Middle Market M & A: Handbook for Advisors, Investors, and Business Owners

Cover
Title Page
Copyright Page
Contents
Preface
Acknowledgments
Part 1 Middle Market Overview
Chapter 1 The Middle Market
Performance and Impact
Definition
Characteristics of Middle Market Companies
Ownership
Access to and Use of Capital
Organization
Chapter 2 Private Capital Markets
Segmented Markets
How Market Players View Risk
Capital Providers
Owners’ and Managers’ Views of Risk/Return
Buyers
Market Activity
Chapter 3 Valuation Perspectives for the Private Markets
Private Business Valuation Can Be Viewed Through Different Standards of Value
Market Value
Investment Value
Fair Market Value
Fair Value
Incremental Business Value
Owner Value
LBO Value
Collateral Value
Book Value
Valuing Intangibles
Why the Different Versions of Value?
Valuation as a Range Concept
Value Worlds and Deals
Part 2 For the Business Owner/Operator and Entrepreneur
Chapter 4 Transition, Succession, and Exit Planning
A Decision Framework
1. Owner Ambitions and Goals
2. Industry Cycle
3. Business Cycle
4. Company Foundation
A Team Approach
Chapter 5 Value Growth and Optimization*
Increasing the Return on Invested Capital
Strategic Position
Customer Base
Cost Structure and Scalability
Working Capital
Human Capital
Reducing the Risk of Investment
Awareness and Planning
Growth Plans and Relative Position
Leadership Team
Predictability of Revenues and Earnings
Concentrations
Compliance
Keeping Current
Ease the Transfer of Ownership
Financial Information
Contracts
Title to Assets
Corporate Structure and Attributes
Don’t Lose Focus on the Core Business
Summary
Formula Definitions
Part 3 The M&A Practice and Processes
Chapter 6 Practice Management
Primary M&A Advisors
Marketing the M&A Practice
Target Audience
Networking
Marketing and Advertising
Pretransaction Consulting
Valuation Services
Other Consulting Services
Becoming an Expert
Client Acceptance
Confidentiality
Client Engagement
Identification of the Parties
Scope of Service
Limitations and Disclosures
Fees—Selling Advisor
Example Fee Structures
Termination and Tail
Buy-Side Engagements
Licensure Issues in the M&A Business*
Chapter 7 Sell-Side Representation and Process
Selling Process Overview
Step 1: Preliminary Discussions with Seller
What Is the Transaction?
Value Expectations
Process
Step 2: Data Collection
Step 3: Industry Research and Identifying Buyers
Research Market Buyers
Step 4: The Marketing Book
Preparation
Seller Motivation
Financial Disclosures
Specific EBITDA Presentations
Balance Sheet Presentation
Other Financial Disclosures
Prospective Financial Presentation
Step 5: Marketing Process
Clear the List with the Seller
Initiate Contact with Buyers
Obtain Nondisclosure Agreements
Distribute the Book
Follow Up, Discuss, and Set Expectations
Step 6: The Auction Dynamic and Negotiations
Negotiated Sale
Private Auction
Public Auction
Step 7: Buyer Interest and Transaction Structure
Term Sheets
Indication of Interest (IOI)
Letters of Intent
Deal Structure
Asset versus Stock Structure
Other Tax Deferral Techniques
Step 8: Due Diligence
Step 9: Definitive Agreements
Step 10: Closing Process
Price and Valuation Changes
Terms and Conditions Changes
Third-Party Challenges
Allocation of Risk
Other Preclosing Mistakes
Postsale Integration
Chapter 8 Corporate Development and the Buy-Side Process
Why Acquire?
The Dismal Ds
Alternatives
The Acquisition Process
The Pipeline and Filter
Approaching the Target
The Balance between a Deep Dive and Locking In the Deal
Lower-Middle Market versus Middle Market Deals
Valuation from a Strategic’s Perspective
Structuring the Transaction
The Bid
Due Diligence
Integration
Practical Tips and What Causes Deals to Fail
What Should We Acquire?
Why Are We Doing This?
