What happens to Company A's EBITDA if it engages in a sale leaseback?

In the context of a sale-leaseback transaction, the correct understanding hinges on how this arrangement affects the company's financial statements, particularly Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).

When Company A engages in a sale-leaseback, it sells an asset (often a property) and simultaneously leases it back from the buyer. This transaction typically results in the company receiving an influx of cash from the sale, but it now has a lease obligation that requires periodic rent payments.

In this scenario, the increased rent expense will reduce EBITDA. EBITDA is calculated by subtracting operating expenses (including rent expense) from revenues. Since the lease payment represents an operating expense that replaces the depreciation and any amortization associated with the owned asset, the shift usually leads to higher overall costs compared to the prior depreciation charges.

Consequently, if the rent expense is higher than the previous depreciation, this will decrease Company A's EBITDA. Thus, the impact of the leaseback leads to an overall decline in EBITDA due to the new, often higher, rent obligations.