Middle Market M & A

Preface xv
Acknowledgments xix
PART ONE The Middle Market 1
CHAPTER 1 Private Capital Markets 1
Segmented Markets 4
Why Are Markets Segmented? 7
Capital Providers 9
Owners' and Managers' Views of Risk/Return 10
Buyers 11
Market Activity 14
CHAPTER 2 Valuation Perspectives for the Private Markets 17
Private Business Valuation Can Be Viewed through Different Standards of Value 18
Market Value 21
Fair Market Value 22
Fair Value 22
Incremental Business Value 23
Investment Value 23
Owner Value 23
Collateral Value 23
Book Value 24
Why the Different Versions of Value? 24
Valuation as a Range Concept 25
Value Worlds and Deals 26
An Alternative Valuation Approach 26
CHAPTER 3 Corporate Development 27
Why Acquire? 28
The Dismal Ds 29
Alternatives 30
The Acquisition Process 31
The Pipeline and Filter 32
Approaching the Target 33
The Balance between a Deep Dive and Locking In the Deal 34
Lower-Middle Market versus Middle Market Deals 34
Valuation from a Strategic's Perspective 35
Structuring the Transaction 37
The Bid 38
Due Diligence 38
Integration 41
Case Study #1 42
Strategic Rationale 42
Challenges 43
Transaction 44
Lessons Learned 44
Case Study #2 44
Practical Tips and What Causes Deals to Fail 47
What Should We Acquire? 47
Why Are We Doing This? 48
Alignment of Interests 48
Allocate Enough Resources 49
If It Can Go Wrong, It Will Go Wrong 49
CHAPTER 4 A Global Perspective 51
Advantages of Global M&A 52
Challenges to Global M&A 52
Negotiations and the Importance of Cultural Tune-In 55
Strategic Due Diligence 56
Postmerger Integration: Are the Odds in Your Favor? 59
From the Start: Think Integration 61
Acquisitions that Build Value 62
1. Set Clear Expectations and Invest in High-Quality, Two-Way Communication 63
2. Acknowledge Cultural Differences but Simultaneously Create a Common Corporate Culture with a Single Goal: Achieving High Performance 64
3. Move to a Cross-Border Operating Model 65
The Legal Environment and the Acquisition Process 66
The Legal Environment and the Conduct of Business 67
Taxation 68
Labor 68
Foreign Corrupt Practices Act (FCPA) 69
Success Factors 70
PART TWO The M&A Practice and Processes 71
CHAPTER 5 Practice Management 73
Primary M&A Advisors 74
Marketing the M&A Practice 76
Networking 76
Marketing and Advertising 77
Pretransaction Consulting 77
Valuation Services 77
Other Consulting Services 78
Becoming an Expert 78
Understanding the Private Business Owner 78
Client Acceptance 79
Initial Financial Analysis 82
Value Discussions 82
Process Discussions 82
Confidentiality 83
Client Engagement 84
Identification of the Parties 85
Scope of Service 85
Limitations and Disclosures 86
Fees 86
Double Lehman Formula 87
Termination and Tail 88
Licensure Issues in the M&A Business 88
CHAPTER 6 Sell-Side Representation and Process 91
Selling Process Overview 91
Step 1: Data Collection 92
Step 2: Industry Research and Identifying Buyer Types 94
Step 3: The Marketing Book 95
Step 4: Marketing Process 99
Step 5: Negotiating Price and Terms 102
Step 6: Structuring the Transaction 106
Step 7: Receiving Letters of Intent or Term Sheets 109
Step 8: Due Diligence 111
Step 9: Definitive Agreements 112
Step 10: Closing Process 114
CHAPTER 7 Buy-Side Representation and Process 117
Strategy 117
Engagement and Fees 119
The Filter 119
Financing 120
Quality of Earnings 120
Coordination 122
Integration 122
CHAPTER 8 Mergers 123
Initial Analysis of Both Entities 123
Strategic Rationale 124
Valuation Modeling 125
Understand Cost, Operational, and Cultural Differences 125
Develop the Integration Plan 127
Deal Structure and Negotiations 127
Due Diligence 128
Legal Process and Closing 129
Postclosing Integration 130
CHAPTER 9 Professional Standards and Ethics 131
Role of the M&A Advisor in the Economy 132
A Whole New Way 133
The Middle Market Standard 134
Ethical and Professional Standards 134
Competence and Professionalism (Reputation) 134
Best Practices (Activities) 135
