Private Capital Markets, + Website: Valuation, Capitalization, and Transfer of Private Business Interests / Edition 2

by Robert T. Slee

Overview

Praise for Private Capital Markets

Valuation, Capitalization, and Transfer of Private Business Interests

SECOND EDITION

"In the years since publication of the first edition of Private Capital Markets, the concepts and ideas that it presents have been widely accepted by progressive members of the business valuation community. Now with the Second Edition, author Rob Slee has included empirical data on capital markets for midsized businesses. This book remains a must for everyone involved in appraising, buying, selling, or financing privately owned businesses."
—Raymond C. Miles, founder, The Institute of Business Appraisers

"The Graziadio School of Business has used the Private Capital Markets book for several years with great success. This course, along with the Pepperdine Private Capital Markets Survey project, has helped our students better prepare for careers in middle market companies."
—Linda Livingstone, Dean of the Graziadio School of Business and Management, Pepperdine University

"Our international association of independent M&A professionals recommends this text as the most comprehensive foundation for understanding the private capital marketplace. This book is essential reading for middle market M&A advisors, investors, and other decision-makers in the private capital markets."
—Mike Nall, founder, Alliance of M&A Advisors

A practical road map for making sound investment and financing decisions based on real experiences and market needs

Now fully revised and in a second edition, Private Capital Markets provides lawyers, accountants, bankers, estate planners, intermediaries, and other professionals with a workable framework for making sound investment and financing decisions based on their own needs and experiences.

This landmark resource covers:

• Private business valuation
• Middle market capital sources
• The business ownership transfer spectrum
• And much more

Private Capital Markets, Second Edition surveys the private capital markets and presents the proven guidance you need to navigate through these uncharted waters.

Product Details

ISBN-13:	9780470928325
Publisher:	Wiley
Publication date:	05/31/2011
Edition description:	2nd ed.
Pages:	640
Product dimensions:	8.60(w) x 11.00(h) x 1.50(d)

About the Author

ROBERT T. SLEE, CBA, CM&AA, is President of Robertson & Foley, an investment banking firm that provides valuation, capital raising, and transfer advisory services to middle market companies. He speaks extensively on value creation for private businesses.

