Acknowledgments xv
Preface xvii
Foreword xix
CHAPTER 1
Private Capital Markets 1
Capital Markets 2
Private Capital Markets Theory 3
Private Capital Markets Theory in Practice 6
Owner Motives 12
Authority 13
Triangulation 14
PART ONE
Business Valuation
CHAPTER 2
Private Business Valuation: Introduction 19
Private Investor Expectations Drive Private Valuation 19
Private Business Valuation Can Be Viewed through Value Worlds 23
Value World Quadrants 32
Valuation as a Range Concept 34
Triangulation 37
CHAPTER 3
Market Value 39
Levels of Private Ownership 43
Enterprise Level (100%) 44
Control Level (51% to 99%) 45
Shared Control Level (50%) 46
Minority Interest Level (Less than 50%) 48
Triangulation 49
CHAPTER 4
Asset Subworld of Market Value 50
Triangulation 54
vii
CHAPTER 5
Financial Subworld of Market Value 56
Specific Investor Return 63
Industry Specific Return 64
General Investor Returns 66
Economic Benefit Stream versus the Private Return Expectation 70
Triangulation 70
CHAPTER 6
Synergy Subworld of Market Value 72
Synergies 75
Subworld Comparisons 80
Unique Valuations 85
Nonenterprise Market Valuations 85
Triangulation 86
CHAPTER 7
Fair Market Value 88
Appraisal Organizations 89
Business Appraisal Standards 90
Fair Market Value Process 91
Weighting and Final Value Conclusion 99
Key Steps to Derive Fair Market Value 100
Does the Fair Market Value Process Make Sense? 100
Triangulation 100
CHAPTER 8
Fair Value 104
Dissenting and Oppressed Shareholders 104
Triggering Events 105
Determination of Fair Value 107
Triangulation 110
CHAPTER 9
Economic Value 112
Nature of Economic Value 112
Value-Based Approaches 115
Economic Value 116
Problems with Economic Value 119
Value Creation Strategies 121
Economic Value versus Market Value 123
Triangulation 124
CHAPTER 10
Insurable Value 125
Risk and Insurance 125
Buy/Sell Agreements 126
Valuation Mechanics 127
Key Person Insurance 131
Business Interruption 132
Triangulation 134
viii CONTENTS
CHAPTER 11
Impaired Goodwill 136
The Rules 136
Fair Value 137
The Valuation 140
Triangulation 143
CHAPTER 12
Intangible Asset Value 144
Subworlds 146
Intellectual Property 149
Intellectual Capital 152
Triangulation 153
CHAPTER 13
Other Values 155
Investment Value 155
Owner Value 156
Collateral Value 157
Early Equity Value 160
Triangulation 161
CHAPTER 14
Private Business Valuation: Conclusion 163
Private Investor Return Expectations 163
Value Worlds 164
Private Business Valuation Is a Range Concept 168
Triangulation 170
Final Thoughts on Valuation 170
PART TWO
Capital Structure
CHAPTER 15
Capital Structure: Introduction 173
Public Capital Markets 173
Private Capital Markets 177
Private Capital Access Line 180
Key Issues Regarding the Private Capital Access Line 185
Capital Structure Treatment 186
Triangulation 188
CHAPTER 16
Bank Lending 190
Types of Facilities 190
Interest Rates 194
Interest Rate Hedges 196
Loan Covenants 199
Loan Costs 200
Risk Ratings 204
Negotiating Points 205
Triangulation 206
Contents ix
CHAPTER 17
Government Lending Programs 208
Industrial Revenue Bonds 208
Business and Industry Loan Program 212
Small Business Administration Programs 213
7(a) Loan Guaranty Program 214
Certified Development Company 504 Loan Program 217
CAPLines Loan Program 219
Export Working Capital Program 221
Negotiating Points 223
Triangulation 224
CHAPTER 18
Equipment Leasing 225
Types of Leases 225
Lease Rate Factors 228
Lessor Types 230
Comparison of Leasing and Purchasing 233
Negotiating Points 237
Triangulation 239
CHAPTER 19
Asset-Based Lending 241
How Asset-Based Lending Works 241
Asset-Based Lenders 244
Tier 1 Asset-Based Lenders 246
Tier 2 Asset-Based Lenders 249
Tier 3 Asset-Based Lenders 253
Negotiating Points 255