Alignment of Interests
Recruit the Right Advisors Early
Allocate Enough Resources
Every Interaction Is a Negotiation13
If It Can Go Wrong, It Will Go Wrong
Chapter 9 Buy-Side Representation
Buyer Clients
Strategy
The Filter
Financing
Quality of Earnings
Coordination
Integration
Chapter 10 Technology in the M&A Process
Virtual Data Room
Market Insight and Data
Deal Sourcing and Exchanges
Due Diligence Software
Project Management Software
Comprehensive M&A Software
Supporting Tools
Artificial Intelligence and Technology Trends
Technology Providers
Chapter 11 Professional Standards and Ethics
Holistic Advice
Ethical and Professional Standards
Competence and Professionalism (Reputation)
Best Practices (Activities)
Ethics (Behavioral Boundaries)
The Middle Market Standard
Part 4 M&A Technical Discussions
Chapter 12 Financial Analysis
Financial Reporting Motivation
EBITDA
Balance Sheet Analysis
Working Capital
Normalization
Chapter 13 Market Valuation
Reasons for Appraisal
Determine the Value Subworld
Calculate the Benefit Stream
Synergies
Determine Private Return Expectation
Specific Investor Return
General Acquisition Selling Multiples
Derive Value
Chapter 14 Deal Structure
Structural Priorities
Business and Economic Terms
Tax Structure
Legal Structure
Mergers
Initial Analysis of Both Entities
Strategic Rationale
Valuation Modeling
Understanding Cost, Operational, and Cultural Differences
Developing the Integration Plan
Deal Structure and Negotiations
Chapter 15 Financing Sources and Capital Structure
Perspective
Financing Primer
Capital Structure
Factors Shaping the Capital Structure
Basic Deals
Buyouts3
Recapitalizations
Acquisitions
Sources and Types of Funding
Debt
Private Equity
Personal Guarantees
Chapter 16 Due Diligence
Due Diligence Process
The Diligence Team
Traditional Due Diligence
Financial Matters
Quality of Earnings Analysis
Balance Sheet Analysis
Ratio Analysis
Other Risks
Audited Financial Statements
GAAP Compliance
Tax Structuring and Compliance
Compensation and Benefits
Legal
Technical Due Diligence
Business Due Diligence
Chapter 17 Tax Provisions Used in M&A
Tax Fundamentals
Transaction Tax Basics
Asset Transactions
Stock Transactions
Stock versus Asset Sale Example
Asset Transaction Details
Buyer Tax Issues
Detailed Tax Structuring
Installment Sales
Risk of Forfeiture
Assets That Qualify for Installment Treatment
Installment Planning Opportunity
Partnership M&A
General Partnership Doctrine
Partnership versus S Corporation
Partnership Gain Tracking Rules
Purchase Price Allocation for Partnership Buyers
Corporate M&A Issues
Contributions to Corporations
Stock/Asset Sale Election: Section 338
Mergers and Reorganizations
S Corporation Issues
Tax Glossary and Reference
Chapter 18 Legal Documentation
The Attorney’s Role
Preliminary Legal Documents
Nondisclosure and Confidentiality Agreement
Letter of Intent
Acquisition Agreements
Structure of the Deal
Stock Sale/Merger
Asset Purchase
Representations and Warranties
Qualifications to Representations and Warranties
Indemnification
Transaction Statistics
Consulting and Employment Agreements
Regulatory Compliance
Chapter 19 Regulation and Compliance *
Protecting Investors: Securities Act of 1933
Exemptions under the 33 Act
Commonly Used Private Placement Exemptions
Keeping The Markets Honest: Securities Exchange Act of 1934
Requirements and Rules
Williams Act
Antitrust Issues and Laws You May Encounter in the Deal
Hart-Scott-Rodino Act
Transactions Involving Foreign Investors, Foreign Trade, and National Defense Matters
Other Regulatory Issues and Laws You May Encounter in the Deal
Bulk Sales Laws
The WARN Act
The Investment Banker’s Perspective
SEC Provisions Regulating Broker-Dealers
M&A Brokers No-Action Letter
Finders
Investment Advisers Act and Investment Company Act of 1940
FINRA Provisions for Broker-Dealers
The Company’s Perspective
Process of Issuing, Selling, or Exchanging Securities for a Deal
State Blue-Sky Laws
Considerations for Public Companies
Chapter 20 Cross-Border Considerations*
Is Cross-Border M&A the Right Move?
Culture
Country Risk
Financial Risk
Market and Operational Risks
The Legal Environment
Labor and Employment
Negotiations
Due Diligence
Integration
Summary
Glossary
Notes
About the Authors
About the Contributors and Reviewers
Index
EULA