Ethics (Behavioral Boundaries) 135
Country Specific (Customs) 136
PART THREE M&A Technical Discussions 137
CHAPTER 10 Financial Analysis 139
Financial Reporting Motivation 139
EBITDA 140
Balance Sheet Analysis 142
Working Capital 142
Normalization 148
CHAPTER 11 Deal Structure and Legal Documentation 151
Attorney's Role 151
Preliminary Legal Documents 153
Confidentiality Agreement 153
Letter of Intent 154
Structure of the Deal 155
Stock Sale/Merger 155
Asset Purchase 157
Section 338(h)(10) Election in a Stock Sale 160
Purchase Price 160
Consulting and Employment Agreements 161
Due Diligence 161
Acquisition Agreements 161
Representations and Warranties 162
Qualifications to Representations and Warranties 163
Indemnification 163
Earnouts 164
Parameters 165
Benefits of Earnouts 165
Shortcomings of Earnouts 165
Regulatory Compliance 166
CHAPTER 12 Tax Structure and Strategy 168
Tax Fundamentals 168
Transaction Tax Basics 172
Asset Transactions 172
Stock Transactions 174
Stock versus Asset Sale Example 175
Negotiations Based on Structure 177
Asset Transaction Details 179
Buyer Tax Issues 185
Tax Glossary and Reference 188
CHAPTER 13 Tax Provisions Used in M&A 193
Installment Sales 193
Risk of Forfeiture 194
Assets that Qualify for Installment Treatment 194
Installment Planning Opportunity 195
Section 1031 (Like-Kind) Exchanges 196
Third-Party Exchanges 196
Partnership M&A 196
General Partnership Doctrine 197
Partnership versus S Corporation 197
Partnership Gain Tracking Rules 200
Purchase Price Allocation for Partnership Buyers 200
Corporate M&A Issues 201
Contributions to Corporations 201
Mergers and Reorganizations 202
Net Operating Loss Limitations 206
Stock/Asset Sale Election: Section 338 206
S Corporation Issues 208
Tax Glossary and Reference 210
CHAPTER 14 Regulation and Compliance 215
Protecting Investors: Securities Act of 1933 215
Exemptions under the 33 Act 216
Commonly Used Private Placement Exemptions 217
Keeping the Markets Honest: Securities Exchange Act of 1934 219
Requirements and Rules 219
Williams Act 220
Antitrust Issues and Laws You May Encounter in the Deal 221
Hart-Scott-Rodino Act 221
Specific Industries 222
Exon-Florio 223
Other Regulatory Issues and Laws You May Encounter in the Deal 223
Bulk Sales Laws 223
The WARN Act 224
The Investment Banker's Perspective 224
SEC Provisions for Broker-Dealers 225
Investment Advisers Act and Investment Company Act of 1940 226
FINRA Provisions for Broker-Dealers 227
The Company's Perspective 227
Process of Issuing and Selling Securities in the Deal 227
State Blue-Sky Laws 228
Considerations for Public Companies 229
CHAPTER 15 Financing Sources and Structures 231
Perspective 231
Buyouts 232
Buyout Deal Structure 234
Bridging the Valuation Gap 237
Recapitalization 237
Acquisitions 237
Financing Primer 239
Capital Structure 239
Factors Shaping the Capital Structure 243
Sources and Types of Funding 246
Debt 247
Private Equity 249
Personal Guarantees 251
CHAPTER 16 Due Diligence 255
Traditional Due Diligence 255
Financial Matters 257
GAAP Compliance 259
Tax Impact and Compliance 260
Compensation and Benefits 262
Legal 263
Information Technology 264
The Diligence Team 265
Due Diligence Process 266
Public versus Private 266
Impact of Globalization 267
Who Relies on Due Diligence? 267
Quality of Earnings 268
Financial Statement Audits 268
CHAPTER 17 Market Valuation 271
Reasons for Appraisal 272
Determine the Value Subworld 272
Calculate the Benefit Stream 273
Synergies 279
Determine Private Return Expectation 281
Specific Investor Return 282
Industry-Specific Return 284
General Investor Returns 284
General Acquisition Selling Multiples 284
Derive Value 285
Global Perspective 289
Epilogue for Business Owners 291
Appendix 297
Transaction Examples 297
Transaction Valuation 298
Tools, Models, Resources, and Templates 299
Glossary 301
Notes 337
About the Authors 343
About the Contributors and Reviewers 347
Index 361