Middle Market M & A

KENNETH H. MARKS, CM&AA, is founder and a Managing Partner of High Rock Partners, Inc. He is the lead author of The Handbook of Financing Growth: Strategies, Capital Structure, and M&A Transactions (Wiley). He has been involved as management, advisor, and board member with many emerging growth and middle market businesses.ROBERT T. SLEE, CM&AA, is Managing Director of Robertson & Foley, a middle market investment-banking firm. He has published over 100 articles on private finance topics in a variety of legal and business journals. He is the author of Private Capital Markets (Wiley).CHRISTIAN W. BLEES, CPA, CM&AA, is President and CEO of BiggsKofford PC, directing several sectors of the business including the firm's merger, acquisition, and sales practice. He has been involved in over 200 middle market M&A sales transactions.MICHAEL R. NALL, CPA, CM&AA, is founder and CEO of the Alliance of Merger & Acquisition Advisors, a Chicago-based professional trade association featuring a resource and development center serving more than 600 independent accountants, attorneys, and business advisors. He is an author and recognized speaker on valuation, growth, and sales of middle market companies.

In-depth coverage in a single handbook of the middle market based on the body of knowledge of the Certified M&A Advisor(TM) credential programM&A advisors have an unprecedented opportunity in the middle market with the generational transfer of wealth and capital being deployed by private equity and corporate investors. Middle Market M&A: Handbook for Investment Banking and Business Consulting is a must-read for investment bankers, M&A intermediaries and specialists, CPAs and accountants, valuation experts, deal and transaction attorneys, wealth managers and investors, corporate development leaders, consultants and advisors, CEOs, and CFOs.* Provides a holistic overview and guide on mergers, acquisitions, divestitures and strategic transactions of companies with revenues from $5 million to $500 million* Encompasses current market trends, activities, and strategies covering pre, during, and post transaction* Addresses the processes and core subject areas required to successfully navigate and close deals in the private capital market* Includes content on engagement and practice management for those involved in the M&A businessThis practical guide and reference is also an excellent primer for those seeking to obtain their FINRA Series 79 license.

