Valuation for M and A : Building Value in Private Companies

by Mellen, Chris M.; Evans, Frank C.

• ISBN13: 9780470604410
• ISBN10: 0470604417
• Edition: 2nd
• Format: Hardcover
• Copyright: 2010-06-08
• Publisher: Wiley

Summary

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 [e-mail].
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 [e-mail].

Table of Contents

Preface	p. xi
Dedication and Acknowledgmentsxv
Winning through Merger and Acquisition	p. 1
Critical Values Shareholders Overlook	p. 2
Stand-alone Fair Market Value	p. 4
Investment Value to Strategic Buyers	p. 5
"Win-Win": Benefits of Merger and Acquisition	p. 7
Building Value and Measuring Return on Investment in a Private Company	p. 13
Public Company Value Creation Model	p. 13
Computing Private Company Value Creation and ROI	p. 15
Analyzing Value Creation Strategies	p. 30
Competitive Analysis	p. 37
Linking Strategic Planning to Building Value	p. 39
Assessing Specific-Company Risk	p. 40
Competitive Factors Frequently Encountered in Nonpublic Entities	p. 45
Financial Analysis	p. 46
Conclusion	p. 51
Merger and Acquisition Market and Planning Process	p. 53
Common Seller and Buyer Motivations	p. 55
Why Mergers and Acquisitions Fail	p. 57
Sales Strategy and Process	p. 58
Acquisition Strategy and Process	p. 66
Due Diligence Preparation	p. 77
Measuring Synergies	p. 81
Synergy Measurement Process	p. 82
Key Variables in Assessing Synergies	p. 85
Synergy and Advance Planning	p. 86
Exit Planning	p. 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 Process	p. 96
Setting Exit Goals	p. 98
Owner Readiness	p. 99
Type of Exiting Owner	p. 100
Exit Options	p. 101
Range of Values	p. 105
Execution of Exit Plan	p. 107
Valuation Approaches and Fundamentals	p. 109
Business Valuation Approaches	p. 109
Using the Invested Capital Model to Define the Investment Being Appraised	p. 111
Why Net Cash Flow Measures Value Most Accurately	p. 112
Frequent Need to Negotiate from Earnings Measures	p. 114
Financial Statement Adjustments	p. 117
Managing Investment Risk in Merger and Acquisition	p. 120
Conclusion	p. 125
Income Approach: Using Rates and Returns to Establish Value	p. 127
Why Values for Merger and Acquisition Should Be Driven by the Income Approach	p. 127
Two Methods within the Income Approach	p. 129
Three-Stage DCF Model	p. 134
Establishing Defendable Long-term Growth Rates and Terminal Values	p. 135
Cost of Capital Essentials for Accurate Valuations	p. 141
Cost of Debt Capital	p. 142
Cost of Preferred Stock	p. 143
Cost of Common Stock	p. 144
Fundamentals and Limitations of the Capital Asset Pricing Model	p. 145
Modified Capital Asset Pricing Model	p. 148
Build-up Model	p. 149
Summary of Ibbotson Rate of Return Data	p. 155
Private Cost of Capital	p. 156
International Cost of Capital	p. 158
How to Develop an Equity Cost for a Target Company	p. 158
Weighted Average Cost of Capital	p. 163
Iterative Weighted Average Cost of Capital Process	p. 164
Shortcut Weighted Average Cost of Capital Formula	p. 168
Common Errors in Computing Cost of Capital	p. 170
Market Approach: Using Guideline Companies and Strategic Transactions	p. 173
Merger and Acquisition Transactional Data Method	p. 174
Guideline Public Company Method	p. 178
Selection of Valuation Multiples	p. 181
Market Multiples Commonly Used	p. 183
Asset Approach	p. 189
Book Value versus Market Value	p. 190
Premises of Value	p. 191
Use of the Asset Approach to Value Lack-of-Control Interests	p. 191
Adjusted Book Value Method	p. 192
Treatment of Nonoperating Assets or Asset Surpluses or Shortages	p. 197
Specific Steps in Computing Adjusted Book Value	p. 197
Adjusting Value through Premiums and Discounts	p. 199
Applicability of Premiums and Discounts	p. 200
Application and Derivation of Premiums and Discounts	p. 201
Apply Discretion in the Size of the Adjustment	p. 203
Control versus Lack of Control in Income-driven Methods	p. 204
Fair Market Value versus Investment Value	p. 205
Reconciling Initial Value Estimates and Determining Value Conclusion	p. 207
Essential Need for Broad Perspective	p. 207
Income Approach Review	p. 210
Market Approach Review	p. 215
Asset Approach Review	p. 216
Value Reconciliation and Conclusion	p. 218
Checks to Value	p. 220
Candidly Assess Valuation Capabilities	p. 221
Art of the Deal	p. 223
Unique Negotiation Challenges	p. 223
Deal Structure: Stock versus Assets	p. 225
Terms of Sale: Cash versus Stock	p. 231
Bridging the Gap	p. 233
See the Deal from the Other Side	p. 236
M&A and Financial Reporting	p. 239
U.S. GAAP and IFRS	p. 240
Relevant FASB and IFRS Statements	p. 241
Reviews by the Audit Firm	p. 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 Process	p. 257
References	p. 260
Intangible Asset Valuation	p. 263
Approaches to Valuing Intangible Assets	p. 264
Key Components to Intangible Asset Valuation	p. 266
Intangible Asset Valuation Methods	p. 275
Conclusion	p. 284
Measuring and Managing Value in High-Tech Start-ups	p. 285
Why Appraisals of High-Tech Start-ups Are Essential	p. 285
Key Differences in High-Tech Start-ups	p. 287
Value Management Begins with Competitive Analysis	p. 288
Stages of Development	p. 290
Risk and Discount Rates	p. 292
Start-ups and Traditional Valuation Methods	p. 293
QED Survey of Valuation Methods Used by Venture Capitalists	p. 298
A Probability-Weighted Scenario Method to Value Start-ups	p. 303
Equity Allocation Methods	p. 309
Conclusion	p. 311
Cross-Border M&A	p. 313
Strategic Buy-Side Considerations	p. 313
Due Diligence	p. 322
Sell-Side Considerations	p. 326
Merger and Acquisition Valuation Case Study	p. 329
History and Competitive Conditions	p. 330
Potential Buyers	p. 331
General Economic Conditions	p. 332
Specific Industry Conditions	p. 333
Growth	p. 334
Computation of the Stand-alone Fair Market Value	p. 334
Computation of Investment Value	p. 348
Suggested Considerations to Case Conclusion	p. 356
About the Authors	p. 350
Index	p. 361
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