January 2014 – Issue 1

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Rapid progress

Industry insiders and investment bankers agree that they are bullish on the fundamentals underpinning the growth of the MCA industry. So, does the $100 million valuation of RapidAdvance mean that other blockbuster MCA acquisitions may soon be announced? Not so fast say some industry skeptics.

The naysayers say that there may be some fundamental differences between RapidAdvance and how some other, less reputable MCA firms are set up.

The primary difference RapidAdvance enjoyed was a credit facility through Wells Fargo. That credit line gave Rapid access to inexpensive capital, lowering their overall cost of doing business, and meaning they didn’t need to pursue their capital from hedge funds or other parties who were expecting double-digit returns.

Another key difference was their investment in data analytics and technological infrastructure.

The question for MCA firms looking to cash in on the momentum of RapidAdvance’s deal appears to be whether they can show they have true enterprise value and business fundamentals, rather than some cash flow and a nice lifestyle business.

Another question is what metrics should be used to come up with a valuation for MCA firms. One temptation is to rely on a multiple of EBITDA, or earnings before interest, tax, depreciation and amortization. And based on that measure, many MCA firms appear to be shining stars.

But critics contend that EBITDA is an improper measure because the interest component is a significant portion of the merchant cash advance cost structure. 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.

By that way of thinking, basing enterprise value on a multiple of cashflow or even pre-tax profit after interest expense may be a better approach.

Gurandiano said that perhaps the best tool for valuing a merchant cash advance company is growth.

“The market is driven by growth,” Gurandiano said. “Any company that can exhibit outsized growth will attract attention.”

That said, even the skeptics agree with the bulls — the MCA space is poised for huge future growth.

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