Valuation for M and A : Building Value in Private Companies

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  • Edition: 2nd
  • Format: Hardcover
  • Copyright: 6/8/2010
  • Publisher: Wiley
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Discover the tools necessary to determine what your company's value is, what drives its value, and how to enhance that value during an M&A transaction.The only book to focus on valuation specifically for merger and acquisitions, Valuation For M&A: Building Value in Private Companies, Second Edition lays out the steps for measuring and managing value creation in privately held businesses. Recognizes a company as an investment and explains how to manage that value to maximize shareholder returns, focusing on returns, risks, and capital invested Explains investment or strategic value versus fair market value and provides a document request checklist; sample interview questions; and formats for adjusting financial statements, developing discount rates, the computation of net cash flow; and a valuation reconciliation form Includes a comprehensive case study to illustrate concepts and calculations Now covers fair value accounting and the impact of SFAS Nos. 141, 142, and 157 and their IFRS counterparts, intangible asset valuation techniques, exit planning, international M&As, and venture backed/early stage companiesShowing corporate executives as well as M&A professionals and business appraisers how to value privately-held businesses for merger and acquisition purposes, this book helps investors, executives, and their advisors determine the optimum strategy to enhance both market value and strategic value to maximize return on investment.

Author Biography

Chris M. Mellen, Asa, Mcba, Cm&Aa, is president and founder of Delphi Valuation Advisors, Inc. (www.delphivaluation.com), located in Boston, Massachusetts and a principal in American Business Appraisers®. He is an Accredited Senior Appraiser (ASA), Master Certified Business Appraiser (MCBA), and Certified Merger & Acquisition Advisor (CM&AA). Chris also holds an MBA with a concentration in finance from Babson College and a bachelor of arts with a major in industrial relations and economics from McGill University. His experience includes completion of over 1,800 valuation assignments since 1989 in a wide range of industries for such purposes as strategic planning, mergers and acquisitions, tax and estate planning and compliance, financial reporting, financing, buy-sell agreements, litigation, and appraisal review. He can be contacted at cm@delphivaluation.com.
Frank C. Evans, ASA, CBA, is the founder of Evans and Associates Valuation Advisory Services (www.evansandassociates.net), in Pittsburgh, Pennsylvania, and a principal in American Business Appraisers®. He holds the Accredited Senior Appraiser (ASA) and Certified Business Appraiser (CBA) designations and held the Certified Public Accountant Accredited in Business Valuation (CPA/ABV) designation. With an MBA and a bachelor of arts degree in economics from the University of Pittsburgh, he performs valuations and related consultation for strategic planning, merger and acquisition, tax planning, shareholder agreements and disputes, and litigation support. He is the coauthor with David Bishop of the first edition of Valuation for M&A and can be reached at fevans@evansandassociates.net.

