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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 valuationMiddle market capital sourcesThe business ownership transfer spectrumAnd much morePrivate Capital Markets, Second Edition surveys the private capital markets and presents the proven guidance you need to navigate through these uncharted waters.
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.
Foreword xvPreface xixAcknowledgments xxiiiCHAPTER 1 Capital Markets 1Market Structure 2Information 2Why Are Markets Segmented? 8CHAPTER 2 Middle-Market Finance 17Middle-Market Finance Theory 18Triadic Logic 19Middle-Market Finance Theory in Practice 19Owner Motives 27Authority 28Triangulation 29PART ONE Business ValuationCHAPTER 3 Private Business Valuation: Introduction 35Private Investor Expectations Drive Private Valuation 36Private Business Valuation Can Be Viewed through Value Worlds 39Valuation as a Range Concept 51Triangulation 54CHAPTER 4 Market Value 57Levels of Private Ownership 61Triangulation 67CHAPTER 5 Asset Subworld of Market Value 69Steps to Derive Net Asset Value 73Triangulation 73CHAPTER 6 Financial Subworld of Market Value 75Specific Investor Return 82Specific Industry Return 84General Investor Returns 87Triangulation 90CHAPTER 7 Synergy Subworld of Market Value 93Synergies 97Capitalization of Benefit Streams 104Discounting of Benefit Streams 104Seller/Buyer Market Valuation 105Nonenterprise Market Valuations 108Triangulation 108CHAPTER 8 Fair Market Value 111Appraisal Organizations 113Business Appraisal Standards 114Fair Market Value Process 115Key Steps to Derive Fair Market Value 125Does the Fair Market Value Process Make Sense? 126Tearing Down the Buildup Models 129Triangulation 130CHAPTER 9 Fair Value 133Dissenting and Oppressed Shareholders 133Triggering Events 134Determination of Fair Value 137Triangulation 140CHAPTER 10 Incremental Business Value 143Nature of Incremental Business Value 144Problems with Using Traditional Methods 146Value-Based Approaches 146Net Present Value 146Incremental Business Value 148Private Cost of Capital Model 151Ramifications of Using PCOC 155Investment 156Project Decision Making 158Problems with Incremental Business Value 158Value-Creation Strategies 158Increase Recast EBITDA 159Reduce Risk 160Employ High-Yielding Capital 160Incremental Business Value versus Market Value 161Triangulation 162CHAPTER 11 Insurable Value 165Risk and Insurance 165Buy/Sell Agreements 167Valuation Mechanics 168Triggering Events 170Key Person Insurance 172Business Interruption 174Triangulation 177CHAPTER 12 FASB Value Worlds 179FASB Fair Value (ASC 820, Formerly FAS 157) 179Business Combinations (ASC 805, Formerly FAS 141R) 184Impaired Goodwill (ASC 350-20) 186Valuation 189Triangulation 192CHAPTER 13 Intangible Asset Value 195Subworlds 197Intellectual Property 201Intellectual Capital 204Triangulation 206CHAPTER 14 Other Value Worlds 209Investment Value World 209Owner Value World 210Collateral Value World 212Early Equity Value World 215Bankruptcy Value World 216Public Value World 217Triangulation 219CHAPTER 15 Private Business Valuation: Conclusion 223Private Investor Return Expectations 223Value Worlds 225Private Business Valuation Is a Range Concept 230Triangulation 231Final Thoughts on Valuation 232PART TWO Capital StructureCHAPTER 16 Capital Structure: Introduction 235Public Capital Markets 235Private Capital Markets 240Pepperdine Private Capital Market Line 244Key Issues Regarding the Pepperdine Private Capital Market Line 249Capital Structure Treatment 250Triangulation 252CHAPTER 17 Bank Lending 255Types of Facilities 255Interest Rates 259Interest Rate Hedges 262Loan Covenants 265How Banks Deal with Covenant Violations 266Loan Costs 266Risk Ratings 270Negotiating Points 270Triangulation 274CHAPTER 18 Government Lending Programs 275Industrial Revenue Bonds 276Business and Industry Loan Program 279Small Business Administration Programs 2817(a) Loan Guaranty Program 282Certified Development Company 504 Loan Program 286CAPLines Loan Program 289Export Working Capital Program 291Negotiating Points 294Triangulation 294CHAPTER 19 Equipment Leasing 297Types of Leases 297Lease Rate Factors 301Lessor Types 302Comparison of Leasing and Purchasing 306Negotiating Points 310Triangulation 312CHAPTER 20 Asset-Based Lending 315How Asset-Based Lending Works 315Asset-Based Lenders 320Tier 1 Asset-Based Lenders 322Tier 2 Asset-Based Lenders 325Tier 3 Asset-Based Lenders 328Negotiating