Equipment Leases and Financed Equipment in a Business Sale
What happens to leased and financed equipment when you sell a business: payoffs, lender consent, lease transfers, and how to avoid surprises at closing.
Words by
Matan Michael
Every buyer asks for an equipment list, and most owners hand over a spreadsheet of what is in the building. A list like that says what is in the building and leaves out who owns it. Some of those machines are paid for. Some are collateral for a loan with a bank that has a lien on them. Some belong to a leasing company and the business only has the right to use them. A buyer's attorney will sort the list into those groups, and it is better if you have already done it.
Three kinds of equipment on one list
Owned equipment is the simplest. You bought it and paid for it, no one else has a claim, and it is yours to sell. It goes into the sale on a bill of sale, usually with a statement that it is free of liens.
Financed equipment is yours on paper, but a lender has a security interest in it. You bought the truck, the oven, the press brake, the dental chair, the delivery van, and the lender filed a notice that the machine secures the loan. Until the loan is paid, you cannot give the buyer clear ownership. The lien runs with the machine, which means the buyer inherits the lender's claim if nobody removes it.
Leased equipment belongs to the leasing company. The business pays monthly for the use, and at the end of the term it may return the machine, renew, or buy it. Copiers, point of sale terminals, forklifts, kitchen equipment, medical imaging, and fleet vehicles are common examples. The business has no title to hand over, so a sale of the business can only pass along whatever rights the lease gives.
The distinction affects the price, the paperwork, and the timeline, and the easiest way to find the mix is to go through the equipment list line by line and add three columns, who owns it, who has a lien, and who is the lessor.
Paying off financed equipment at closing
If the loan is paid at closing, the process is routine. The closing agent asks the lender for a payoff letter that states the balance, the interest per day after that date, and where to wire the money. The payoff comes out of your proceeds and the lender files a document releasing the lien. Keep a copy of that release, and ask your attorney to confirm that the public record shows the lien as discharged, since a release that was never filed will surface later, usually in a buyer's lender's title search.
Two details hide in these letters. Some equipment loans carry a charge for paying early, which is sometimes a stated number of months of interest. And some loans cover several machines under one agreement, so that paying off one machine means paying all. Ask the lender early what it takes to release a single item, because you may want to sell it as part of the business while keeping another.
Vehicles have their own wrinkle. A financed truck has a title held by the lender or noted on it. The title transfers after the payoff, not before, and a buyer who needs the truck on the first morning of ownership should know how the release will arrive.
When the buyer wants to take over the loan
Sometimes a buyer prefers to keep the existing financing, especially when the rate is low. This takes the lender's consent, because the lender approved you and has not approved the buyer. Expect a credit application, financial statements, and maybe a fee. The lender may raise the rate, ask for a larger down payment, or ask for a personal guarantee from the buyer.
For you, the question is whether you get released. A lender who consents to an assumption but keeps you on the note leaves you guaranteeing the buyer's payments for years. Our post on personal guarantees when you sell covers how to ask for a release and what to do if the lender refuses. When the lender will not release you, many sellers prefer to pay the loan off and adjust the price.
Buyers who finance their purchase with an SBA loan often prefer to pay off the seller's equipment debt with the new loan proceeds. That solves the problem for everybody. See our post on SBA loans in acquisitions for how the lender looks at equipment.
Leased equipment needs the lessor's yes
A lease usually says the business cannot assign it without the lessor's written consent. The lessor will want to look at the buyer. Some are quick and some take weeks, so start early and list every lease. The consent is a separate document, and a good one releases the original lessee.
Read the end-of-term provisions of each lease. Some have a purchase option at a stated price or fair market value. Some require the equipment to be returned in good condition, with a charge for wear. A copier lease with a buyout is a nuisance. A lease for a line of kitchen equipment with a heavy return obligation is a liability that a buyer's accountant will put a value on, and the value will come off your price.
Terminating a lease early is expensive, because the lessor usually collects most of the remaining payments. If the buyer does not want the equipment, you may be stuck paying out the lease, so ask the buyer early which leases they want. If you want to walk away from a lease the buyer is declining, ask whether the lessor will take the equipment back and at what price.
Capital leases and the quiet buyouts
Some leases function as financing. At the end the business can buy the equipment for a nominal sum, and the monthly payments work as installment payments on a purchase. Accountants sometimes treat these as debt on the balance sheet. A buyer who is paying a price "free of debt" will count the balance as debt and subtract it, either by having it paid off at closing or by reducing the price. If your lease looks like a lease and acts like a loan, tell the buyer in the first round so it does not look like something hidden in the second.
A related point: a buyer who sees a large monthly payment for equipment will wonder whether those payments are in your earnings figure. Equipment payments belong in the expense side of the financial picture in one form or another, either as rent or as depreciation and interest. Our posts on SDE and EBITDA explain why different treatments change the measure of earnings and how buyers handle the difference.
Fixtures, vehicles, and things attached to the building
Some items on your list may not be yours to sell even when you paid for them. Built-in equipment such as a walk-in cooler, a spray booth, a hood system, a lift anchored to the floor, or tenant improvements may belong to the landlord under the lease, either when installed or when the lease ends. Read the lease for language about fixtures and alterations. If the landlord claims the item, take it off the equipment schedule or describe it as a leasehold improvement, because a buyer who is paying for something that belongs to the landlord will find out and will take it back out of the price.
Vehicles are titled separately and move through a state process with a transfer and a registration, and rules vary by state. Your attorney confirms what applies and tells you whether the vehicles belong in the bill of sale at all.
Software and subscriptions sit on the same list and are often forgotten. A shop management system, a scheduling platform, and a point of sale on a subscription may not move to a new owner without the vendor's agreement.
How the price and the schedule fit together
In an asset sale, the purchase agreement attaches the equipment list as a schedule and the price is allocated among categories of assets. Our post on the asset purchase agreement shows where. Leased equipment is owned by the lessor, so it stays off the schedule of assets sold, and the lease itself goes on the schedule of assumed contracts. Equipment that is financed belongs on the first list with the lien noted, and the payoff belongs in the funds flow. A buyer's attorney who finds the mix wrong on the day before closing may delay the deal while sorting it, so the closing statement should show every payoff.
Buyers also look at condition. The age and service history of the main machines affect the price, and buyers sometimes hire an appraiser to value the equipment. A short maintenance log for each major item and a photo of the serial plate helps the appraiser and the buyer's lender. The more of this you have ready, the less the buyer can claim that the equipment needs replacing.
What to do before you list
Build the equipment schedule with the three columns. Pull every loan and lease and put the balances, the monthly payments, and the end dates beside each item. Call each lender and lessor, ask what they need to consent to a transfer or to accept a payoff, and ask what the charge would be. Check the lease for fixture language. Then talk with your attorney and accountant about which of the financed items you would rather pay off before going to market, since clearing a lien early can make a listing simpler.
Our post on due diligence describes what a buyer will check, and the equipment schedule is nearly always in the first request. A seller who can answer which machines are owned, financed, or leased on the same day the question is asked looks organized, and organized sellers tend to get cleaner offers. Business Advisors of America is glad to go through the schedule with you before it goes anywhere.