Table of Contents

Prefacep. xi
Dedication and Acknowledgmentsxv
Winning through Merger and Acquisitionp. 1
Critical Values Shareholders Overlookp. 2
Stand-alone Fair Market Valuep. 4
Investment Value to Strategic Buyersp. 5
"Win-Win": Benefits of Merger and Acquisitionp. 7
Building Value and Measuring Return on Investment in a Private Companyp. 13
Public Company Value Creation Modelp. 13
Computing Private Company Value Creation and ROIp. 15
Analyzing Value Creation Strategiesp. 30
Competitive Analysisp. 37
Linking Strategic Planning to Building Valuep. 39
Assessing Specific-Company Riskp. 40
Competitive Factors Frequently Encountered in Nonpublic Entitiesp. 45
Financial Analysisp. 46
Conclusionp. 51
Merger and Acquisition Market and Planning Processp. 53
Common Seller and Buyer Motivationsp. 55
Why Mergers and Acquisitions Failp. 57
Sales Strategy and Processp. 58
Acquisition Strategy and Processp. 66
Due Diligence Preparationp. 77
Measuring Synergiesp. 81
Synergy Measurement Processp. 82
Key Variables in Assessing Synergiesp. 85
Synergy and Advance Planningp. 86
Exit Planningp. 89
Why Is Exit Planning So Difficult?p. 90
What Makes Planning for Your Private Company Investment Unique?p. 93
Why Should Exit Planning for Your Private Company Begin Now?p. 95
Exit Planning Processp. 96
Setting Exit Goalsp. 98
Owner Readinessp. 99
Type of Exiting Ownerp. 100
Exit Optionsp. 101
Range of Valuesp. 105
Execution of Exit Planp. 107
Valuation Approaches and Fundamentalsp. 109
Business Valuation Approachesp. 109
Using the Invested Capital Model to Define the Investment Being Appraisedp. 111
Why Net Cash Flow Measures Value Most Accuratelyp. 112
Frequent Need to Negotiate from Earnings Measuresp. 114
Financial Statement Adjustmentsp. 117
Managing Investment Risk in Merger and Acquisitionp. 120
Conclusionp. 125
Income Approach: Using Rates and Returns to Establish Valuep. 127
Why Values for Merger and Acquisition Should Be Driven by the Income Approachp. 127
Two Methods within the Income Approachp. 129
Three-Stage DCF Modelp. 134
Establishing Defendable Long-term Growth Rates and Terminal Valuesp. 135
Cost of Capital Essentials for Accurate Valuationsp. 141
Cost of Debt Capitalp. 142
Cost of Preferred Stockp. 143
Cost of Common Stockp. 144
Fundamentals and Limitations of the Capital Asset Pricing Modelp. 145
Modified Capital Asset Pricing Modelp. 148
Build-up Modelp. 149
Summary of Ibbotson Rate of Return Datap. 155
Private Cost of Capitalp. 156
International Cost of Capitalp. 158
How to Develop an Equity Cost for a Target Companyp. 158
Weighted Average Cost of Capitalp. 163
Iterative Weighted Average Cost of Capital Processp. 164
Shortcut Weighted Average Cost of Capital Formulap. 168
Common Errors in Computing Cost of Capitalp. 170
Market Approach: Using Guideline Companies and Strategic Transactionsp. 173
Merger and Acquisition Transactional Data Methodp. 174
Guideline Public Company Methodp. 178
Selection of Valuation Multiplesp. 181
Market Multiples Commonly Usedp. 183
Asset Approachp. 189
Book Value versus Market Valuep. 190
Premises of Valuep. 191
Use of the Asset Approach to Value Lack-of-Control Interestsp. 191
Adjusted Book Value Methodp. 192
Treatment of Nonoperating Assets or Asset Surpluses or Shortagesp. 197
Specific Steps in Computing Adjusted Book Valuep. 197
Adjusting Value through Premiums and Discountsp. 199
Applicability of Premiums and Discountsp. 200
Application and Derivation of Premiums and Discountsp. 201
Apply Discretion in the Size of the Adjustmentp. 203
Control versus Lack of Control in Income-driven Methodsp. 204
Fair Market Value versus Investment Valuep. 205
Reconciling Initial Value Estimates and Determining Value Conclusionp. 207
Essential Need for Broad Perspectivep. 207
Income Approach Reviewp. 210
Market Approach Reviewp. 215
Asset Approach Reviewp. 216
Value Reconciliation and Conclusionp. 218
Checks to Valuep. 220
Candidly Assess Valuation Capabilitiesp. 221
Art of the Dealp. 223
Unique Negotiation Challengesp. 223
Deal Structure: Stock versus Assetsp. 225
Terms of Sale: Cash versus Stockp. 231
Bridging the Gapp. 233
See the Deal from the Other Sidep. 236
M&A and Financial Reportingp. 239
U.S. GAAP and IFRSp. 240
Relevant FASB and IFRS Statementsp. 241
Reviews by the Audit Firmp. 242
ASC 820: Fair Value Measurements (SFAS 157)p. 243
ASC 805: Business Combinations (SFAS 141(R))p. 246
ASC 350: Goodwill and Other Intangible Assets (SFAS 142)p. 255
Incorporating ASC 805 (SFAS 141(R)) into the Due Diligence Processp. 257
Referencesp. 260
Intangible Asset Valuationp. 263
Approaches to Valuing Intangible Assetsp. 264
Key Components to Intangible Asset Valuationp. 266
Intangible Asset Valuation Methodsp. 275
Conclusionp. 284
Measuring and Managing Value in High-Tech Start-upsp. 285
Why Appraisals of High-Tech Start-ups Are Essentialp. 285
Key Differences in High-Tech Start-upsp. 287
Value Management Begins with Competitive Analysisp. 288
Stages of Developmentp. 290
Risk and Discount Ratesp. 292
Start-ups and Traditional Valuation Methodsp. 293
QED Survey of Valuation Methods Used by Venture Capitalistsp. 298
A Probability-Weighted Scenario Method to Value Start-upsp. 303
Equity Allocation Methodsp. 309
Conclusionp. 311
Cross-Border M&Ap. 313
Strategic Buy-Side Considerationsp. 313
Due Diligencep. 322
Sell-Side Considerationsp. 326
Merger and Acquisition Valuation Case Studyp. 329
History and Competitive Conditionsp. 330
Potential Buyersp. 331
General Economic Conditionsp. 332
Specific Industry Conditionsp. 333
Growthp. 334
Computation of the Stand-alone Fair Market Valuep. 334
Computation of Investment Valuep. 348
Suggested Considerations to Case Conclusionp. 356
About the Authorsp. 350
Indexp. 361
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