Dealmasters D.M. Ltd.

Our monthly newsletter dealing with acquisitions and investments in private companies

Issue: 2/2011




Our newsletter is designed to bring to your mailbox a wealth of experience on acquisitions, project finance and in general, on anything to do with investments in private enterprises - both in our region and globally.


In every issue, you will find articles on the latest trends that impact the M&A market, analysis of technical issues and our corporate news.


We always appreciate your feedback, so please feel free to email us to share your thoughts, reactions, opinions. Suggestions for specific topics that you would like to be covered are also welcome.


Sale/Leaseback Deals Gathering Momentum

In a Sale/Leaseback deal, a business sells real estate property to an investor and simultaneously leases the same real estate back, from the same investor.
(For those among you with an Accounting or Finance background, we clarify that the lease should be an operating lease and not a capital lease. In the latter case it would be a sale/buyback deal, not a sale/leaseback deal)

We will briefly explain why this type of deal has recently become so popular - for both investors and businesses - and what the benefits are for both sides.

Companies and Entrepreneurs with financial savvy have always avoided locking up their capital in real estate such as office, industrial, warehouse or retail property. The reason is elementary ("Finance 101" we could say): If your core business is making and selling "widgets", then your capital (equity or debt) should be much more profitably employed in developing your  "widgets" business than in owning real estate.  Unless, of course, your core business is Real Estate. There are a few exceptions to the rule, such as the case where the type of property needed to conduct a business is very specialized or not available for lease on the market. Or, cases where the investment needed to improve and modify a specific property is substantial in relation to the acquisition cost.

What makes Sale/Leaseback particularly attractive nowadays is the difficulty in raising
capital - both equity and debt . The credit crunch, coupled with the general economic slowdown, have left many businesses literally starved for cash; and in many cases, unable to service their debt.  This is not a problem just for small, private businesses. Even listed companies are unable to raise fresh capital from the stock-markets at the same time they are under intense pressure from their lenders. 

The main advantage for the investor is that he does not have to find tenants.  The tenant is already in the property - so occupancy is 100% from day one.  Another advantage is that the yield will be higher. Our experience with corporate clients (sellers) is that they are willing to pay rents ranging from 30% to 50% higher than market rates. Since real estate has been showing a downward trend, a trend which may continue or intensify, sellers are happy to get more money upfront and pay a higher rent.  So, investors cannot expect to buy at a discount but, on the other hand, they will enjoy a higher yield or R.O.I.

Indicatively, the R.O.I. for hotels in Cyprus is around 3% based on G.O.P. and Asking Prices for a straight sale.  However, in our discussions with several Hotel owners, they were willing to make lease payments of up to 6% on the 2009 Market Value, in
a Sale/Leaseback deal.

One disadvantage of a corporate sale/leaseback deal is the buyer's reliance on a single tenant. In effect, the investor is not just investing in property he is also investing in the seller's business prospects.  However, single-tenant risk can be effectively mitigated in many ways, which we are happy to discuss with prospective investors.    

Which brings us to the advantages for sellers: First, they can settle all their debt, or at least settle enough debt to keep their Bankers happy!  In addition, they get precious liquidity which gives them a great competitive advantage in today's markets.  Finally, they continue conducting their business in the same premises without any interruption.

Bottom line, Sale/Leaseback is a win-win situation. 

  • It's great for passive investors as it's quick, easy and much more profitable than a straight acquisition.   
  • It's great for corporate real estate owners as it helps them de-leverage and build up cash reserves quickly, while maintaining full control of their business.     

Sectors in which Sale/Leaseback deals are in demand are:

  • Hotels & Hotel Apartments (Property of Hospitality industry companies) 
  • Industrial property (Property of Manufacturing companies)
  • Supermarkets, Grocery Stores, Convenience stores  (Individual businesses or chains) 
  • Clinics & Old People's Homes
  • Office buildings (Property of large corporations)  
  • In general, any viable business with substantial real estate holdings 

Featured Deal


(You can also view this listing on our website)


This interiors, finishes & renovations contractor is well established for over 30 years and enjoys an excellent reputation for quality and reliability. Sales for 2011 are forecast to reach EUR 3Million.


Specializing on the high-end of the market, mainly corporate contracts for hotel, office and commercial buildings. Both renovations and newbuilds and also interior and exterior sports surfaces.


Steady, repeat business from major hotels and corporations in Cyprus. Also undertakes contracts abroad.


Operating out of a State Industrial Estate with fully equipped facilities, warehouse, offices, showroom of total area 1.310 sqm. Independently appraised Market Value of real estate (industrial plot, warehouse, offices, showroom) EUR1Million and value at cost of inventories ranges from EUR 500 to 600K.


