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.
Can we use EBITDA to value leasing & rental and savings & loan businesses?
Answers
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.
This is very helpful Joseph. Thank you. What is S/B profitability? How do you measure loan quality - is there a certain metric?
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
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