Equipment Leasing Broker Business Plan - PDF by gbp12616

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									             SO, YOU WANT TO SELL YOUR LEASING BUSINESS

                                  By Bruce Kropschot


There comes a time in the life of most entrepreneurial business owners when he or she
starts to think seriously about an exit strategy. The owner may be contemplating
retirement, doing estate planning or having health concerns. Sometimes the owner just
becomes bored with the business or is suffering from burnout. In other cases, business
factors, such as severe competition or lack of capital, may make a sale advisable or even
imperative.

Individual owners of equipment leasing businesses face special challenges in selling their
business in today’s environment. Small leasing companies and lease brokerage firms
face their own unique issues in finding a buyer willing to pay a premium value for the
business. This article will provide some historical perspective to the acquisition market
for leasing companies. I will then share with you some tips that I have found to be
important in my many years of helping leasing company owners maximize the fruits of
their labor; I hope they will help you in planning your exit strategy.

Historical Perspective on Leasing Company Acquisitions

The 1980s and the 1990s were decades of tremendous consolidation in the equipment
leasing industry. The proverbial whales seemingly had an insatiable appetite for eating
the minnows. The three largest equipment finance and leasing companies in the U.S., GE
Capital, CitiCapital and CIT, are the surviving entities of what once were dozens of
independent equipment leasing companies. Much of the earlier acquisition activity in the
leasing industry involved either the large diversified financial service companies buying
niche businesses or new entrants to leasing acquiring a platform business. The
acquisition of small leasing companies and lease brokers did not become popular until the
mid 1990s.

The acquisition market necessarily follows the law of demand and supply, and the market
is most vibrant when there are both many interested buyers and many motivated sellers.
Of course, the relative motivation of a seller is generally heavily dependent upon the
selling price that can be obtained, although the need for competitively priced funding has
become a contributing factor for many sellers.

Two factors combined in the mid 1990s to make small leasing companies and lease
brokers more attractive to buyers. First, lease securitization became a popular method for
larger leasing companies to finance small ticket leases, and many of these companies
used gain on sale accounting to recognize much of their profits on securitized leases at
the time of securitization. Second, the initial public offering market was receptive to
leasing companies, and a number of small ticket lessors took advantage of this
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opportunity to access the public equity market. Such companies included Granite, First
Sierra, T & W, LINC and UniCapital, all of which were active acquirers of small leasing
companies and lease brokers and all of which initially used gain on sale accounting for
lease securitizations. These 5 companies made approximately 60 leasing company
acquisitions in the mid to late 1990s.

The acquisition of leasing businesses that had previously sold or brokered most of their
leases was particularly attractive to the newly-public lessors because they could finance
the leases originated by the acquired companies at substantially lower interest rates
through lease securitizations. This advantageous financing and gain on sale accounting
allowed the acquirers to recognize greater profits at the time of securitization than the
acquired companies had recognized upon their sale or brokering of leases. However, in
the second half of 1998 the gain on sale accounting method lost favor among investment
analysts who follow leasing companies, and the 4 newly public leasing companies
(excluding Granite, which was acquired by Fidelity National Financial in early 1998 and
closed down in 2001) succumbed to pressure from the investment community to
discontinue the use of gain on sale accounting for securitizations. This greatly reduced
these companies’ earnings and had a dramatic adverse impact on their stock prices.

The diminished stock values of First Sierra, LINC, T & W and UniCapital and the
inability to show immediate increases in earnings per share by using gain on sale
accounting for acquired companies’ lease originations combined to bring the small
leasing company acquisition binge to an abrupt halt. Soon their rapid growth and
problems related to the management of the growth led LINC, T & W and UniCapital into
bankruptcy; SierrraCities.com (formerly First Sierra) survived by being acquired by
American Express for less than its IPO price. The demise of most of the aggressive
acquirers of small leasing companies and lease brokerage firms ended the short era of
huge acquisition premiums being paid for such businesses.

The market value of leasing companies that have little or no retained lease portfolio is not
likely to ever recover to the acquisition pricing levels experienced from 1995 to 1998.
Sellers of such companies must realize that most of their earnings are now recorded at the
lease inception, but most acquirers will recognize income over the life of the lease. Thus
most acquired companies without a portfolio will produce a loss for their parent company
in the first year or two. This is unacceptable to many acquirers, and those acquirers
willing to accept start-up losses will certainly discount their acquisition valuation
accordingly.

Who are the acquirers of leasing companies today? The large leasing companies are
already in most of the markets they desire to be in, and many of the major bank leasing
companies are busy integrating the leasing businesses that came together in the wave of
bank consolidations. Despite the reduced demand for leasing company acquisitions and
prices that are down from the peak, acquisition prospects for successful leasing
businesses are not totally negative. A number of community and regional banks are
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exploring opportunities in the leasing industry for the first time, and they could be good
matches for smaller privately owned leasing companies and lease brokerage firms. Many
such banks are very liquid, and the yields available in equipment leases are attractive to
them. Also, private equity groups and venture capital firms have substantial funds to
invest, and a few of these groups have recently considered investments in well-run
equipment leasing businesses. For lease brokerage firms, other lease brokers or small
leasing companies are potential acquirers, although an acquirer in the same business
generally does not pay as high of a price as a buyer that does not have similar expertise.

Timing of the Sale

Since the business owner often does not know in advance when a sale of the company
may become desirable or necessary, the owner should constantly be prepared for that
eventuality. Furthermore, by planning for the eventuality of a sale as part of the
company’s strategic planning process, the owner will be better able to optimize the
timing of the sale. The owner who retains timing flexibility is better able to maximize
the value of the business than the owner who is forced to make a quick sale for personal
or business reasons.

