Middle Market M & A Handbook for Investment Banking and Business Consulting
by Marks, Kenneth H.; Slee, Robert T.; Blees, Christian W.; Nall, Michael R.Edition: 1st
Format: Hardcover
Pub. Date: 2012-02-01
Publisher(s): Wiley
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Summary
In-depth coverage in a single handbook of the middle market based on the body of knowledge of the Certified M&A Advisor" credential program M&A advisors have an unprecedented opportunity in the middle market with the generational transfer of wealth and capital being deployed by private equity and corporate investors. Middle Market M&A: Handbook for Investment Banking and Business Consulting is a must-read for investment bankers, M&A intermediaries and specialists, CPAs and accountants, valuation experts, deal and transaction attorneys, wealth managers and investors, corporate development leaders, consultants and advisors, CEOs, and CFOs. Provides a holistic overview and guide on mergers, acquisitions, divestitures and strategic transactions of companies with revenues from $5 million to $500 million Encompasses current market trends, activities, and strategies covering pre, during, and post transaction Addresses the processes and core subject areas required to successfully navigate and close deals in the private capital market Includes content on engagement and practice management for those involved in the M&A business This practical guide and reference is also an excellent primer for those seeking to obtain their FINRA Series 79 license.
Author Biography
KENNETH H. MARKS, CM&AA, is founder and a Managing Partner of High Rock Partners, Inc. He is the lead author of The Handbook of Financing Growth: Strategies, Capital Structure, and M&A Transactions (Wiley). He has been involved as management, advisor, and board member with many emerging growth and middle market businesses.
ROBERT T. SLEE, CM&AA, is Managing Director of Robertson & Foley, a middle market investment-banking firm. He has published over 100 articles on private finance topics in a variety of legal and business journals. He is the author of Private Capital Markets (Wiley).
CHRISTIAN W. BLEES, CPA, CM&AA, is President and CEO of BiggsKofford PC, directing several sectors of the business including the firm's merger, acquisition, and sales practice. He has been involved in over 200 middle market M&A sales transactions.
MICHAEL R. NALL, CPA, CM&AA, is founder and CEO of the Alliance of Merger & Acquisition Advisors, a Chicago-based professional trade association featuring a resource and development center serving more than 600 independent accountants, attorneys, and business advisors. He is an author and recognized speaker on valuation, growth, and sales of middle market companies.
Table of Contents
| Preface | p. xv |
| Acknowledgments | p. xix |
| The Middle Market | p. 1 |
| Private Capital Markets | p. 1 |
| Segmented Markets | p. 4 |
| Why Are Markets Segmented? | p. 7 |
| Capital Providers | p. 9 |
| Owners' and Managers' Views of Risk/Return | p. 10 |
| Buyers | p. 11 |
| Market Activity | p. 14 |
| Valuation Perspectives for the Private Markets | p. 17 |
| Private Business Valuation Can Be Viewed through Different Standards of Value | p. 18 |
| Market Value | p. 21 |
| Fair Market Value | p. 22 |
| Fair Value | p. 22 |
| Incremental Business Value | p. 23 |
| Investment Value | p. 23 |
| Owner Value | p. 23 |
| Collateral Value | p. 23 |
| Book Value | p. 24 |
| Why the Different Versions of Value? | p. 24 |
| Valuation as a Range Concept | p. 25 |
| Value Worlds and Deals | p. 26 |
| An Alternative Valuation Approach | p. 26 |
| Corporate Development | p. 27 |
| Why Acquire? | p. 28 |
| The Dismal Ds | p. 29 |
| Alternatives | p. 30 |
| The Acquisition Process | p. 31 |
| The Pipeline and Filter | p. 32 |
| Approaching the Target | p. 33 |
| The Balance between a Deep Dive and Locking In the Deal | p. 34 |
| Lower-Middle Market versus Middle Market Deals | p. 34 |
| Valuation from a StrategicâÇÖs Perspective | p. 35 |
| Structuring the Transaction | p. 37 |
| The Bid | p. 38 |
| Due Diligence | p. 38 |
| Integration | p. 41 |
| Case Study #1 | p. 42 |
| Strategic Rationale | p. 42 |
| Challenges | p. 43 |
| Transaction | p. 44 |
| Lessons Learned | p. 44 |
