Hi guys,
I have a quick question on how to treat capital leases in LBO models please. I saw from a Mergers and Inquisition video that capital leases should be included in EV , because “what’s included in EV must be added back in Ebitda”, and vice versa. In cases where firms don’t break out capital lease specific interest expenses and D&A expenses, I think the above analysis makes sense.
In an LBO model however, do you include capital lease as a debt in Sources and Uses? I’m conflicted/confused because, 1) if you don’t include it, then the multiples for the deal may be even lower than the company’s current EV/Ebitda multiple ( if capital lease is much larger than traditional debt), 2) if you include it, it also seems strange as you don’t need to actually repay it?
Appreciate your thoughts, thank you!
Capital leases are debt so they need to be included in enterprise value. They typically are not repaid at closing so the rollover of the capital lease is just treated as both a source and a use.
Thank you Bootstrap! In case of a large amount of capital lease, would you find it strange that the Ev/Ebitda (debt plus equity) at which the deal is done, is a lot lower than the Ev/Ebitda the business is currently at (since the deal multiple doesn’t include capital lease)? Thanks!
The capital lease is included in EV, so it would be included in the deal multiple.
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