Middle Market M & A E-Book

Kenneth H. Marks

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 615

Veröffentlichungsjahr: 2012

Beschreibung

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.

Leseprobe

Contents

Cover

Endorsements

Series

Title Page

Copyright

Dedication

Preface

Acknowledgments

Part One: The Middle Market

Chapter 1: Private Capital Markets

SEGMENTED MARKETS

WHY ARE MARKETS SEGMENTED?

MARKET ACTIVITY

Chapter 2: Valuation Perspectives for the Private Markets

PRIVATE BUSINESS VALUATION CAN BE VIEWED THROUGH DIFFERENT STANDARDS OF VALUE

WHY THE DIFFERENT VERSIONS OF VALUE?

VALUATION AS A RANGE CONCEPT

VALUE WORLDS AND DEALS

AN ALTERNATIVE VALUATION APPROACH

Chapter 3: Corporate Development

WHY ACQUIRE?

THE ACQUISITION PROCESS

CASE STUDY #1

CASE STUDY #2

PRACTICAL TIPS AND WHAT CAUSES DEALS TO FAIL

Chapter 4: A Global Perspective

ADVANTAGES OF GLOBAL M&A

CHALLENGES TO GLOBAL M&A

NEGOTIATIONS AND THE IMPORTANCE OF CULTURAL TUNE-IN

STRATEGIC DUE DILIGENCE

POSTMERGER INTEGRATION: ARE THE ODDS IN YOUR FAVOR?

FROM THE START: THINK INTEGRATION

ACQUISITIONS THAT BUILD VALUE

TAXATION

LABOR

FOREIGN CORRUPT PRACTICES ACT (FCPA)

