Cleaning Operating

Lease (Dutch GAAP)

Sunday November 15th 2020
Joris Kersten MSc BSc RAB/ Netherlands
Kersten Corporate Finance (M&A)
Kersten Corporate ➢ Consulting in M&A and Valuation
Finance ➢ Training in Valuation and Financial Modelling
➢ Address: Gording 67 – 5406 CN Uden – The
www.joriskersten.nl Netherlands
www.kerstencf.nl
➢ Joris@kerstencf.nl / +31 (0)6 8364 0527
Trainer/ Consultant

➢ Joris Kersten (1980);

➢ Independent M&A
consultant;
➢ Independent Trainer Globally
in Valuation and Financial
Modelling;
➢ Co-owner real estate DIY
sector;
➢ Trainer Financial Modelling at
AMT Training London, New
York and Hong Kong;
➢ Trainer Corporate Finance at
Leoron Institute Dubai/ UAE.
 Trainer/
Consultant
➢ Adjunct Lecturer Corporate Finance &
Accounting at: TIAS Business School,
Nyenrode University, Maastricht School
of Management (MSM);
➢ Adjunct Lecturer Corporate Finance &
Accounting at partner Universities of
MSM at: Peru/ Lima, Mongolia/
Ulaanbaatar, Surinam/ Paramaribo and
Kuwait/ Kuwait City.
➢ Education: MSc Strategic Management &
BSc Business Studies, both from Tilburg
University;
➢ Registered Advisor Business Acquisitions
– Tax & Legal (RAB);
➢ Degree to teach in Universities;
➢ Registered Valuator (RV) – Right now
following this education/ training myself.
 6 days - Business Valuation & Deal Structuring.
Face to face
training 7, 8, 9, 10 and 12, 13 April 2021.

Registration at Location: Hotel Van De Valk Uden/ The Netherlands.

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I am very happy to let you
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Topic

How to adjust for “operating

lease” (under Dutch GAAP)

Source used:
Dealing with operating leases in valuation (1999). Aswath Damodaran. Stern
School of Business New York.
Operating lease and
valuation: An introduction
As mentioned, I am from the
Netherlands.
And under Dutch GAAP (the Dutch
bookkeeping/ accounting rules) we can
still put “operating lease” as an expense
in the P&L.
And we can keep the debt involved with
the operating lease “off balance” for non-
listed firms.
Operating lease and
valuation: An introduction
This in contrast to the IFRS (the
European bookkeeping/ accounting
rules for “listed” firms), since IFRS 16
tells us to show the debt involved
with lease on the balance sheet.
Operating lease and
valuation: An introduction
In the Netherlands I still get questions
from professionals on how to treat
“operating lease” in valuations.
And this specific for non-listed firms with
annual reports under Dutch GAAP.
So I have decided to write this blog about
it.
Operating lease and
valuation: An introduction
The source used for this blog is the
classic article of “Aswath Damodaran”:
• Dealing with operating leases in
valuation (1999). Aswath Damodaran.
Stern School of Business New York.
In case you have not read the article, it is
highly recommended!
Operating lease in the
P&L
Leasing is an alternative of borrowing
money and buying the assets.
This also means that lease payments are
financial expenses and not operating
expenses.
And this obviously will have an impact on
income, debt and overall profitability.
Operating lease in the
P&L
So let’s take a look at how we need to
adjust “operating lease” since we can still
find this expense in annual reports under
Dutch GAAP (in contrast to IFRS).
Operating lease capital
adjustment
When operating lease is considered a
financing expense, then the present
value of the future lease payments has to
be treated like “debt”.
To convert operating lease commitments
into an equivalent debt amount we need
to discount them back to the present.
And here fore we use the pre-tax cost of
debt of the company.
Operating lease capital
adjustment
The book value of equity of the company
is unaffected by this!
So the adjusted book value of capital =
• Book value of capital + present value of
future (operating) lease payments.
Operating lease income
adjustment
If operating lease expenses represent
fixed commitments for the future, then
they have to be treated as financing
expenses and not operating expenses.
This will have a big impact on operating
income since current “operating lease”
expenses all sit in the operating
expenses.
Operating lease income
adjustment
So taking operating lease out will
increase the operating income!
Let’s take a look at the formula on how to
calculate this:
• Adjusted pre-tax operating income =
EBIT + imputed interest expenses on
capitalized lease.
Operating lease income
adjustment
But moving all “operating lease” costs to
below EBITDA should have no effect on “net
income”.
This since we change the operating lease
amount to:
1. Interest;
2. Depreciation.
And both items are “above” net income (so no
effect in the end).
Operating lease income
adjustment
The only thing that can happen is that
there are “timing effects” with the net
income earlier in the years being lower,
and later in the years being higher as a
result of the re-categorization.
Operating lease income
adjustment
So the net income after the adjustments
for operating lease will look as follows:
• Net income = net income + operating
lease expenses – imputed interest
expense on capitalized lease –
depreciation on capitalized lease asset.
Operating lease free cash
flow (FCF) adjustment
When operating lease expenses are
treated as financing expenses not
only operating income is affected but
also the “net capital expenditures”
(capex).
Operating lease free cash
flow (FCF) adjustment
So to be consistent with the
treatment of operating lease as
financing expenses, also specific
capital expenditures need to be
taken into account.
Operating lease free cash
flow (FCF) adjustment
We do this by looking at the present
value of lease expenses over time.
And then we take the yearly “delta” of
the present value of the lease expenses
as a capex.
Let’s show this with a formula:
Net capex (t) = present value operating
lease (t) – present value operating lease
(t – 1).
The effect of “cleaning
operating lease” on
discounted cash flow value