| Case Study #2 | p. 44 |
| Practical Tips and What Causes Deals to Fail | p. 47 |
| What Should We Acquire? | p. 47 |
| Why Are We Doing This? | p. 48 |
| Alignment of Interests | p. 48 |
| Allocate Enough Resources | p. 49 |
| If It Can Go Wrong, It Will Go Wrong | p. 49 |
| A Global Perspective | p. 51 |
| Advantages of Global M&A | p. 52 |
| Challenges to Global M&A | p. 52 |
| Negotiations and the Importance of Cultural Tune-In | p. 55 |
| Strategic Due Diligence | p. 56 |
| Postmerger Integration: Are the Odds in Your Favor? | p. 59 |
| From the Start: Think Integration | p. 61 |
| Acquisitions that Build Value | p. 62 |
| Set Clear Expectations and Invest in High-Quality, Two-Way Communication | p. 63 |
| Acknowledge Cultural Differences but Simultaneously Create a Common Corporate Culture with a Single Goal: Achieving High Performance | p. 64 |
| Move to a Cross-Border Operating Model | p. 65 |
| The Legal Environment and the Acquisition Process | p. 66 |
| The Legal Environment and the Conduct of Business | p. 67 |
| Taxation | p. 68 |
| Labor | p. 68 |
| Foreign Corrupt Practices Act (FCPA) | p. 69 |
| Success Factors | p. 70 |
| The M&A Practice and Processes | p. 71 |
| Practice Management | p. 73 |
| Primary M&A Advisors | p. 74 |
| Marketing the M&A Practice | p. 76 |
| Networking | p. 76 |
| Marketing and Advertising | p. 77 |
| Pretransaction Consulting | p. 77 |
| Valuation Services | p. 77 |
| Other Consulting Services | p. 78 |
| Becoming an Expert | p. 78 |
| Understanding the Private Business Owner | p. 78 |
| Client Acceptance | p. 79 |
| Initial Financial Analysis | p. 82 |
| Value Discussions | p. 82 |
| Process Discussions | p. 82 |
| Confidentiality | p. 83 |
| Client Engagement | p. 84 |
| Identification of the Parties | p. 85 |
| Scope of Service | p. 85 |
| Limitations and Disclosures | p. 86 |
| Fees | p. 86 |
| Double Lehman Formula | p. 87 |
| Termination and Tail | p. 88 |
| Licensure Issues in the M&A Business | p. 88 |
| Sell-Side Representation and Process | p. 91 |
| Selling Process Overview | p. 91 |
| Data Collection | p. 92 |
| Industry Research and Identifying Buyer Types | p. 94 |
| The Marketing Book | p. 95 |
| Marketing Process | p. 99 |
| Negotiating Price and Terms | p. 102 |
| Structuring the Transaction | p. 106 |
| Receiving Letters of Intent or Term Sheets | p. 109 |
| Due Diligence | p. 111 |
| Definitive Agreements | p. 112 |
| Closing Process | p. 114 |
| Buy-Side Representation and Process | p. 117 |
| Strategy | p. 117 |
| Engagement and Fees | p. 119 |
| The Filter | p. 119 |
| Financing | p. 120 |
| Quality of Earnings | p. 120 |
| Coordination | p. 122 |
| Integration | p. 122 |
| Mergers | p. 123 |
| Initial Analysis of Both Entities | p. 123 |
| Strategic Rationale | p. 124 |
| Valuation Modeling | p. 125 |
| Understand Cost, Operational, and Cultural Differences | p. 125 |
| Develop the Integration Plan | p. 127 |
| Deal Structure and Negotiations | p. 127 |
| Due Diligence | p. 128 |
| Legal Process and Closing | p. 129 |
| Postclosing Integration | p. 130 |
| Professional Standards and Ethics | p. 131 |
| Role of the M&A Advisor in the Economy | p. 132 |
| A Whole New Way | p. 133 |
| The Middle Market Standard | p. 134 |
| Ethical and Professional Standards | p. 134 |
| Competence and Professionalism (Reputation) | p. 134 |
| Best Practices (Activities) | p. 135 |
| Ethics (Behavioral Boundaries) | p. 135 |
| Country Specific (Customs) | p. 136 |
| M&A Technical Discussions | p. 137 |
| Financial Analysis | p. 139 |
| Financial Reporting Motivation | p. 139 |
| EBITDA | p. 140 |
| Balance Sheet Analysis | p. 142 |
| Working Capital | p. 142 |
| Normalization | p. 148 |
| Deal Structure and Legal Documentation | p. 151 |
| Attorney's Role | p. 151 |
| Preliminary Legal Documents | p. 153 |
| Confidentiality Agreement | p. 153 |
| Letter of Intent | p. 154 |
| Structure of the Deal | p. 155 |
| Stock Sale/Merger | p. 155 |
| Asset Purchase | p. 157 |
| Section 338(h)(10) Election in a Stock Sale | p. 160 |
| Purchase Price | p. 160 |
| Consulting and Employment Agreements | p. 161 |
| Due Diligence | p. 161 |
| Acquisition Agreements | p. 161 |
| Representations and Warranties | p. 162 |
| Qualifications to Representations and Warranties | p. 163 |