Triangulation 257
CHAPTER 20
Factoring 259
How Factoring Works 259
Mechanics of Factoring 261
Fees and Terms 262
Negotiating Points 266
Triangulation 268
CHAPTER 21
Mezzanine Capital 270
Loan Structure 270
Mezzanine Investors 272
Targeted Investments 274
Pricing 275
Debt Mezzanine Capital 275
Equity Mezzanine Capital 277
Other Deal Terms 279
Negotiating Points 280
Triangulation 283
x CONTENTS
CHAPTER 22
Private Equity 284
Stages of Private Equity Investment 285
Private Equity Providers 285
Pre- and Postmoney Valuation 297
Term Sheet 297
Negotiating Points 297
Triangulation 301
CHAPTER 23
Capital Structure: Conclusion 303
Choice of Capital Structure Affects Shareholder Value 303
The Private Capital Access Line Comprises Expected Returns 304
Increased Efficiencies May Eventually Reduce Private Return Expectations 306
Capital Providers Manage Risk and Return in their Portfolios 309
Triangulation 310
PART THREE
Business Transfer
CHAPTER 24
Business Transfer: Introduction 313
Market Structure 313
Public versus Private Transfer Correlation 317
Public Manager and Owner Motives 319
Private Business Transfer Spectrum 320
Employee Transfer Channel 322
Charitable Trusts Transfer Channel 323
Family Transfer Channel 324
Co-Owners Transfer Channel 325
Outside, Retire, Transfer Channel 325
Outside, Continue, Transfer Channel 325
Going Public, Going Private Transfer Channel 326
Triangulation 326
CHAPTER 25
Employee Stock Ownership Plans 328
Overview 328
Leveraged ESOPs 332
ESOPs in S Corporations 333
Setting Up an ESOP 334
Points to Consider 337
Bottom Line on ESOPs 339
Triangulation 339
CHAPTER 26
Management Transfers 341
Differences between Management Buyouts and Management Buyins 341
Likely Deal Structures 344
Contents xi
Deals 346
Points to Consider 354
Triangulation 357
CHAPTER 27
Charitable Trusts 358
Structure of Charitable Trusts 358
Charitable Remainder Trusts 358
Points to Consider for CRTs 362
Charitable Lead Trusts 364
Points to Consider for CLTs 367
Comparison of CRTs and CLTs 368
Triangulation 368
CHAPTER 28
Family Transfers 370
Stock Giftings 370
Private Annuities 374
Self-Canceling Installment Notes 376
Grantor Retained Annuity Trusts 377
Family Limited Partnerships 379
Intentionally Defective Grantor Trusts 383
Comparison of Family Transfer Methods 385
Triangulation 386
CHAPTER 29
Co-Owner Transfers 387
Buy/Sell Agreements 387
Buy/Sell Types 389
Buy/Sell Provisions 390
Triggering Events 391
Funding Techniques 393
Ways to Handle Deadlocks 393
When No Buy/Sell Agreement Exists 394
Triangulation 394
CHAPTER 30
Outside Transfers: Retire 395
Preparation for a Transfer 396
Transfer Players 396
Marketing Processes 398
Negotiated Transfers 399
Private Auctions 402
Two-Step Private Auctions 407
After the Transfer 409
Triangulation 409
CHAPTER 31
Outside Transfers: Continue 411
Consolidations 411
Roll-Ups 415
xii CONTENTS
Buy and Build or Recapitalizations 416
Recapitalization Points to Consider 420
Triangulation 421
CHAPTER 32
Going Public, Going Private 422
Direct Public Offerings 423
Which Companies Are Public? 424
Initial Public Offering Team 425
IPO Process 426
Advantages of Going Public 429
Disadvantages of Going Public 429
Going Public Key Points to Consider 430
Reverse Mergers 431
Going Private 432
Going Private Key Points to Consider 433
Triangulation 434
CHAPTER 33
Business Transfer: Conclusion 436
Segmented Transfer Activity and Arbitrage 436
Owner Motives Choose the Range of Values 439
Creating Value in a Private Business Requires Planning 442
Triangulation 447
CHAPTER 34
Conclusion 449
Theme 1 449
Theme 2 450
Theme 3 450
Theme 4 451
Theme 5 451
Private Capital Markets 452
What We Do Not Know 454
A Final Thought 456