The Multiplier Effect
How a $50,000 Lease Error Can Cost You $275,000
If you are planning to sell your business in the next 12-24 months, stop looking at your Revenue and start looking at your Lease Portfolio.
Most companies treat ASC 842 compliance as a "check-the-box" exercise to satisfy auditors. But in a transaction scenario, your lease data isn't just compliance—it’s currency.
Why? Because of The Multiplier Effect.
The EBITDA Trap
Business valuations in the mid-market are typically driven by a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). A common multiple for a healthy service or logistics business is 5.5x.
This means for every $1.00 you add to your EBITDA, you add $5.50 to your sale price.
But the reverse is also true. For every dollar of EBITDA you lose due to bad accounting, you lose $5.50 in your exit check.
This is where lease classification becomes a forensic weapon.
The "Operating" vs. "Finance" Mistake
Under ASC 842, how you classify a lease changes where the expense hits your P&L:
Operating Lease: The payments are treated as "Rent Expense." This sits above the line, directly reducing your EBITDA.
Finance Lease: The payments are treated as "Amortization and Interest." These sit below the line, and do NOT reduce EBITDA.
Here is the disaster scenario I see:
A company has a fleet of trucks or a server contract. Their software defaults these to "Operating Leases" because nobody checked the specific transfer-of-ownership clauses. The company pays $50,000 a year for these assets.
Because they are classified as Operating Leases, that $50,000 is treated as Rent. It lowers their EBITDA by $50,000.
The Forensic Math
Let’s look at the cost of that mistake at the closing table:
The Error: You classified a Finance Lease as an Operating Lease.
The EBITDA Hit: Your EBITDA is artificially reported $50,000 lower than it should be.
The Valuation Multiple: Your buyer is paying 5.5x EBITDA.
The Lost Value: $50,000 (Error) × 5.5 (Multiple) = $275,000.
You didn't just lose $50,000. You essentially set fire to $275,000 of enterprise value.
The Buyer’s Advantage
Sophisticated acquirers invest heavily in forensic due diligence for a reason. Their goal is to ensure the price they pay is supported by airtight data.
If a buyer identifies an accounting oversight that understated your earnings, they are under no obligation to adjust their offer upward. They will often proceed with the valuation you provided, leaving you with a lower exit check than you deserve.
Conversely, if they discover unrecorded liabilities or classification errors that favor them, they will cite these assessments to justify a price reduction. By the time they find these gaps, your leverage at the negotiating table has already shifted.
The Solution: A Pre-Sale Forensic Scrub
This is why Lease & Ledger Advisory exists. We don't just do the books. We perform a Forensic Lease Analysis designed to maximize your valuation.
We apply the 7-Step Forensic Integrity Framework™ to:
Re-Test Classifications: Are those Operating Leases actually Finance Leases that could boost your EBITDA?
Hunt for Embedded Leases: Identify hidden liabilities early to prevent unexpected obstacles from derailing your closing.
Validate The Data: Ensure your financials withstand the most rigorous institutional due diligence.
The ROI is Simple
Protect Your Enterprise Value
Your business's value shouldn't be dictated by a classification error. When you're at the finish line, the 'Multiplier Effect' works both ways—we make sure it works for you. By restoring your EBITDA through a forensic lens, we ensure your exit check reflects the reality of your success. Don’t leave your equity on the table; ensure your numbers are as strong as the business you’ve built.