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Table of Contents

Foreword xv

Preface xix

Acknowledgments xxiii

CHAPTER 1 Capital Markets 1

Market Structure 2

Information 2

Why Are Markets Segmented? 8

CHAPTER 2 Middle-Market Finance 17

Middle-Market Finance Theory 18

Triadic Logic 19

Middle-Market Finance Theory in Practice 19

Owner Motives 27

Authority 28

Triangulation 29

PART ONE Business Valuation

CHAPTER 3 Private Business Valuation: Introduction 35

Private Investor Expectations Drive Private Valuation 36

Private Business Valuation Can Be Viewed through Value Worlds 39

Valuation as a Range Concept 51

Triangulation 54

CHAPTER 4 Market Value 57

Levels of Private Ownership 61

Triangulation 67

CHAPTER 5 Asset Subworld of Market Value 69

Steps to Derive Net Asset Value 73

Triangulation 73

CHAPTER 6 Financial Subworld of Market Value 75

Specific Investor Return 82

Specific Industry Return 84

General Investor Returns 87

Triangulation 90

CHAPTER 7 Synergy Subworld of Market Value 93

Synergies 97

Capitalization of Benefit Streams 104

Discounting of Benefit Streams 104

Seller/Buyer Market Valuation 105

Nonenterprise Market Valuations 108

Triangulation 108

CHAPTER 8 Fair Market Value 111

Appraisal Organizations 113

Business Appraisal Standards 114

Fair Market Value Process 115

Key Steps to Derive Fair Market Value 125

Does the Fair Market Value Process Make Sense? 126

Tearing Down the Buildup Models 129

Triangulation 130

CHAPTER 9 Fair Value 133

Dissenting and Oppressed Shareholders 133

Triggering Events 134

Determination of Fair Value 137

Triangulation 140

CHAPTER 10 Incremental Business Value 143

Nature of Incremental Business Value 144

Problems with Using Traditional Methods 146

Value-Based Approaches 146

Net Present Value 146

Incremental Business Value 148

Private Cost of Capital Model 151

Ramifications of Using PCOC 155

Investment 156

Project Decision Making 158

Problems with Incremental Business Value 158

Value-Creation Strategies 158

Increase Recast EBITDA 159

Reduce Risk 160

Employ High-Yielding Capital 160

Incremental Business Value versus Market Value 161

Triangulation 162

CHAPTER 11 Insurable Value 165

Risk and Insurance 165

Buy/Sell Agreements 167

Valuation Mechanics 168

Triggering Events 170

Key Person Insurance 172

Business Interruption 174

Triangulation 177

CHAPTER 12 FASB Value Worlds 179

FASB Fair Value (ASC 820, Formerly FAS 157) 179

Business Combinations (ASC 805, Formerly FAS 141R) 184

Impaired Goodwill (ASC 350-20) 186

Valuation 189

Triangulation 192

CHAPTER 13 Intangible Asset Value 195

Subworlds 197

Intellectual Property 201

Intellectual Capital 204

Triangulation 206

CHAPTER 14 Other Value Worlds 209

Investment Value World 209

Owner Value World 210

Collateral Value World 212

Early Equity Value World 215

Bankruptcy Value World 216

Public Value World 217

Triangulation 219

CHAPTER 15 Private Business Valuation: Conclusion 223

Private Investor Return Expectations 223

Value Worlds 225

Private Business Valuation Is a Range Concept 230

Triangulation 231

Final Thoughts on Valuation 232

PART TWO Capital Structure

CHAPTER 16 Capital Structure: Introduction 235

Public Capital Markets 235

Private Capital Markets 240

Pepperdine Private Capital Market Line 244

Key Issues Regarding the Pepperdine Private Capital Market Line 249

Capital Structure Treatment 250

Triangulation 252

CHAPTER 17 Bank Lending 255

Types of Facilities 255

Interest Rates 259

Interest Rate Hedges 262

Loan Covenants 265

How Banks Deal with Covenant Violations 266

Loan Costs 266

Risk Ratings 270

Negotiating Points 270

Triangulation 274

CHAPTER 18 Government Lending Programs 275

Industrial Revenue Bonds 276

Business and Industry Loan Program 279

Small Business Administration Programs 281

7(a) Loan Guaranty Program 282

Certified Development Company 504 Loan Program 286

CAPLines Loan Program 289

Export Working Capital Program 291

Negotiating Points 294

Triangulation 294

CHAPTER 19 Equipment Leasing 297

Types of Leases 297

Lease Rate Factors 301

Lessor Types 302

Comparison of Leasing and Purchasing 306

Negotiating Points 310

Triangulation 312

CHAPTER 20 Asset-Based Lending 315

How Asset-Based Lending Works 315

Asset-Based Lenders 320

Tier 1 Asset-Based Lenders 322

Tier 2 Asset-Based Lenders 325

Tier 3 Asset-Based Lenders 328

Negotiating Points 331

Triangulation 333

CHAPTER 21 Factoring 335

How Factoring Works 335

Mechanics of Factoring 337

Fees and Terms 338

Negotiating Points 343

Triangulation 345

