March/April 2014 – Issue 2

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EBITDA: A Response to “Wall Street Evaluates Merchant Cash Advance”


The subject of valuations in the alternative business lending space has become a hot topic. In our last issue, writer Michael Giusti contended that EBITDA as a valuation measure of a merchant cash advance company, was not without critics. “For capital-intensive industries, the criticism goes, excluding interest is ignoring a key cost of doing business – kind of like a food company excluding the cost of sugar.”

Chief Editor Sean Murray delved into that argument on his Merchant Processing Resource blog in early February. Citing academics such as Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University and author of several texts on corporate finance and valuations, Murray initially arrived at the same conclusion, that EBITDA is a troublesome measure for alternative business lenders and their merchant cash advance counterparts.

In a 2009 paper by Damodaran titled, Valuing Financial Services Firms, he argues “debt is to a bank what steel is to a manufacturing company, something to be molded into other products which can then be sold at a higher price and yield a profit.”

Craig Coleman, the CEO of ForwardLine, a decade old Woodland Hills, CA-based merchant finance firm, still believes EBITDA has merit. He argued the purpose of the I in EBITDA is to neutralize interest paid on any non-portfolio capital, a way to make an apples to apples comparison between a company that financed its overhead with debt and one that used equity.

His point was that the cost of portfolio capital should never be deducted in an EBITDA calculation. “The cost of our portfolio capital is our cost of funds, so it’s in our Cost of Goods Sold because money is our inventory,” he said.

As Wall Street continues to evaluate this industry, it will be interesting to see which method if any sets a precedent. Rumor has it that some valuations are being priced with a multiple of annual funding volume, a figure that is detatched from earnings. That’s probably a lot more generous than what any other methodology is likely to conclude.

Then again, as the industry blossoms, the appetite investors have for this model appears to be insatiable. A generous price today could be a steal tomorrow. That’s the nature of the beast. DF

Wall Street

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