| Indemnification | p. 163 |
| Earnouts | p. 164 |
| Parameters | p. 165 |
| Benefits of Earnouts | p. 165 |
| Shortcomings of Earnouts | p. 165 |
| Regulatory Compliance | p. 166 |
| Tax Structure and Strategy | p. 168 |
| Tax Fundamentals | p. 168 |
| Transaction Tax Basics | p. 172 |
| Asset Transactions | p. 172 |
| Stock Transactions | p. 174 |
| Stock versus Asset Sale Example | p. 175 |
| Negotiations Based on Structure | p. 177 |
| Asset Transaction Details | p. 179 |
| Buyer Tax Issues | p. 185 |
| Tax Glossary and Reference | p. 188 |
| Tax Provisions Used in M&A | p. 193 |
| Installment Sales | p. 193 |
| Risk of Forfeiture | p. 194 |
| Assets that Qualify for Installment Treatment | p. 194 |
| Installment Planning Opportunity | p. 195 |
| Section 1031 (Like-Kind) Exchanges | p. 196 |
| Third-Party Exchanges | p. 196 |
| Partnership M&A | p. 196 |
| General Partnership Doctrine | p. 197 |
| Partnership versus S Corporation | p. 197 |
| Partnership Gain Tracking Rules | p. 200 |
| Purchase Price Allocation for Partnership Buyers | p. 200 |
| Corporate M&A Issues | p. 201 |
| Contributions to Corporations | p. 201 |
| Mergers and Reorganizations | p. 202 |
| Net Operating Loss Limitations | p. 206 |
| Stock/Asset Sale Election: Section 338 | p. 206 |
| S Corporation Issues | p. 208 |
| Tax Glossary and Reference | p. 210 |
| Regulation and Compliance | p. 215 |
| Protecting Investors: Securities Act of 1933 | p. 215 |
| Exemptions under the 33 Act | p. 216 |
| Commonly Used Private Placement Exemptions | p. 217 |
| Keeping the Markets Honest: Securities Exchange Act of 1934 | p. 219 |
| Requirements and Rules | p. 219 |
| Williams Act | p. 220 |
| Antitrust Issues and Laws You May Encounter in the Deal | p. 221 |
| Hart-Scott-Rodino Act | p. 221 |
| Specific Industries | p. 222 |
| Exon-Florio | p. 223 |
| Other Regulatory Issues and Laws You May Encounter in the Deal | p. 223 |
| Bulk Sales Laws | p. 223 |
| The WARN Act | p. 224 |
| The Investment Banker's Perspective | p. 224 |
| SEC Provisions for Broker-Dealers | p. 225 |
| Investment Advisers Act and Investment Company Act of 1940 | p. 226 |
| FINRA Provisions for Broker-Dealers | p. 227 |
| The CompanyâÇÖs Perspective | p. 227 |
| Process of Issuing and Selling Securities in the Deal | p. 227 |
| State Blue-Sky Laws | p. 228 |
| Considerations for Public Companies | p. 229 |
| Financing Sources and Structures | p. 231 |
| Perspective | p. 231 |
| Buyouts | p. 232 |
| Buyout Deal Structure | p. 234 |
| Bridging the Valuation Gap | p. 237 |
| Recapitalization | p. 237 |
| Acquisitions | p. 237 |
| Financing Primer | p. 239 |
| Capital Structure | p. 239 |
| Factors Shaping the Capital Structure | p. 243 |
| Sources and Types of Funding | p. 246 |
| Debt | p. 247 |
| Private Equity | p. 249 |
| Personal Guarantees | p. 251 |
| Due Diligence | p. 255 |
| Traditional Due Diligence | p. 255 |
| Financial Matters | p. 257 |
| GAAP Compliance | p. 259 |
| Tax Impact and Compliance | p. 260 |
| Compensation and Benefits | p. 262 |
| Legal | p. 263 |
| Information Technology | p. 264 |
| The Diligence Team | p. 265 |
| Due Diligence Process | p. 266 |
| Public versus Private | p. 266 |
| Impact of Globalization | p. 267 |
| Who Relies on Due Diligence? | p. 267 |
| Quality of Earnings | p. 268 |
| Financial Statement Audits | p. 268 |
| Market Valuation | p. 271 |
| Reasons for Appraisal | p. 272 |
| Determine the Value Subworld | p. 272 |
| Calculate the Benefit Stream | p. 273 |
| Synergies | p. 279 |
| Determine Private Return Expectation | p. 281 |
| Specific Investor Return | p. 282 |
| Industry-Specific Return | p. 284 |
| General Investor Returns | p. 284 |
| General Acquisition Selling Multiples | p. 284 |
| Derive Value | p. 285 |
| Global Perspective | p. 289 |
| Epilogue for Business Owners | p. 291 |
| Appendix | p. 297 |
| Transaction Examples | p. 297 |
| Transaction Valuation | p. 298 |
| Tools, Models, Resources, and Templates | p. 299 |
| Glossary | p. 301 |
| Notes | p. 337 |
| About the Authors | p. 343 |
| About the Contributors and Reviewers | p. 347 |
| Index | p. 361 |
| Table of Contents provided by Publisher. All Rights Reserved. |
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