Points 331Triangulation 333CHAPTER 21 Factoring 335How Factoring Works 335Mechanics of Factoring 337Fees and Terms 338Negotiating Points 343Triangulation 345CHAPTER 22 Mezzanine Capital 347Loan Structure 347Mezzanine Investors 351Targeted Investments 353Pricing 354Debt Mezzanine Capital 354Equity Mezzanine Capital 356Other Deal Terms 358Negotiating Points 360Triangulation 363CHAPTER 23 Owners, Angels, and Venture Capitalists 365Stages of Private Equity Investor Involvement 366Private Placements 368Financial Barn Raisings 368Within Existing Business Relationships 369Why Private Placements Fail 369Pre- and Postmoney Valuation 379Negotiating Points 380Triangulation 383CHAPTER 24 Private Equity 385Stages of Private Equity Investor Involvement 386Hedge Funds 392Family Offices 394Term Sheet 396Negotiating Points 397Triangulation 399CHAPTER 25 Capital Structure: Conclusion 401Capital Providers Manage Risk and Return in Their Portfolios 401The Pepperdine Private Capital Market Line Comprises Expected Returns 402Private Cost of Capital Emanates from the Private Capital Markets 404High Cost of Capital Limits Private Company Value Creation 405Intermediation Is Relatively Ineffective in the Middle Market 406Triangulation 407PART THREE Business TransferCHAPTER 26 Business Transfer: Introduction 411Public Manager and Owner Motives 411Private Business Ownership Transfer Spectrum 413Employee Transfer Channel 415Charitable Trusts Transfer Channel 416Family Transfer Channel 417Co-Owner Transfer Channel 418Outside, Retire, Transfer Channel 418Outside, Continue, Transfer Channel 419Going Public, Going Private Transfer Channel 419Exit Planning 420Triangulation 421CHAPTER 27 Employee Stock Ownership Plans 423Overview 424Leveraged ESOPs 429ESOPs in S Corporations 431Setting Up an ESOP 431Points to Consider 436Bottom Line on ESOPs 438Triangulation 438CHAPTER 28 Management Transfers 441Differences between Management Buyouts and Management Buy-Ins 443Likely Deal Structures 444Deals 447Points to Consider 456Triangulation 459CHAPTER 29 Charitable Trusts 461Structure of Charitable Trusts 461Charitable Remainder Trusts 461Points to Consider for CRTs 466Charitable Lead Trusts 468Points to Consider for CLTs 471Comparison of CRTs and CLTs 473Triangulation 473CHAPTER 30 Family Transfers 475Stock Gifts 476Private Annuities 480Self-Canceling Installment Notes 482Grantor-Retained Annuity Trusts 483Family Limited Partnerships 487Intentionally Defective Grantor Trusts 489Comparison of Family Transfer Methods 492Role of Insurance in Family Transfers 493Triangulation 493CHAPTER 31 Co-Owner Transfers 495Buy/Sell Agreements 495Buy/Sell Types 497Triggering Events 499Funding Techniques 501Ways to Handle Deadlocks 502When No Buy/Sell Agreement Exists 502Triangulation 503CHAPTER 32 Outside Transfers: Retire 505Preparation for a Transfer 506Transfer Players 507Marketing Processes 508Negotiated Transfers 509Private Auctions 512Two-Step Private Auctions 517Closing the Deal 519After the Transfer 521Triangulation 521CHAPTER 33 Outside Transfers: Continue 523Consolidations 523Roll-Ups 526Buy and Build or Recapitalizations 528Recapitalization Points to Consider 533Triangulation 533CHAPTER 34 Going Public, Going Private 535Direct Public Offerings 536Which Companies Are Public? 538Initial Public Offering Team 539IPO Process 541Advantages of Going Public 544Disadvantages of Going Public 544Going Public Key Points to Consider 545Going Public on Foreign Exchanges 546Reverse Mergers 547Going Private 548Going Private Key Points to Consider 549Triangulation 551CHAPTER 35 Business Transfer: Conclusion 553Segmented Transfer Activity and Arbitrage 553Owner Motives Choose the Range of Values 556Creating Value in a Private Business Requires Planning 560Triangulation 566CHAPTER 36 Conclusion 569Theme 1 569Theme 2 570Theme 3 571Theme 4 571Theme 5 572Private Capital Markets 573What We Do Not Know 575A Final Thought 578APPENDIX A Corporate Finance Theory: Application to Private Capital Markets 579APPENDIX B Principle of Substitution www.wiley.com/go/privatecapitalAPPENDIX C IBA Standards: Business Appraisal Standards www.wiley.com/go/privatecapitalAPPENDIX D Private Equity Securities www.wiley.com/go/privatecapitalAPPENDIX E Sample Preferred Stock Offering Term Sheet www.wiley.com/go/privatecapitalAPPENDIX F Private Placements www.wiley.com/go/privatecapitalAPPENDIX G Sample Management Buyout Letter of Intent www.wiley.com/go/privatecapitalAbout the Web Site 597Index 599