Firms with increasing operating lease

expenses over time will have net capital
expenditures reflecting this growth.
The final effect on free cash flow (to firm)
of treating operating lease expenses as
financing expenses will depend on two
factors:
The effect of “cleaning
operating lease” on
discounted cash flow value

1. The reclassification of "operating

expense" to "finance expenses" will
increase the free cash flow to the firm;
2. Any increase in the present value of
operating lease expense over time will
have a negative effect on cash flow
because it will be treated as an
additional capex.
The effect of “cleaning
operating lease” on
discounted cash flow value

And in the end there is no effect on free

cash flow (to equity) with this
reclassification (operating lease expense
to financing expenses).
The effect of “cleaning
operating lease” on
discounted cash flow value

This because the increase in “capital

expenditures” (created by the change in
present value of operating lease
expenses) will be exactly offset by the
increase in “net debt” created by this
reclassification.
The effect of “cleaning
operating lease” on
discounted cash flow value
Converting operating lease expenses into
financing expenses affects the firm by
changing:
1. Operating income;
2. Net capital expenditures (capex);
3. Level of debt (and the “cost of
capital”/ WACC).
Concerning valuation, we look at the
“enterprise value” (EV).
The effect of “cleaning
operating lease” on
discounted cash flow value

We calculate this EV with the modified

inputs and then we take out the “net
debt”.
And obviously net debt includes the debt
associated with “operating lease” as
well!
The effect of “cleaning
operating lease” on
discounted cash flow value