CHAPTER 22 Mezzanine Capital 347

Loan Structure 347

Mezzanine Investors 351

Targeted Investments 353

Pricing 354

Debt Mezzanine Capital 354

Equity Mezzanine Capital 356

Other Deal Terms 358

Negotiating Points 360

Triangulation 363

CHAPTER 23 Owners, Angels, and Venture Capitalists 365

Stages of Private Equity Investor Involvement 366

Private Placements 368

Financial Barn Raisings 368

Within Existing Business Relationships 369

Why Private Placements Fail 369

Pre- and Postmoney Valuation 379

Negotiating Points 380

Triangulation 383

CHAPTER 24 Private Equity 385

Stages of Private Equity Investor Involvement 386

Hedge Funds 392

Family Offices 394

Term Sheet 396

Negotiating Points 397

Triangulation 399

CHAPTER 25 Capital Structure: Conclusion 401

Capital Providers Manage Risk and Return in Their Portfolios 401

The Pepperdine Private Capital Market Line Comprises Expected Returns 402

Private Cost of Capital Emanates from the Private Capital Markets 404

High Cost of Capital Limits Private Company Value Creation 405

Intermediation Is Relatively Ineffective in the Middle Market 406

Triangulation 407

PART THREE Business Transfer

CHAPTER 26 Business Transfer: Introduction 411

Public Manager and Owner Motives 411

Private Business Ownership Transfer Spectrum 413

Employee Transfer Channel 415

Charitable Trusts Transfer Channel 416

Family Transfer Channel 417

Co-Owner Transfer Channel 418

Outside, Retire, Transfer Channel 418

Outside, Continue, Transfer Channel 419

Going Public, Going Private Transfer Channel 419

Exit Planning 420

Triangulation 421

CHAPTER 27 Employee Stock Ownership Plans 423

Overview 424

Leveraged ESOPs 429

ESOPs in S Corporations 431

Setting Up an ESOP 431

Points to Consider 436

Bottom Line on ESOPs 438

Triangulation 438

CHAPTER 28 Management Transfers 441

Differences between Management Buyouts and Management Buy-Ins 443

Likely Deal Structures 444

Deals 447

Points to Consider 456

Triangulation 459

CHAPTER 29 Charitable Trusts 461

Structure of Charitable Trusts 461

Charitable Remainder Trusts 461

Points to Consider for CRTs 466

Charitable Lead Trusts 468

Points to Consider for CLTs 471

Comparison of CRTs and CLTs 473

Triangulation 473

CHAPTER 30 Family Transfers 475

Stock Gifts 476

Private Annuities 480

Self-Canceling Installment Notes 482

Grantor-Retained Annuity Trusts 483

Family Limited Partnerships 487

Intentionally Defective Grantor Trusts 489

Comparison of Family Transfer Methods 492

Role of Insurance in Family Transfers 493

Triangulation 493

CHAPTER 31 Co-Owner Transfers 495

Buy/Sell Agreements 495

Buy/Sell Types 497

Triggering Events 499

Funding Techniques 501

Ways to Handle Deadlocks 502

When No Buy/Sell Agreement Exists 502

Triangulation 503

CHAPTER 32 Outside Transfers: Retire 505

Preparation for a Transfer 506

Transfer Players 507

Marketing Processes 508

Negotiated Transfers 509

Private Auctions 512

Two-Step Private Auctions 517

Closing the Deal 519

After the Transfer 521

Triangulation 521

CHAPTER 33 Outside Transfers: Continue 523

Consolidations 523

Roll-Ups 526

Buy and Build or Recapitalizations 528

Recapitalization Points to Consider 533

Triangulation 533

CHAPTER 34 Going Public, Going Private 535

Direct Public Offerings 536

Which Companies Are Public? 538

Initial Public Offering Team 539

IPO Process 541

Advantages of Going Public 544

Disadvantages of Going Public 544

Going Public Key Points to Consider 545

Going Public on Foreign Exchanges 546

Reverse Mergers 547

Going Private 548

Going Private Key Points to Consider 549

Triangulation 551

CHAPTER 35 Business Transfer: Conclusion 553

Segmented Transfer Activity and Arbitrage 553

Owner Motives Choose the Range of Values 556

Creating Value in a Private Business Requires Planning 560

Triangulation 566

CHAPTER 36 Conclusion 569

Theme 1 569

Theme 2 570

Theme 3 571

Theme 4 571

Theme 5 572

Private Capital Markets 573

What We Do Not Know 575

A Final Thought 578

APPENDIX A Corporate Finance Theory: Application to Private Capital Markets 579

APPENDIX B Principle of Substitution www.wiley.com/go/privatecapital

APPENDIX C IBA Standards: Business Appraisal Standards www.wiley.com/go/privatecapital

APPENDIX D Private Equity Securities www.wiley.com/go/privatecapital

APPENDIX E Sample Preferred Stock Offering Term Sheet www.wiley.com/go/privatecapital

APPENDIX F Private Placements www.wiley.com/go/privatecapital

APPENDIX G Sample Management Buyout Letter of Intent www.wiley.com/go/privatecapital

About the Web Site  597

Index  599