SUCCESS FACTORS

Part Two: The M&A Practice and Processes

Chapter 5: Practice Management

PRIMARY M&A ADVISORS

MARKETING THE M&A PRACTICE

UNDERSTANDING THE PRIVATE BUSINESS OWNER

CLIENT ACCEPTANCE

INITIAL FINANCIAL ANALYSIS

VALUE DISCUSSIONS

PROCESS DISCUSSIONS

CONFIDENTIALITY

CLIENT ENGAGEMENT

Chapter 6: Sell-Side Representation and Process

SELLING PROCESS OVERVIEW

Chapter 7: Buy-Side Representation and Process

STRATEGY

ENGAGEMENT AND FEES

THE FILTER

FINANCING

QUALITY OF EARNINGS

COORDINATION

INTEGRATION

Chapter 8: Mergers

INITIAL ANALYSIS OF BOTH ENTITIES

STRATEGIC RATIONALE

VALUATION MODELING

UNDERSTAND COST, OPERATIONAL, AND CULTURAL DIFFERENCES

DEVELOP THE INTEGRATION PLAN

DEAL STRUCTURE AND NEGOTIATIONS

DUE DILIGENCE

LEGAL PROCESS AND CLOSING

POSTCLOSING INTEGRATION

Chapter 9: Professional Standards and Ethics

ROLE OF THE M&A ADVISOR IN THE ECONOMY

A WHOLE NEW WAY

THE MIDDLE MARKET STANDARD

ETHICAL AND PROFESSIONAL STANDARDS

Part Three: M&A Technical Discussions

Chapter 10: Financial Analysis

FINANCIAL REPORTING MOTIVATION

EBITDA

BALANCE SHEET ANALYSIS

Chapter 11: Deal Structure and Legal Documentation

ATTORNEY'S ROLE

PRELIMINARY LEGAL DOCUMENTS

STRUCTURE OF THE DEAL

DUE DILIGENCE

ACQUISITION AGREEMENTS

REPRESENTATIONS AND WARRANTIES

EARNOUTS

REGULATORY COMPLIANCE

Chapter 12: Tax Structure and Strategy

TAX FUNDAMENTALS

TRANSACTION TAX BASICS

TAX GLOSSARY AND REFERENCE

Chapter 13: Tax Provisions Used in M&A

INSTALLMENT SALES

SECTION 1031 (LIKE-KIND) EXCHANGES

PARTNERSHIP M&A

CORPORATE M&A ISSUES

TAX GLOSSARY AND REFERENCE

Chapter 14: Regulation and Compliance

PROTECTING INVESTORS: SECURITIES ACT OF 1933

KEEPING THE MARKETS HONEST: SECURITIES EXCHANGE ACT OF 1934

ANTITRUST ISSUES AND LAWS YOU MAY ENCOUNTER IN THE DEAL

OTHER REGULATORY ISSUES AND LAWS YOU MAY ENCOUNTER IN THE DEAL

THE INVESTMENT BANKER'S PERSPECTIVE

THE COMPANY'S PERSPECTIVE

CONSIDERATIONS FOR PUBLIC COMPANIES

Chapter 15: Financing Sources and Structures

PERSPECTIVE

BUYOUTS

RECAPITALIZATION

ACQUISITIONS

FINANCING PRIMER

SOURCES AND TYPES OF FUNDING

PERSONAL GUARANTEES

Chapter 16: Due Diligence

TRADITIONAL DUE DILIGENCE

THE DILIGENCE TEAM

DUE DILIGENCE PROCESS

PUBLIC VERSUS PRIVATE

IMPACT OF GLOBALIZATION

WHO RELIES ON DUE DILIGENCE?

QUALITY OF EARNINGS

FINANCIAL STATEMENT AUDITS

Chapter 17: Market Valuation

REASONS FOR APPRAISAL

DETERMINE THE VALUE SUBWORLD

CALCULATE THE BENEFIT STREAM

DETERMINE PRIVATE RETURN EXPECTATION

DERIVE VALUE

GLOBAL PERSPECTIVE

Epilogue for Business Owners

Appendix

TRANSACTION EXAMPLES

TRANSACTION VALUATION

TOOLS, MODELS, RESOURCES, AND TEMPLATES

Glossary

Notes

About the Authors

About the Contributors and Reviewers

Index

ADDITIONAL PRAISE FOR MIDDLE MARKET M&A

“At last we have a comprehensive body of knowledge for the M&A middle market. This anthology of contemporary thinking is very timely considering how global this market has become. Many of these insights and best practices are truly universal and will resonate with leading practitioners the world over.”

—Paul Hawkins Managing Director, MergeCo International Pty Ltd, Sydney, Australia

“Middle Market M&A brings together the knowledge and expertise of several seasoned M&A professionals to provide an abundance of information, practice tips, and examples on the middle market, the practice of M&A, and related technical topics. From a valuation perspective, a clear and concise explanation is provided on how there can be multiple values for the same company, based on the value worlds concept. This book will serve as a fabulous reference not only to any advisor who deals with M&A issues, but also for any business owner or executive contemplating the purchase or sale of a business. A must-have for anybody involved in M&A!”

—Chris M. Mellen, ASA, MCBA, ABAR, CM&AA President, Delphi Valuation Advisors, Inc. Co-author, Valuation for M&A: Building Value in Private Companies, 2nd edition, Wiley, 2010

“Four talented authors combine their talents for one powerful treatise on Mergers and Acquisitions. A great educational tool for the M&A novice or professional, and a valuable referral source for both.”

—Everett H Walker, Jr. Chairman/President, National Funding Association, Inc.

“Marks, Slee, and company have produced a volume that fills the void for information on a topic of crucial importance to sellers of businesses, students of finance, and those who have or wish to have a career in the world of M&A. Written in clear, precise language, the book thoroughly details the basics of the M&A process. This is an exceptional work and will be of tremendous benefit to anyone involved in buying and selling a business.”

—Barry Yelton Vice President and Business Development Officer, TAB Bank

“There is no roadmap for banking and business consulting for middle market M&A. Each deal needs its own roadmap. The strength of the handbook is that it reflects the judgment and experience of Kenneth Marks and its other authors and equips the reader to approach each deal uniquely.”

