as soon as they are generated," says Jeffrey Farkas, principal of Advantage Funding Corp., a factoring company based in Atlanta. "They need to forward acceptable documentation [such as the original invoice and related documents] to the factor. We then advance cash to the business in a relatively short time.

"The fact is, banks are tightening lending requirements for small-business owners. Factoring can be a great alternative," says Farkas.

Factoring also has its downside. "The primary danger in factoring is the blanket lien most factors require," says Swart. A blanket lien gives the factor a legal interest in all the business's assets and other collateral even if the company is only factoring one or two receivables. This blanket lien stays with you until released by the factor, usually once it collects on the receivables. It can even inhibit future refinancing. "Some factors are more negotiable than others, and may be willing to tie the lien to specific collateral," says Swart. "So compare and contrast your factoring alternatives before you decide."

Licensing a product, name or other intellectual property

Entrepreneurs may view licensing as an easy revenue source that increases market share with little additional expense. Licensing gives a person permission to use your company's name, trademark, logo or product for his or her own distribution. While it can increase the profile and distribution of your assets, licensing exposes you to the greatest risk of all: denigration of your trademark or name.

"It is very tempting to license out a great product or a great name, but most companies do it too soon and have no clear exit strategy," explains Swart. "The license agreement needs to set out exactly what the licensee is required to do to maintain the integrity of the name or trademark and what the licensor may do if this integrity is breached."

Swart also advises entrepreneurs to be sure they have an infrastructure in place to handle the support needed to license a product. "Software companies, in particular, have good products that have faltered because they put the cart before the horse. Don't oversell your product, and don't license it until you're sure you can support it."

No matter what your choice for selling assets, the experts continue to recite the entrepreneur's mantra: Investigate alternatives, negotiate the deal and reduce the risk as much as possible.

Web sites to help you mine the spare cash from your business

Licensing of a name
An excellent Q&A site concerning the licensing of a name, idea or product:

Search more than 3,600 capital sources for the right sale/lease-back deal:

Free evaluation of your "factoring potential" and a network of 150 factors:

Sean P. Melvin is an author, attorney and assistant professor of business at Elizabethtown College in Elizabethtown, Pennsylvania.

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