Appeared in the August 2008 World Leasing News

Since last summer, many equipment leasing and financing companies have been facing difficult decisions because of one of the most serious global credit meltdowns in recent history.  Solid leasing companies with a good track record have found the doors closed to a number of financing options, including securitization.  It matters not that the securitization market disruption was due principally to problems in the consumer sub-prime mortgage market.  Many investors are out of the securitization market, and no one knows when they will return.  In the meantime, the impacted leasing companies have a dilemma – should they look for other financing options, should they reduce their lease originations, or should they look for a strategic partner to acquire or invest in the business?

In recent months, we have seen a number of sizable leasing companies that have pursued one or more of these strategies.  For some of these companies, other financing options have been available, although usually at a higher interest rate.  Furthermore, lenders are reducing their advance rates, thus making it necessary for some leasing companies to seek additional capital to cover their negative cash flow.  Some banks have cut back or discontinued their lending to equipment leasing companies because of loan problems unrelated to leasing or capital constraints within the bank.  Faced with financing limitations and uncertainty as to when the financing markets will return to some semblance of normalcy, several leasing companies have found it necessary to terminate employees and reduce their lease originations because of cash flow and/or earnings considerations.

An option that some companies are reluctant to consider is to seek an acquirer of the business.  However, this can be an attractive alternative for both the owners and the management of the leasing company.  Because of the rapid consolidation of the leasing industry from the late 1980s to the late 1990s, there are not many sizable independent leasing companies remaining.  Quality leasing companies in attractive niche markets continue to be in demand from a variety of buyers, including other leasing companies, financial institutions, foreign investors and private equity groups.  When the right buyer is matched with a compatible seller, it can be a “win – win” for all parties.  The leasing company owners get an attractive purchase price for their equity interests, the leasing company gets access to additional equity and more competitive financing, the management team is allowed to again be in a growth mode and the acquirer has a motivated management team that is eager to demonstrate that they can provide the acquirer with a good return on their investment.

Owners of leasing companies prefer to sell when their business is on a strong upward trend because such timing tends to maximize the company’s valuation.  However in the current unsettled financial markets, potential buyers are well-aware that financial market conditions have adversely impacted many excellent leasing companies.  Thus we are finding that buyers are still willing to pay attractive premiums for companies that have a good business strategy and whose management teams have demonstrated favorable results in the past.  Of course, buyers are seeking to minimize their risk, so they will often propose “earn out” arrangements wherein part of the purchase price is contingent upon future results.  When such earn outs are structured carefully, they can provide selling shareholders and management with substantial upside potential if the company achieves performance targets after the acquisition.  With the improved capital access that an acquirer typically can provide, we have seen many acquired leasing companies greatly exceed their own and the acquirer’s expectations after the acquisition.

Independent leasing companies are not the only ones who can benefit from a sale of the business.  Some leasing companies are owned by parent companies that are having significant problems, creating a distraction and possibly funding difficulties for the leasing subsidiary.  At one time, most major banks had diversified leasing capabilities; now some banks in the U.S. and in other countries do not believe that leasing is a necessary line of business, and they are selling part or all of their leasing activities.  Oftentimes, it would be better for both the parent company and the leasing company if the leasing company is sold.  Another situation that has occurred several times in the past year is when private investors reach the limits of their investment capability; in such cases, it is in the best interests of the leasing affiliate for the investors to either sell their stake in the leasing company or bring in other investors.

Leasing executives in the past have proved their ability to adapt to changes in the tax, accounting and regulatory environments, and well-managed companies will likely survive the current financing crisis.  However, it behooves leasing company owners and management to study all alternatives, and one of those alternatives for many companies should be to explore the possibilities of selling all or part of the equity interests in the company or developing an on-going relationship with a strategic partner. 

by Bruce Kropschot 

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Bruce Kropschot is President of Kropschot Financial Services, a firm he founded in 1986 that has arranged the sale of over 150 equipment leasing and specialty finance companies.  Kropschot Financial Services recently became affiliated with The Alta Group, the only global provider of specialized consulting services exclusively focused on equipment leasing and finance.  Mr. Kropschot serves as managing principal of Alta’s Merger and Acquisition Advisory Division.  He can be contacted at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it