—Gerald F. Roach Head of Corporate Group, Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLP

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Library of Congress Cataloging-in-Publication Data:

Marks, Kenneth. Middle market M & A : handbook for investment banking and business consulting / Kenneth Marks … [et al.]. p. cm. – (Wiley finance series) Includes index. ISBN 978-0-470-90829-7 (hardback); ISBN 978-1-118-19860-5 (ebk); ISBN 978-1-118-19861-2 (ebk); ISBN 978-1-118-19862-9 (ebk) 1. Consolidation and merger of corporations. 2. Small business–Mergers. I. Marks, Kenneth, 1963– HG4028.M4M53 2012 658.1′62–dc23 2011037185

To our families and God

Preface

Deal markets go through cycles just as the broader economy ebbs and flows. And after a long drought of merger and acquisition (M&A) activity, the market for private companies is on the rise again. If you own, operate, or advise a middle market company, one with $5 million to $500 million in revenues, what does this mean for you and your clients when thinking about shareholder liquidity, or selling or buying a business? And how can you improve the odds of getting a deal done? Middle Market M&A: Handbook of Investment Banking & Business Consulting is a foundational reference for those advisors, leaders, and executives involved in the lifecycle and process of M&A transactions. It is based on the body of knowledge of the industry benchmark credential: the Certified M&A Advisor® (CM&AA) originated and led by the Alliance of Merger & Acquisition Advisors (AM&AA).

As with all industries and segments, the private capital markets continue to evolve, addressing challenges and seizing opportunities. Significant influence in the middle market over the past several years has come from private equity, regulatory reform, and the impact of aging Baby Boomers seeking eventual liquidity or transitions from their middle market businesses. Couple these drivers with a cross-border appetite for investment and growth, and you have a wealth of opportunity.

From a private equity perspective, the dollars invested in middle market companies more than doubled since 2009. Buyout and growth equity funds have record amounts of committed capital ready to invest. The challenge continues to be credit availability (especially at the lower end of the middle market) and partner time tied up in fixing existing portfolio companies. Publicly traded strategic buyers like the S&P 500 companies have unusually high levels of cash, and are seeking to deploy part of this hoard to generate significant revenue through external growth initiatives like acquisitions. While most middle market companies by themselves will not move the needle in terms of revenue for the S&P 500–sized businesses, a number of strategic acquisitions can begin to impact their overall performance. These relatively smaller, or niche, acquisitions can provide access to new customers, higher-margin product lines, new technologies, and entrepreneurial talent. The same concept applies to what private equity refers to as tuck-in or bolt-on acquisitions for larger existing portfolio companies. For buyout funds, some middle market companies provide a platform for entry into new markets and from which to add niche businesses for expansion.

On the surface, the number of transactions is increasing and appears to be rebounding; however, the character of the market and deals is different from that of the pre–Great Recession vintage. In the period from 2004 to early 2008, there was significantly less scrutiny in underwriting and financing transactions. There was an abundance of capital available to all types of companies, almost independent of operating performance. Coupled with easy credit, valuations soared. Today, the performance bar has been raised very high with a flight to quality. Transactions are being done primarily with the very best industry players within a market or segment; and these companies are able to garner valuation multiples at nearly 2008 levels. However, the average and lower performing businesses will likely find greatly depressed multiples, or worse, no interest from buyers or investors at all. Thus the quandary: the “value gap.” What is the typical middle market company to do to create a partial or complete exit for its owners? This challenge creates an opportunity for resolute leaders and executives as well as for innovative and trusted advisors.

This handbook is meant to be a practical guide and reference for those practitioners and operators, buyers and sellers, and educators and students. The term M&A advisor is used throughout the text as a reference to the many professionals involved in the M&A process, including investment bankers, M&A intermediaries and specialists, CPAs and accountants, deal and transaction attorneys, valuation experts, wealth managers and investors, and consultants and business advisors. The intent is to provide a holistic overview and guide concerning mergers, acquisitions, divestitures, and strategic transactions for middle market companies. It covers pretransaction planning, deal execution, and post-transaction considerations, and addresses the processes and core subject areas required to successfully navigate and close deals in the private capital markets. Middle Market M&A and the CM&AA program can be thought of as providing a horizontal perspective for the many participants in the process, which typically bring expertise in one or more vertical subject areas.