Preface xvAcknowledgments xixPART ONE The Middle Market 1CHAPTER 1 Private Capital Markets 1Segmented Markets 4Why Are Markets Segmented? 7Capital Providers 9Owners' and Managers' Views of Risk/Return 10Buyers 11Market Activity 14CHAPTER 2 Valuation Perspectives for the Private Markets 17Private Business Valuation Can Be Viewed through Different Standards of Value 18Market Value 21Fair Market Value 22Fair Value 22Incremental Business Value 23Investment Value 23Owner Value 23Collateral Value 23Book Value 24Why the Different Versions of Value? 24Valuation as a Range Concept 25Value Worlds and Deals 26An Alternative Valuation Approach 26CHAPTER 3 Corporate Development 27Why Acquire? 28The Dismal Ds 29Alternatives 30The Acquisition Process 31The Pipeline and Filter 32Approaching the Target 33The Balance between a Deep Dive and Locking In the Deal 34Lower-Middle Market versus Middle Market Deals 34Valuation from a Strategic's Perspective 35Structuring the Transaction 37The Bid 38Due Diligence 38Integration 41Case Study #1 42Strategic Rationale 42Challenges 43Transaction 44Lessons Learned 44Case Study #2 44Practical Tips and What Causes Deals to Fail 47What Should We Acquire? 47Why Are We Doing This? 48Alignment of Interests 48Allocate Enough Resources 49If It Can Go Wrong, It Will Go Wrong 49CHAPTER 4 A Global Perspective 51Advantages of Global M&A 52Challenges to Global M&A 52Negotiations and the Importance of Cultural Tune-In 55Strategic Due Diligence 56Postmerger Integration: Are the Odds in Your Favor? 59From the Start: Think Integration 61Acquisitions that Build Value 621. Set Clear Expectations and Invest in High-Quality, Two-Way Communication 632. Acknowledge Cultural Differences but Simultaneously Create a Common Corporate Culture with a Single Goal: Achieving High Performance 643. Move to a Cross-Border Operating Model 65The Legal Environment and the Acquisition Process 66The Legal Environment and the Conduct of Business 67Taxation 68Labor 68Foreign Corrupt Practices Act (FCPA) 69Success Factors 70PART TWO The M&A Practice and Processes 71CHAPTER 5 Practice Management 73Primary M&A Advisors 74Marketing the M&A Practice 76Networking 76Marketing and Advertising 77Pretransaction Consulting 77Valuation Services 77Other Consulting Services 78Becoming an Expert 78Understanding the Private Business Owner 78Client Acceptance 79Initial Financial Analysis 82Value Discussions 82Process Discussions 82Confidentiality 83Client Engagement 84Identification of the Parties 85Scope of Service 85Limitations and Disclosures 86Fees 86Double Lehman Formula 87Termination and Tail 88Licensure Issues in the M&A Business 88CHAPTER 6 Sell-Side Representation and Process 91Selling Process Overview 91Step 1: Data Collection 92Step 2: Industry Research and Identifying Buyer Types 94Step 3: The Marketing Book 95Step 4: Marketing Process 99Step 5: Negotiating Price and Terms 102Step 6: Structuring the Transaction 106Step 7: Receiving Letters of Intent or Term Sheets 109Step 8: Due Diligence 111Step 9: Definitive Agreements 112Step 10: Closing Process 114CHAPTER 7 Buy-Side Representation and Process 117Strategy 117Engagement and Fees 119The Filter 119Financing 120Quality of Earnings 120Coordination 122Integration 122CHAPTER 8 Mergers 123Initial Analysis of Both Entities 123Strategic Rationale 124Valuation Modeling 125Understand Cost, Operational, and Cultural Differences 125Develop the Integration Plan 127Deal Structure and Negotiations 127Due Diligence 128Legal Process and Closing 129Postclosing Integration 130CHAPTER 9 Professional Standards and Ethics 131Role of the M&A Advisor in the Economy 132A Whole New Way 133The Middle Market Standard 134Ethical and Professional Standards 134Competence and Professionalism (Reputation) 134Best Practices (Activities) 135Ethics (Behavioral Boundaries) 135Country Specific (Customs) 136PART THREE M&A Technical Discussions 137CHAPTER 10 Financial Analysis 139Financial Reporting Motivation 139EBITDA 140Balance Sheet Analysis 142Working Capital 142Normalization 148CHAPTER 11 Deal Structure and Legal Documentation 151Attorney's Role 151Preliminary Legal Documents 153Confidentiality Agreement 153Letter of Intent 154Structure of the Deal 155Stock Sale/Merger 155Asset Purchase 157Section 338(h)(10) Election in a Stock Sale 160Purchase Price 160Consulting and Employment Agreements 161Due Diligence 161Acquisition Agreements 161Representations and Warranties 162Qualifications to Representations and Warranties 163Indemnification 163Earnouts 164Parameters 165Benefits of Earnouts 165Shortcomings of Earnouts 165Regulatory Compliance 166CHAPTER 12 Tax Structure and Strategy 168Tax Fundamentals 168Transaction Tax Basics 172Asset Transactions 172Stock Transactions 174Stock versus Asset Sale Example 175Negotiations Based on Structure 177Asset Transaction Details 179Buyer Tax Issues 185Tax Glossary and Reference 188CHAPTER 13 Tax Provisions Used in M&A 193Installment Sales 193Risk of Forfeiture 194Assets that Qualify for Installment Treatment 194Installment Planning Opportunity 195Section 1031 (Like-Kind) Exchanges 196Third-Party Exchanges 196Partnership M&A 196General Partnership Doctrine 197Partnership versus S Corporation 197Partnership Gain Tracking Rules 200Purchase Price Allocation for Partnership Buyers 200Corporate M&A Issues 201Contributions to Corporations 201Mergers and Reorganizations 202Net Operating Loss Limitations 206Stock/Asset Sale Election: Section 338 206S Corporation Issues 208Tax Glossary and Reference 210CHAPTER 14 Regulation and Compliance 215Protecting Investors: Securities Act of 1933 215Exemptions under the 33 Act 216Commonly Used Private Placement Exemptions 217Keeping the Markets Honest: Securities Exchange Act of 1934 219Requirements and Rules 219Williams Act 220Antitrust Issues and Laws You May Encounter in the Deal 221Hart-Scott-Rodino Act 221Specific Industries 222Exon-Florio 223Other Regulatory Issues and Laws You May Encounter in the Deal 223Bulk Sales Laws 223The WARN Act 224The Investment Banker's Perspective 224SEC Provisions for Broker-Dealers 225Investment Advisers Act and Investment Company Act of 1940 226FINRA Provisions for Broker-Dealers 227The Company's Perspective 227Process of Issuing and Selling Securities in the Deal 227State Blue-Sky Laws 228Considerations for Public Companies 229CHAPTER 15 Financing Sources and Structures 231Perspective 231Buyouts 232Buyout Deal Structure 234Bridging the Valuation Gap 237Recapitalization 237Acquisitions 237Financing Primer 239Capital Structure 239Factors Shaping the Capital Structure 243Sources and Types of Funding 246Debt 247Private Equity 249Personal Guarantees 251CHAPTER 16 Due Diligence 255Traditional Due Diligence 255Financial Matters 257GAAP Compliance 259Tax Impact and Compliance 260Compensation and Benefits 262Legal 263Information Technology 264The Diligence Team 265Due Diligence Process 266Public versus Private 266Impact of Globalization 267Who Relies on Due Diligence? 267Quality of Earnings 268Financial Statement Audits 268CHAPTER 17 Market Valuation 271Reasons for Appraisal 272Determine the Value Subworld 272Calculate the Benefit Stream 273Synergies 279Determine Private Return Expectation 281Specific Investor Return 282Industry-Specific Return 284General Investor Returns 284General Acquisition Selling Multiples 284Derive Value 285Global Perspective 289Epilogue for Business Owners 291Appendix 297Transaction Examples 297Transaction Valuation 298Tools, Models, Resources, and Templates 299Glossary 301Notes 337About the Authors 343About the Contributors and Reviewers 347Index 361

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