ADDITIONAL PRAISE FOR MIDDLE MARKET M&A

Size: px

Start display at page:

Download "ADDITIONAL PRAISE FOR MIDDLE MARKET M&A"

Teresa Greene
6 years ago
Views:

3 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.

4 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

5 Middle Market M&A

6 Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation, and financial instrument analysis, as well as much more. For a list of available titles, visit our Web site at

7 Middle Market M&A Handbook for Investment Banking and Business Consulting KENNETH H. MARKS ROBERT T. SLEE CHRISTIAN W. BLEES MICHAEL R. NALL John Wiley & Sons, Inc.

8 Copyright c 2012 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) , fax (978) , or on the Web at Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) , fax (201) , or online at Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) , outside the United States at (317) or fax (317) Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at 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 (hardback); ISBN (ebk); ISBN (ebk); ISBN (ebk) 1. Consolidation and merger of corporations. 2. Small business Mergers. I. Marks, Kenneth, 1963 HG4028.M4M dc Printed in the United States of America

9 To our families and God

11 Contents Preface Acknowledgments xv 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 vii

12 viii CONTENTS 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 Set Clear Expectations and Invest in High-Quality, Two-Way Communication Acknowledge Cultural Differences but Simultaneously Create a Common Corporate Culture with a Single Goal: Achieving High Performance 64

13 Contents ix 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

14 x CONTENTS 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

15 Contents xi 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

Hedge Fund. Course STUART A. MCCRARY. John Wiley & Sons, Inc.

Hedge Fund. Course STUART A. MCCRARY. John Wiley & Sons, Inc. Hedge Fund Course STUART A. MCCRARY John Wiley & Sons, Inc. Hedge Fund Course Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North