The optimum time to sell a business is generally thought to be when earnings are
approaching their peak. However, it could be a mistake to wait until the company’s
growth rate has slowed down and it no longer has the momentum that justifies a high
price/earnings multiple. Buyers are most interested in companies that have several years
of impressive growth and good prospects for the future. The owner should also
remember that most buyers would want the top one or two executives to commit to a
three to five year employment agreement. The value of the company will be diminished
if an owner/CEO waits until retirement to sell.

The timing of a sale can be influenced by factors not directly related to the company
being sold. In periods of high interest rates, buyers generally pay less for companies than
when interest rates are low. Similarly, demand for acquisitions is usually less during
recessions, causing a softening of selling prices. Competitive conditions and industry
trends can also be important to a seller in determining the appropriate time to sell. A
business owner who has planned ahead will likely have a business that is ready to sell and
more attractive to buyers than the owner who has not prepared for an eventual sale.

Preparation for the Sale


Following are some suggestions for owners on how to prepare their equipment leasing
company for sale, whether that sale is expected in one year or ten years:
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•   If necessary, strengthen the management team. Much of the premium the buyer
    pays is for management expertise. Make sure there is both quality and depth of
    management, including one or more individuals with the potential to succeed the
    chief executive officer. (Of course, this may not be possible in a one-person lease
    broker business.) Buyers fear that an owner/CEO will not be as effective or as
    motivated to stay with the company after receiving a substantial amount of cash
    upon the sale of the company.
•   Try to sustain a stable growth pattern. Buyers are much more likely to pay a
    premium based on projected future results if the historical trend is one of steady
    growth instead of many ups and downs.
•   Become an expert in one segment of the market. Equipment leasing companies
    that specialize in one or a few market niches and service those niches well attract
    a wider range of prospective acquirers and sell for a higher premium than
    companies that are generalists. Also, companies that provide value-added
    services are more attractive than those that are in a commodity-type business.
•   If you do not have a lease portfolio, try to develop non-recourse or recourse
    borrowing relationships so that you can retain a portion of your lease originations.
    Some funding sources will provide servicing, and there are also firms that provide
    servicing on an out-sourcing basis. However, you should develop your own
    servicing capability as soon as your portfolio reaches a size where it is
    economical to do so. The more capabilities you have in-house, the more valuable
    you will likely be to an acquirer.
•   Obtain an audit of the year-end financial statements by a CPA firm if you have a
    retained lease portfolio; a review report by a CPA firm is likely to be sufficient
    for a company that does not have a portfolio. The CPA firm does not need to be a
    large national one, but it should have an established reputation in your local area,
    and the CPA responsible for your relationship should understand accounting and
    tax rules applicable to equipment leasing businesses.
•   Develop good systems for financial statement preparation and management
    reporting, consistent with the size and needs of your company. Prospective
    acquirers expect to receive timely interim financial statements and management
    reports. Since much of the buyer’s due diligence efforts will be directed to
    financial analysis, the seller’s credibility can be heavily influenced by the quality
    of the accounting personnel and financial reporting systems.
•   Use the preferred accounting methods, and err on the side of conservatism. Most
    prospective buyers will do enough due diligence work to uncover aggressive
    accounting practices for such items as bad debt reserves and residual valuations,
    so don’t be embarrassed by insupportable accounting assumptions.
•   Prepare detailed annual budgets and long-range projections. It is difficult to get
    where one is going without a road map. Every equipment leasing company, even
    one-person firms, should develop the discipline of preparing business and
    financial plans. The long-term strategic plan should be tied into the owner’s exit
    strategy.
•   Have an attorney experienced in equipment leasing review your lease
    documentation and internal procedures to make sure they adequately protect the
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       company’s interests. More than one leasing company acquisition has fallen
       through because the buyer was uncomfortable with the lease documentation.
   •   As the time to sell the business approaches, retain a professional merger and
       acquisition advisor who understands the equipment leasing business and who has
       sold other equipment leasing companies. The experienced advisor can provide an
       indication of the company’s probable market value, recommend a deal structure
       that will best fit the owner’s needs, introduce prospective acquirers who are
       interested in acquiring equipment leasing companies, market the company’s
       strengths and growth potential and guide the owner through the selling and
       negotiation process. Most prospective acquirers have experience in acquiring
       other companies, whereas most sellers sell only once. Thus, sellers that do not
       have an experienced merger and acquisition advisor guiding them can be at a
       distinct disadvantage in the selling process.

Getting your equipment leasing business in the best position for a possible sale is not an
easy task. However, following the recommendations outlined above will not only make
your business more valuable to a buyer but should also improve your business’s long-
term prospects. You can be sure that competition for business will become even more
intense in the coming years, and small companies that do not have the capital availability
or borrowing costs of the major companies will be at a competitive disadvantage.
However, the highly focused small leasing company that is always striving for
improvement can continue to be successful. So, regardless of the timing of your exit
strategy, as the owner of a small leasing business, you should always be looking for ways
to make your leasing company more valuable.


                                 * * * * * * * *


Bruce Kropschot is President of Kropschot Financial Services of Vero Beach, Florida, a
merger and acquisition advisory firm for the equipment leasing and financing industry,
which he founded in 1986. Mr. Kropschot has been active in the equipment leasing
industry for 30 years and has served as a senior executive of 3 large leasing companies.
Kropschot Financial Services has arranged the sale of over 130 equipment leasing and
specialty finance businesses and numerous portfolios. The firm also arranges lease
funding, subordinated debt and equity for leasing companies and performs business
valuations. Mr. Kropschot is a CPA and holds BBA and MBA degrees in accounting and
finance from the University of Michigan. He has served on the Board of Directors of
ELA, EAEL and UAEL and is also a member of NAELB.

								
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