In addition to contracting work the company does wholesale and retail sales of flooring, wall and ceiling finishes and decorative materials. Majority of materials sold are own imports.


Headcount is 18 persons including Management, full-time technicians and supervisors, interior decoration designers, warehouse and administration personnel.


An excellent opportunity for a General Contactor who wishes to integrate interiors construction to their operation, an existing interiors company which wishes to grow by acquisitions, or a major developer/property owner who wishes to do all interiors and finishes works in-house.


Interested parties will be required to sign a Confidentiality Agreement

How we classify Investors and Business Buyers 
OR, Do You Really Know Where You Are Going?


We regularly advise individual investors, locals and foreigners, who want to buy a business. Our first priority is to understand the Buyer's motives and business objectives, so we can serve them better - or, in most cases, to help them crystallize their own investment criteria, motives and objectives. Just like any other purchase or investment decision, it's important to know what you want, before you go out looking for it!  


From our experience, if a business buyer does not know what he/she wants, a lot of time and effort is wasted by everybody: the buyers, ourselves as advisors to the buyers and also by business vendors. So, it's very important to first specify the type of business investment the buyer wants to make, to avoid just running around on a non-productive "shopping around" trip.


We classify business buyers into four main types:


1. Lifestyle Business

The most important consideration for the buyer in this case is the lifestyle that goes with the business. It may be a sea-sports business, a night-club, an adventure holidays business, a ladies fashion shop, a dancing school, a restaurant, etc. Basically, the client wants the business to revolve around his/her hobbies, personal interests and social life. He/She will want to have a source of personal income as owner/manager while satisfying, at the same time, lifestyle expectations.  The decision to buy is not based exclusively on financial criteria.


2. Owner/Manager

Most small business buyers belong to this category. In this case, the business buyer mainly wants to make a living from the business and, if things go well, also make a profit (i.e. more money than he/she needs as a salary). Main considerations in this case are business size, experience and skills needed to operate the business (so that the owner and his family can manage the business on their own) and the risk of the business. Location will also be important to reduce the travelling time between business and home, childrens' schools, etc.


3. Absentee Owner

In this case the Buyer does not want to manage the business personally, at least not on a daily basis. He/She may spend a lot of time abroad, have other businesses, or just not want to work on a regular basis. Therefore, professional Management will need to be hired, plus there must be sufficient control and reporting mechanisms to ensure that Management does their job properly. The main criteria in this case, are (a) the size of the business and (b) the ability to maintain sufficient control. The business has to be of a size that can pay professional Management and still make a profit. Also, it cannot be a cash business (e.g. night-club, cafeteria, bar) as it is very difficult to control the financial aspects of such businesses. Provided the above two criteria are met, an "Absentee Owner" type has a much wider range of businesses to choose from, than a "Lifestyle" or "Owner/Manager" type of buyer.        


4. Passive Investors

Wealthy individuals may invest in private businesses the same way they would invest in listed shares, bonds or property. When properly planned, executed and monitored, such investments can generate much higher profits than any other investment. They may also be less risky than conventional investments, now that the financial system globally is in a state of crisis. The percentage of shares bought in such cases may range from 5% to 100%. Each case is different, so there are no fixed rules. It may be an investment in a high-growth, high-risk business start-up or in a low-risk business such as a Photovoltaic energy project or Medical Center. As in all cases, the cardinal rules are (1) appraise the quality of Management, business risk and potential profits in detail (2) negotiate a good deal, both in terms of profit participation and in terms of control (3) monitor the investment continuously. As part of our job, we can assist in all three of the above rules and also provide Board of Directors representation.  


Having established the type of business or investment suitable for the Buyer, we then need to narrow down our choices. At a minimum, we should define specific Business Sectors, preferred Locations and the maximum Amount of Investment.


Dealmasters can help you formulate an acquisition strategy, identify suitable targets and represent you in the initial approaches while maintaining your anonymity.


Buy the Company or buy the Assets? 
OR, There's More Than One Way to get to the Same Place

When you decide to acquire a business there are two choices: You can buy the company that owns the business (i.e. buy all company shares from existing shareholders) or you can buy the assets of the company. 


In both cases, a buyer needs to conduct thorough Due Diligence to ensure that the value of the company (or assets) is not impaired by liabilities or any other factors.  Due Diligence may be broken down into five main types:

  • Legal
  • Accounting/Audit
  • Financial/Valuation
  • Commercial
  • Technical

A more detailed overview of Due Diligence procedures will be included in our next Newsletter.  


