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Can we use EBITDA to value leasing & rental and savings & loan businesses?

smu tony's Profile

Most PE firms buy and sell manufacturing or services companies and they predominantly use EBITDA to valuate the targets. When buying leasing & rental or savings & loan businesses, is it still appropriate to use EBITDA? Would great appreciate your insight.


Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

You should the EBITDA multiple for any type of operating business. For a S&Ls, banks or other lenders, the metrics S/B profitability, interest rate spread, ROA and quality of loan portfolio.

smu tony
Title: partner
Company: ponyexpress
(partner, ponyexpress) |

This is very helpful Joseph. Thank you. What is S/B profitability? How do you measure loan quality - is there a certain metric?

Jim Schwartz
Title: Corporate financial advisor
Company: Wabash Financial Strategies
(Corporate financial advisor, Wabash Financial Strategies) |

S/B profitability = "Should Be" profitability (as one of the measured metrics).

For loan/lease quality matters, I suggest you do some basic research. The metrics likely will include delinquency measures, reserve and write-off trends, loss-to-liquidation ratio stats, etc. It's important to also look at qualitative practices and do some benchmarking. Thus, you'll want to evaluate underwriting standards and consistency of applying these standards; collection practices and effectiveness; existence of and adherence to clearly documented write-off policies; quality and consistency of documentation; and responsibility/approval/frequency of exceptions and modifications to policies, procedures and contracts. If it's not possible to demonstrate consistenty applied standards and practices, then reliance on past performance as a predictor of future results is especially problematic.

If the target is a bank or S&L, written evaluations by the respective regulators can provide siginficant insights about potential weaknesses. Also look at funding sources and their reliability. A lending or leasing business without adequate and competitive funding is a boat anchor.

In a leasing business, understanding the structure (e.g., short-term rental, $1 option or fair market value contracts) is critical. If FMV, for example, there are many tax ramifications. It's also important to evaluate residual setting and realization results, equipment remarketing and lease renewal practices, and portfolio concentration risks to name a few. Seek help from a trade group such as the Equipment Leasing and Finance Association, for example. Also consider hiring experts to help evaluate and handle due diligence. There are some small firms with lengthy track records in leasing industry M&A work and similar providers in the banking / S&L industry.


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