The main content is divided into three parts, with the first being an overview of the middle market including a global view. This market perspective is heavily influenced by the work of co-author Robert Slee and his research and experiences in the private capital markets (also the title of one of his books). Keeping in sync with market trends, this section includes a high-level discussion about corporate development and its intersection with the middle market. This is particularly important given the likely impact that strategic buyers will have in shaping the exit and liquidity plans of middle market owners, and the competing pressure against private equity. As the public markets have become a less attractive alternative, these strategic buyers (represented by those in corporate development) also represent a potentially desirable exit for the same private equity buyers then selling a few years later. This section ends with a look at the global and cross-border impact of middle market M&A activity.

Part II focuses on the M&A processes and practice management. It addresses sell-side, buy-side, and merger processes and introduces a framework for professional standards and ethics. This is thought to be the first such introduction for the middle market.

Part III delves more deeply into the technical subjects. Each chapter is a stand-alone treatise on a specific topic. Together, they provide the supporting details to begin understanding the subtleties and intricacies in making a deal or transaction work. Keep in mind that this handbook is a guide. It is not intended as an endpoint in the search for understanding and clarity about M&A, but is rather a quick start to understanding the topics and processes and determining where more in-depth knowledge and experience is required.

The remainder of the text provides an epilogue for business owners; a glossary; references to a companion website (www.MiddleMarketMA.com) for tools and resources of the trade; and a brief introduction to Transaction Value, an alternative view of valuing companies based on the work and research of Mike Adhikari, a leading member, thought leader, and president of the AM&AA and the founder of Business ValueXpress™ software company.

Throughout the handbook, wherever practical, there are anecdotes and annotations that provide a global perspective: character, details, and practical advice about the subject matter as it relates to cross-border and regional differences and concepts. We expect to bolster these and make them more robust in future editions of this handbook.

The author team crafting this handbook includes Robert T. Slee, as mentioned above; Christian W. Blees, chair of the CM&AA credentialing program and a key instructor in developing its content; Michael R. Nall, CPA, founder of the AM&AA and the MidMarket Alliance; Mona Pearl, a special contributor to this work and author of Grow Globally; and Kenneth H. Marks, lead author of the Handbook of Financing Growth and also an instructor in the CM&AA program. We have endeavored to generate and capture content, knowledge, and experiences from industry and subject matter leaders to provide a holistic, practical, and balanced perspective. As you scan the list of contributors and reviewers involved in creating this edition, you will notice that the breadth and depth of experience, expertise, diversity, and backgrounds is vast.

M&A is a careful blend of art and science. On one hand it is multidisciplinary, complex, and analytical. On the other, it is all about people, relationships, nuances, timing, and instinct. This dynamic produces opportunity coupled with conflict, ambiguity and challenges, all supporting an exhilarating business ripe for those seeking to create value.

We invite you to send your comments, questions, and observations to us at: [email protected], [email protected], [email protected], [email protected].

KENNETH H. MARKS ROBERT T. SLEE CHRISTIAN W. BLEES MICHAEL R. NALL

www.MiddleMarketMA.com

Acknowledgments

The author team is grateful to the contributors and reviewers (listed below) who provided a wealth of time, content, shared experiences, shared expertise, and support in writing this handbook. They represent a cross-section of industry experience and subject matter expertise from the many disciplines involved in the M&A process; we extend our sincerest appreciation and acknowledgment to each. We have included their biographies in the final part of this handbook.

