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More About This Title Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests, Second Edition +Website
English
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.
English
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.
English
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