Buy the Company: this is the most convenient method, as you simply buy all (or a majority) of the shares from existing owners. The company (and the business of the company) is then yours but otherwise, it's "business as usual". Nothing needs to be changed on the surface. Personnel, suppliers and clients do not even need to know that the company has new shareholders/owners, unless you want them to know.


When you buy a company you also acquire its trading history, which may be important if you intend to raise funds from private investors or if you plan for an IPO in the near future.  


Another major advantage (at least under Cyprus Law) is that there are no taxes on capital gains from the sale of shares, unless the company owns real estate assets, in which case the sellers will pay capital gains tax on the portion of sale proceeds which relate to these real estate assets only. As sellers usually add taxes payable to the price, the absence of tax helps keep the price down.   


However, when you buy a company you not only buy all the assets you also buy all the liabilities - meaning, for example, any debts the company may have, any tax dues or back-due rents. 


Even if the agreement with the sellers is to buy the company clean of any Bank debt or other liabilities, there may be contingent liabilities which are not recorded with the Company Registrar, in company accounts or other company documents. For example, an ongoing legal action against the company by an ex-employee, or legal action against the company by a competitor for trade name or trade mark infringement which may even be initiated after you buy the company.


So, buying a company's shares is quick and convenient, but extra care is needed in conducting Due Diligence and also in drafting the "Share Purchase Agreement" which must include suitable representations, warranties and indemnities from the sellers.



Buy the Assets: In this case, you avoid any problems with any liabilities a company may have, as what you are buying is not the company itself but the company's assets, whether these are tangible or intangible. Tangible assets would be any property owned by the company, whether real property or movable property such as stocks, equipment, furniture and the such. Intangible assets could be trade names/trade marks, sales contracts with clients, copyrights, patents or even receivables if this is part of the agreement with the current owner. We note that you may justifiably pay "goodwill", i.e. more than sum of the value of the assets, which will vary depending on the prospects and potential of the business.


The problem with buying the assets is that you have to be very, very thorough in drafting your "shopping list". You may leave something very important off this list, such as a trade name that enjoys wide recognition in the marketplace, or a "hidden asset" such as a big receivable from a creditworthy client, or a lucrative exclusive agreement with a supplier.       


In addition, if the company is operating out of rented premises, you will have to arrange for a transfer of the rental agreements, or pre-negotiate new rental agreements with landlords which will be effective immediately upon the sale of the assets. Whereas in the case of a company sale, the existing rental agreements stay in place.


In contrast to a share purchase, an asset purchase is subject to TWO types of  taxation: Income Tax on the company from the profit made in selling the assets; plus VAT (currently 15%) on the sale of each asset.  


So, buying the assets of a company may avoid "inheriting" any unwanted liabilities, but it has a substantial tax burden plus it still requires thorough Due Diligence. You need to check if all assets are free from any liens or encumbrances, such as mortgages, memos, fixed charges or floating charges. In the case of registered assets, such as real estate and motor vehicles, the checkings are relatively straightforward. But in the case of all other tangible assets such as equipment, furniture, even inventories, it is extremely difficult to establish if there is any claim against them by a third party.  


We undertake for Corporate Buyers Commercial and Financial/Valuation Due Diligence. We also collaborate with Corporate Lawyers and Auditors to cover Legal and Accounting/Audit as well as specialist Engineers to cover Technical Due Diligence.


Dealmasters is an advisory firm providing investors and privately owned enterprises with Intermediary and Representation services in relation to acquisitions, fund-raising and private investments. For further details of the range of services we offer, you can download our corporate profile here.



Marios Argyris, for

Dealmasters D.M. Ltd. 

Featured Deal
Individual Investors Classified
Buy the Company or the Assets?

Quick Links



Who needs an M&A Advisor? 


In our July Newsletter we stated that we are on a mission to educate our clients, particularly on the sell-side.   


Buy-side clients and Investors are rarely first-timers. But on the Sell-side, we are usually dealing with Shareholders and Executives who have never sold a company before.


Our first in a series of articles is a short and plain language treatise on the Engagement (or Mandate in our jargon).  The Mandate is a written agreement between an advisor and the owners of a business, whereby the advisor is instructed to act as the owners' intermediary, consultant or promoter in relation to the sale of their business.   


We have heard many horror stories about unscrupulous, unethical and even fraudulent practices by "agents" or other intermediaries.  In ALL cases  we found that (a) the "agents" in question were amateurs or part-timers and (b) there was no written Mandate.  


In this article, we explain why a Mandate is needed to protect the interests of both parties, what terms a Mandate should incorporate at a minimum and describe the main types of Mandates.  

Download it here - we hope you find it instructive.    



For owners of small businesses we have a comprehensive guide on selling a business which may be downloaded here.