Special ContributorMona PearlBeyondAStrategy, Inc.www.BeyondAStrategy.comContributorsMichael P. Saber, Esquire, and Amanda KeisterSmith, Anderson, Blount, Dorsett, Mitchell & Jernigan, LLPwww.SmithLaw.comDavid A. CohnDiamond Capital Partnerswww.DiamondCapitalPartners.comMichael S. RobertsRoberts McGivney Zagotta, LLCwww.rmczlaw.comChamp W. Davis IIIDavis Capital, LLCwww.DavisCapital.comStephen CazaletDouble Eagle Advisory, LLCwww.DoubleEagle Advisory.comJohn C. WattsCurtiss-Wright Corporationwww.CurtissWright.comAllen BurchettABB North Americawww.ABB.comScott MossCherry, Bekaert & Holland, LLPwww.cbh.comReviewersAmalie L. TuffinWhitmeyer Tuffin, PLLCwww.Whit-Law.comDeirdre PattenPatten Training & Review, LLCwww.pattentraining.comJohn A. HowardHigh Rock Partners, Inc.www.HighRockPartners.comWilliam H. StewartNavigator Partners, LLC.www.navigatorpartners .comDavid G. KostmayerBarrett & Kostmayer, PLLCwww.BarrettKostmayer.comDaniel A. CotterKorey Cotter Heather & Richardson, LLCwww.kchrlaw.comAustin BuckettBiggsKofford Capital, LLCwww.BiggsKofford.comB. Graeme Frazier IVPrivate Capital Research LLCwww.pcrllc.comMark DevineIndependent consultantMike ErtelLegacy M&A Advisors, LLCwww.legacymandaadvisors.comAnnette MasonBAE Systemswww.baesystems.comBrandon ClewettMcGladrey Capital Markets LLCwww.mcgladreycm.comDarrell V. ArneArne & Co.www.arne-co.comWillis E. EayrsCorporate Financial AdvisorBruce N. LipianStoneCreek Capital, Inc.www.stonecreekcapital.com

Thanks to Eric Chabinsky for his visual critique, to Carolyn Manuel and Capital IQ for their assistance in obtaining market data, and to Andy Greenberg and GF Data Resources for valuation data. We appreciate the support, patience, and direction of John DeRemigis, Jennifer MacDonald, Laura Cherkas, and the entire team at John Wiley & Sons. Lastly, special thanks go to the never-wavering support and encouragement of Diane Niederman, vice president for business development and marketing, and the operations team, both of the Alliance of M&A Advisors.

PART One

The Middle Market

CHAPTER 1

Private Capital Markets

Afundamental premise in this handbook is that there is a difference between the deals, transactions, and financings in the middle market and those in the large-company, traditional-corporate-finance public market. As indicated in the preface, the focus of this book is the middle market, primarily composed of private businesses. This chapter sets the stage for the balance of the discussion in this handbook by providing an overview and perspective of the middle market and private capital market activity.

A capital market is a market for securities (debt or equity) where businesses can raise long-term funds. Since the 1970s, public capital markets1 have received much of the attention from academics in the literature and press. Since that time it has been assumed that the public and private markets are substitutes, but in recent years this assumption has been challenged by research studies showing that the two markets are different in many meaningful ways.a

Merger and acquisition (M&A) activity is mainly driven by capital availability, liquidity, and motives of the players, which vary in each market. Regardless of the purview of the buyer, seller, M&A advisor, investor, or lender in the middle market, it is important to understand the market differences and dynamics.

A number of factors differentiate the public and private markets:

Risk and return are unique to each market.Liquidity within each market is different.Motives of private owners are different from those of professional managers.Underlying capital market theories that explain the behavior of players in each market are different.Private companies are priced at a point in time, while public companies are continuously priced.Public markets allow ready access to capital, whereas private capital is difficult to arrange.Public shareholders can diversify their holdings, whereas shareholders of closely held businesses have few opportunities to create liquidity or to reallocate their ownership in a private company.Private markets are inefficient, whereas public markets are fairly efficient.Market mechanisms have differing effects on each market.Costs of capital are substantially different for each market.The expected holding period for investors is different.The transaction costs of buying versus selling a business are different.

So, why does it matter whether large public and middle markets are different? It is important because acquisition pricing and behavior vary by market, or more specifically, by market segment. Further, much of what is taught in traditional corporate finance is not easily applied, nor appropriate to apply, to the private capital markets and to many middle market deals. And lastly, a clearer understanding of market behaviors, drivers, processes, and dynamics will ideally enable those on all sides of a transaction to put greater focus on meeting strategic objectives, creating value, and achieving owner and shareholder objectives.