The buyer's draft of the purchase agreement classifies our long-term facility lease obligations as debt, which they plan to deduct directly from our enterprise value at close. How do we use the IVS 105 Market Approach to defeat this debt-like treatment of our leases?

Question

Tyler Smith · Accepted Answer

Buyers frequently attempt to classify long-term operating leases as financial debt to reduce the cash paid to the seller at close. This tactic exploits accounting standards that require leases to be listed on the balance sheet, but it misrepresents the operational reality of your business. To defeat this treatment, you must use the IVS 105 Market Approach to prove that lease liabilities are standard operating expenses, not financial debt. Show the buyer that your facility lease is a standard operational requirement for your industry and that all comparable companies in the market utilize similar leasing structures. If the public comparable companies used to determine your valuation multiple also lease their facilities, then the cost of those leases is already accounted for in the industry EBITDA multiple. Classifying your lease as debt and deducting it from the purchase price would constitute double-counting the expense. Back up this argument by pointing to your V/TO, which details your long-term facility strategy as an ongoing operational cost of doing business. Keep your team focused on maintaining clean operational metrics on your Scorecard throughout the deal process, and hold a firm line on the definition of net debt in the definitive agreement. Lease obligations are operating expenses, not debt to be deducted from your payout.