Under the multiple approach, de ondernemingswaarde in the case of many operating leases can be substantially lower than in the case of financial leases.
Entrepreneurs have to deal with investment issues on a regular basis. Often, for various reasons, they choose to arrange the financing of the investment on the basis of a lease construction. This spreads the payment obligation over time and allows the entrepreneur to continue to use his cash position to finance working capital and further growth, for example.
Operational and financial lease
A common form of leasing is operating lease. With this form of leasing, nothing is capitalized on the balance sheet. The periodic lease liability is recognized in the income statement as part of operating expenses. Operating income is reduced by the same amount. The future lease expenses are effectively an off-balance sheet liability.
A form of lease that is included in the balance sheet is financial lease. Here, the company takes out a loan for an object and acquires economic ownership. As a result, the lease object is included on the debit side (assets) and the lease amount on the credit side of the balance sheet (liabilities). The installment amount payable consists of two parts; interest and repayment.
In fact, it is up to the entrepreneur to determine the method of financing (off-balance versus on-balance). When valuing the business, theoretically, the method of financing should have no impact on the value of the shares.
Valuation methods
A company can be valued in different ways. The Discounted Cash Flow method is generally considered the theoretically most correct valuation methodology. This methodology is based on the future cash flows (cash flows) a company is expected to be able to generate. It does not look at (bookable) profits, but at cash flows released from operations.
Cash flows are defined as the profits and depreciation released from operating activities less investments in fixed assets and working capital. The future expected cash flows must then be discounted to the valuation moment to arrive at the enterprise value. To calculate the equity value, interest-bearing debts are deducted one-to-one from the calculated enterprise value and (excess) cash and cash equivalents are added to this value.
In practice, nowadays we see that de ondernemingswaarde is (for convenience) regularly determined on the basis of a multiple times the operating result. Because debt is then subtracted from this, the method of financing can have an impact on the calculated value of the shares in case of insufficient in-depth analysis.
Valuation issue
Indeed, with the multiple approach, de ondernemingswaarde can be substantially lower in the case of many operating leases than with financial leases (because the periodic lease obligation is included in the costs). In the case of a financial lease construction, the lease amount on the balance sheet will be deducted euro-for-euro from de ondernemingswaarde.
Therefore, the valuation of a company should always take this fact sufficiently into account in order to arrive at a correct equity valuation. Advisers with experience in valuing shares can be of assistance in this regard.
