- External factors are as important as internal ones when determining best timing.
- M&A valuations of equipment leasing companies have been favorable since 2013.
- The current favorable M&A market cycle is closer to its end than to its beginning.
- There is wide-spread interest in leasing company acquisitions from banks.
- This includes small- and mid-sized banks with little or no previous leasing activity.
- Banks not only are eying middle- and large-ticket markets; small-ticket and vendor leasing are attractive.
- Independent leasing companies and private equity firms are pursuing acquisitions.
- The “right” buyer may or may not be the one offering the largest purchase price.
In this article we will address the following important considerations for owners who are considering the sale of their equipment leasing and finance companies:
- When is the best time to consider a sale?
- Who are the most likely acquirers?
- What factors should be considered in selecting the “right” buyer?
Owners of an independent equipment leasing company, whether they are executives of the company or an investor such as a private equity firm, usually will have an eventual need to sell the business to obtain liquidity. Most potential sellers believe that the right time to sell should be dictated by when the company can demonstrate a good growth record in profits and lease originations. However, they often fail to realize that external factors can be at least as important in achieving a good price for the business.
The sale prices of privately owned companies generally have a high correlation with the market valuations of public companies. When the stock market is at historically high valuation levels, as it currently is, the sale prices of privately owned companies usually reflect relatively high price/earnings multiples. Conversely, when the stock market meltdown occurred during the 2008-2009 Great Recession, a number of independent equipment leasing companies were attractive acquisition candidates but the market prices they could sell for were unattractive to the owners.
The valuations of public and privately-owned companies are highly dependent on general economic conditions, the confidence level of businesses, consumers and investors, and interest rate trends. When interest rates rise, acquirers have a higher cost of capital and must increase their return on investment requirements, which reduces the price they are willing to pay for an acquisition. A stagnant or declining economy not only can adversely affect business valuations and reduce the demand for acquisitions, it can portend lower lease originations and higher delinquencies for an equipment leasing company. Therefore, it is likely that we will again see acquisition prices plummet and merger and acquisition activity slow down during the next recession and major stock market decline.
One of the best periods we have seen for M&A valuations of equipment leasing companies in decades is the current one, which began in 2013. However, market valuations have always been very cyclical, and it is likely that the current favorable M&A market cycle is closer to its end than to its beginning. This is likely why we have seen in 2017 a strong interest in selling from a number of independent equipment leasing and finance companies.
Bank-owned leasing businesses have an obvious advantage over independent leasing companies with their lower cost of funds and higher leverage ratios. Therefore, many independent leasing companies have a long-term goal of being acquired by a bank. Never have we seen such wide-spread interest in leasing company acquisitions from the banking community as we have seen in the last few years. This interest is not just from the major banks with a well-established presence in leasing; many small and mid-sized banks with little or no leasing activity are now seriously considering a leasing company acquisition as a good strategic move.
Banks traditionally have been most attracted to the middle and large-ticket leasing markets, especially companies originating the majority of their business directly from lessees. We are now seeing a greater interest in the small-ticket leasing market, particularly in the vendor leasing business, from banks.
Banks have not been the only businesses stepping up their equipment leasing acquisition activities. Several independent leasing companies have been pursuing acquisitions to expand and diversify their businesses and to utilize more favorable funding arrangements.
Although private equity firms are generally at a disadvantage regarding funding costs for acquired companies, a number of them have been pursuing equipment leasing companies in specialized markets. Several private equity-backed leasing companies have recently made add-on acquisitions to diversify their leasing markets. Private equity firms may offer terms that are more attractive to independent leasing company entrepreneurs, including potentially lucrative earn-out arrangements and/or allowing the owners to retain a minority interest in the business. Private equity firms usually have a three- to seven-year time horizon for liquidating investments, and they like to align the interests of the acquired company’s management with theirs in maximizing the value of the business in a subsequent sale.
Selecting the “Right” Buyer
Most sellers would suggest that the “right” buyer is the buyer who comes up with the largest upfront purchase price but it is also important to consider who may be the best long-term partner to help the business achieve its growth goals and objectives. This is especially applicable to owners/managers who want to continue to guide the business after the acquisition and/or owners who have a deep concern for the future well-being of their employees.
Following are some questions that a seller may want to ask interested acquirers.
- What is the buyer’s corporate culture and how will it impact the acquired company?
- What are the terms of employment and non-compete agreements that the buyer expects the acquired company’s owners and senior management to sign?
- What are the buyer’s expectations on future salaries, incentive compensation and sales commissions for employees of the acquired company?
- Will the acquired company be able to continue to operate the way it has in the past or will it be subject to significantly more regulation and controls?
- How will the acquired company’s operating model be changed?
- If the buyer has acquired other companies, how successful have they been?
- What will be the availability and cost of capital for the acquired company?
- Does the buyer have the financial strength to provide for the acquired company’s anticipated future capital needs?
- What changes will be made in the credit approval parameters and process?
- Will the buyer want to centralize functions such as treasury, accounting, information technology, human resources, and legal?
- What synergies and support from the buyer will aid the acquired company’s sales and marketing efforts?
- What is the buyer’s long-term strategy and how will this impact the acquired company and its employees?
The principals of The Alta Group’s Merger and Acquisition Advisory Practice have provided advisory services on the sale of over 200 equipment leasing and financing businesses. If you have any questions on the topics discussed in this article, do not hesitate to contact Jim Jackson (email@example.com; 978-987-0539) or Bruce Kropschot (firstname.lastname@example.org; 239-260-4405).