Why Leasing Makes Sense

Originally appeared in Monitor Daily

Fleets have a number of options when it comes to asset acquisition. They can buy, finance or lease an asset. In my estimation, the lease versus buy analysis favors leasing, especially when talking about operating leases. Here are several reasons why.

Let’s start with used truck prices as residual values have a big impact on the total cost of ownership of an asset. There has always been a deviation between high and low used equipment values. However, more recently the high and low deviation range of used equipment values has continued to widen, creating unmanageable volatility. Generally, fleets do not have the ability to absorb this type of volatility. If, for example, residual values move $10,000 to $15,000 per truck and a fleet has 200 trucks to turn in, they may be prevented from doing so because they will be upside down in value.

In addition, Fair Market Value Walkaway leases eliminate residual risk permanently because at the end of the term the lessee simply hands the asset back to the lessor and has no further obligation for the asset.

Leasing rather than buying an asset frees up capital which can be used by a business to generate additional revenue, for productivity improvements and to invest in human capital.

Operating leases also positively affect Return on Equity. This automatic improvement produces a positive effect on the value of the corporation via a higher company valuation multiple being applied to the EBITDAR (earnings before interest, taxes, depreciation, amortization and rents), net pre-tax income or adjusted EBITDA (for the interest portion with a lease rent).

Here is an example of what that looks like:

Before Operating Leasing Company Valuation

• $10 million net pre-tax income x multiple of 4 (due to  higher assets on the books) = $40 million

After Operating Leasing Company Valuation

• $10 million net pre-tax income x multiple of 6 (due to  being asset lighter) = $60 million

The same company with the same operation, revenue and profit is valued higher as a result of less owner equity involved to sustain and drive the business. Whether a private or publicly owned company, this kind of increase in a company’s value is truly extraordinary and it happens with no changes to the company.

In addition to operating leases, fleets also can choose capital leases when acquiring assets. However, in a capital lease the fleet, in essence, takes ownership of the asset and at the end of the lease term has to deal with the residual value of the asset.

Operating leases are a smart decision for many fleets. The fleet not only reaps the benefit of eliminating residual risk but can actually enhance the value of their company by leasing the asset for the optimal amount of time and, at the same time, free up cash for other needs.

Tom Toton, vice president of Sales, Capital Equipment Solutions, brings nearly 40 years of extensive experience in the transportation industry to his role at Corcentric. He works with companies to determine a flexible, data-driven solution that is based on their operational and financial needs in order to optimize every asset.