And now we can conclude that changing

operating lease into a financing expense
has no impact on the equity value.
When we value with “multiples” then
this is another story, so let’s now look at
that situation!
Operating lease
adjustments to multiples
Many of the same issues as we have
discussed before also apply to “valuation
multiples”.
“Multiples” are used all over the world to
value companies relatively easy.
Operating lease
adjustments to multiples
If the multiple is an “equity multiple”
(e.g. price/ earnings or price/ book value)
then there should be no effect from re-
categorizing operating lease.
Operating lease
adjustments to multiples
But if the multiple is on firm value, in
other words on EV, than you really need
to be careful!
We all know the multiple:
• Enterprise value/ EBTIDA.
When we have re-categorized operating
lease this would look as follows:
Operating lease
adjustments to multiples
• Enterprise value/ EBITDA = (Market
value equity + Market value Debt +
Present value operating lease
payments) / (EBITDA + operating lease
payments expenses)
Operating lease
adjustments to multiples
Whether the EV/ EBITDA multiple will
increase, or decrease, depends on
whether the “un-adjusted” EV/ EBITDA
multiple is greater than, or lesser than,
the ratio of the “present value of
operating lease expenses” to the “annual
operating lease expense”.
Operating lease
adjustments to multiples
The implications for analysis where firm
value multiples are compared across
companies can be profound in any of the
following scenarios:
1. When some firms lease assets and
other firms buy their assets;
2. When some firms treat leases as
capital leases while other firms qualify
for operating leases.
Operating lease
adjustments to multiples
In both situations converting (adjusting)
operating leases to equivalent debt will
make EV multiples comparable!
So the rule with “financial statement
analysis” and “valuation” is to always
adjust for operating lease!
Operating lease
adjustments to multiples
Especially with multiples it is important
to adjust for “operating lease” first!
This is not an issue anymore with IFRS
(because of IFRS 16), but for Dutch
companies under Dutch GAAP this still
needs to be done, as mentioned at the
start from this article!
 Do not hesitate to contact me with
End any questions:

Any Questions ??
➢Joris@kerstencf.nl
 Source used

Dealing with operating leases in valuation (1999).

Aswath Damodaran.
Stern School of Business New York.
 6 days - Business Valuation & Deal Structuring.
Face to face
training 7, 8, 9, 10 and 12, 13 April 2021.

Registration at Location: Hotel Van De Valk Uden/ The Netherlands.

joriskersten.nl or email
Price 3900 euro ex vat. AND ONLY 2900 euro ex vat when
joris@kerstencf.nl
you book before March 1st 2021 (early bird discount).
I am very happy to let you
know that:

My 6-day "Business Valuation

& Deal Structuring" training
(39 hours) now qualifies for PE
points (permanent education)
for Registered Valuators (RVs)
from the NIRV (Dutch Institute
for Registered Valuators)!
Kersten Corporate ➢ Consulting in M&A and Valuation
Finance ➢ Training in Valuation and Financial Modelling
➢ Address: Gording 67 – 5406 CN Uden – The
www.joriskersten.nl Netherlands
www.kerstencf.nl
➢ Joris@kerstencf.nl / +31 (0)6 8364 0527
Job vacancies
Introduction: Job vacancies
Kersten Corporate Finance (KCF) is a boutique
style corporate finance consulting firm
founded by Joris Kersten (1980) five years ago
in 2015.
The office of KCF is located in Uden, a middle
sized town in The Netherlands.
This at about 30 minutes by car east from city
Den Bosch and 30 minutes north of city
Eindhoven.
Job vacancies
Accidently founder Joris was asked to
provide training in Business Valuation,
Financial Modelling and Mergers &
Acquisitions in The Netherlands at banks
and financial institutions.
But soon (due to social media/ linkedin)
Joris was providing training in Corporate
Finance all over the world.
Job vacancies
This at the biggest (“bulge bracket”)
investment banks in New York, London,
Hong Kong and the Middle East.
And also at Universities over the globe,
for example in Peru/ Lima, Mongolia/
Ulaanbaatar, Surinam/ Paramaribo,
Kuwait/ Kuwait City etc. etc.
Job vacancies
Now due to Covid-19 flying/ travelling
came to a stop, so KCF decided to move
back to its core business:
➢Consulting/ deal making in M&As.
This for SMEs (small & medium sized
enterprises) in The Netherlands.
Job vacancies
Activities KCF:
➢Buy side M&A consulting of SMEs in The Netherlands;
➢Sell side M&A consulting of SMEs in The Netherlands;
➢Business Valuations in The Netherlands/ Globally;
➢Financial Modelling in The Netherlands/ Globally;
➢Attracting financing (banks loans/ private equity) in The
Netherlands;
➢Providing a 6 day valuation training 2 times a year in
The Netherlands. During spring at town: Uden and
during Autumn at Amsterdam South (Zuidas).
Job vacancies
1 or 2 Corporate Finance analysts needed
Note: Analyst needs to be fluent in Dutch with
both speaking and writing (this on top of
English).
KCF works mainly for Dutch clients with
annual reports and documents in the Dutch
language which makes being fluent in Dutch
an absolute must!
For increased work in M&A consulting KCF is
looking for 1 or 2 Corporate Finance analysts.
Their work will consist out of:
Job vacancies
➢Conducting business valuations in Microsoft excel
for SMEs in The Netherlands. Think of valuation
with “multiples”, discounted cash flow valuation
(DCF) and leveraged buyout analysis (valuation with
check on internal rate of return (IRR) with certain
financing structure);
➢Writing “information memoranda” for sell-side
M&A projects;
➢Searching and selecting candidate buyers (e.g.
strategic parties, private equity parties etc.);
➢Searching and selecting candidate sellers (target
M&A companies);
Job vacancies
➢Providing (helping with) corporate finance
input to Letters of Intent (LOIs);
➢Providing (helping with) corporate finance
input to Share Purchase Agreements (SPAs);
➢Providing (helping with) corporate finance
input for fiscal issues (tax issues in M&A);
➢Coordinating (helping with coordinating)
due diligence.
Job vacancies
Characteristics of the Corporate Finance analyst
For this job you need to possess or have the following
characteristics:
➢A Master of Science (MSc) degree in Finance or
Accounting;
➢0 to 3 years working experience in Corporate Finance.
So you either come straight from University with a
master in Finance/ Accounting, or you have a few years
working experience in Corporate Finance;
➢A past internship in M&A at an Investment Bank, M&A
boutique or Corporate Finance department of an
Accounting firm or corporate is a pre;
➢Extra-curricular activities conducted within the field of
M&A and/ or Corporate Finance is a pre;
Job vacancies
➢Financial Modelling skills in excel is a pre. But a basic
understanding of Microsoft Excel is enough (you will
learn financial modelling with keyboard excel shortcuts
on the job);
➢Skills to build presentations in power point is a pre. But
a basic understanding of building presentations is
enough (you will learn these skills on the job);
➢Excellent writing skills in both Dutch and English;
➢Excellent speaking skills in both Dutch and English;
➢Living within 45 minutes from town Uden (office
location KCF) is an absolute must since M&A is still
“people business”. So you need to be able to attend at
face to face meetings in Uden very regularly (e.g.
negotiations, client meetings, discussing deal structures
with colleagues etc.).
Job vacancies
What you will get:
➢With this job you will start off with a free 6 day valuation
training of KCF to learn advanced modelling and valuation
skills for the job (training takes place in Spring or Autumn);
➢Market based salary;
➢Bonus based salary based on M&A deal flow;
➢Ability to grow in this relatively young and very ambitious
M&A boutique;
➢Working in a team with high class Investment Banking
valuation techniques with focus on SMEs in The
Netherlands;
➢Working in a highly entrepreneurial team and possibilities to
grow up to ‘partner’ when you work hard and show right
characteristics (e.g. analytical skills, communication skills,
networking skills, entrepreneurial mindset).
Job vacancies
Process of application:
Please write your motivation letter to: joris@kerstencf.nl
Please just type your motivation in the email itself, so no
attachments.
And please provide the link to your LinkedIn profile, so please
no curriculum vitae in attachment, but just link to your
LinkedIn page.
Suitable candidates will be contacted in October/ November
2020.
And the first acquaintance meeting will take place in
December 2020. This face to face at the office of KCF in Uden/
The Netherlands.
Second meeting will take place in January 2021. This face to
face at the office of KCF in Uden/ The Netherlands. And
potentially a third meeting will take place in February 2021.
Starting date job: Quarter 2 of 2021.
Contact
Details

Kersten Corporate Finance

Joris Kersten
Joris@kerstencf.nl
+31 (0)6 8364 0527
www.joriskersten.nl

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