Private Capital Markets: Valuation, Capitalization, and Transfer of Private Business Interests, 2nd Edition

June 2011 Hardcover

Robert Slee

John Wiley & Sons, Inc.

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.

"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

This landmark resource covers:

  • Private business valuation
  • Middle market capital sources
  • The business ownership transfer spectrum
  • And much more

Private 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.

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Table of Contents

Foreword. 
Preface. 
Acknowledgement. 

Chapter 1 Capital Markets.
 
Market Structure. 
Information. 
Why Are Markets Segmented? 

Part One Business Valuation.
 

Chapter 2 Middle Market Finance.
 
Middle Market Finance Theory. 
Triadic Logic. 
Middle Market Finance Theory in Practice. 
Owner Motives. 
Authority. 
Triangulation. 

Chapter 3 Private Business Valuation: Introduction.
 
Private Investor Expectations Drive Private Valuation. 
Is the Subject Company Similar? 
Principle of Substitution. 
Private Business Valuation Can be Viewed through Value Worlds. 
Value Worlds as Possible Worlds. 
Value Worlds. 
Value World Quadrants. 
Valuation as a Range Concept. 
Triangulation. 

Chapter 4 Market Value.
 
Levels of Private Ownership. 
Triangulation. 

Chapter 5 Asset Subworld of Market Value.
 
Steps to Derive Net Asset Value. 
Triangulation. 

Chapter 6 Financial Subworld of Market Value.
 
Specific Investor Return. 
Industry Specific Return. 
General Investor Returns. 
Triangulation. 

Chapter 7 Synergy Subworld of Market Value.
 
Synergies. 
Capitalization of Benefit Streams. 
Discounting of Benefit Streams. 
Seller/Buyer Market Valuation. 
Non-Enterprise Market Valuations. 
Triangulation. 

Chapter 8 Fair Market Value.
 
Appraisal Organizations. 
Business Appraisal Standards. 
Fair Market Value Process. 
Step 7: Derive a Final Value Conclusion. 
Key Steps to Derive Fair Market Value. 
Does the Fair Market Value Process Make Sense? 
Tearing Down the Build-Up Models. 
Triangulation. 

Chapter 9
 Fair Value. 
Dissenting and Oppressed Shareholders. 
Triggering Events. 
Determination of Fair Value. 
Triangulation. 

Chapter 10 Incremental Business Value.
 
Nature of Incremental Business Value. 
Problems with Using Traditional Methods. 
Value-Based Approaches. 
Net Present Value. 
Incremental Business Value. 
Private Cost of Capital Model. 
Ramifications of Using PCOC. 
Investment. 
Project Decision Making. 
Problems with Incremental Business Value. 
Value Creation Strategies. 
Increase Recast EBITDA. 
Reduce Risk. 
Employ High Yielding Capital. 
Incremental Business Value versus Market Value. 
Triangulation. 

Chapter 11 Insurable Value.
 
Risk and Insurance. 
Buy/Sell Agreements. 
Valuation Mechanics. 
Triggering Events. 
Key Person Insurance. 
Business Interruption. 
Triangulation. 

Chapter 12 FASB Value Worlds.
 
FASB Fair Value (ASC 820, formerly FAS 157). 
Business Combinations (ASC 805, formerly FAS 141R). 
Impaired Goodwill (ASC 350-20). 
The Valuation. 
Triangulation. 

Chapter 13 Intangible Asset Value.
 
Subworlds. 
Intellectual Property. 
Intellectual Capital. 
Triangulation. 

Chapter 14 Other Value Worlds .
 
Investment Value World. 
Owner Value World. 
Collateral Value World. 
Early Equity Value World. 
Bankruptcy Value World. 
Public Value World. 
Triangulation. 

Chapter 15 Private Business Valuation: Conclusion.
 
Private Investor Return Expectations. 
Value Worlds. 
Private Business Valuation is a Range Concept. 
Triangulation. 
Final Thoughts on Valuation. 

Part Two Capital Structure.
 

Chapter 16 Capital Structure: Introduction.
 
Public Capital Markets. 
Private Capital Markets. 
Pepperdine Private Capital Market Line. 
Key Issues Regarding the Pepperdine Private Capital Market Line. 
Capital Structure Treatment. 
Triangulation. 

Chapter 17 Bank Lending.
 
Types of Facilities. 
Interest Rates. 
Interest Rate Hedges. 
Loan Covenants. 
How Banks Deal With Covenant Violations. 
Loan Costs. 
Risk Ratings. 
Negotiating Points. 
Triangulation. 

Chapter 18 Government Lending Programs.
 
Industrial Revenue Bonds. 
Business and Industry Loan Program. 
Small Business Administration Programs. 
7(a) Loan Guaranty Program. 
Certified Development Company 504 Loan Program. 
CAPLines Loan Program. 
Export Working Capital Program. 
Negotiating Points. 

Triangulation.
 

Chapter 19 Equipment Leasing.
 
Types of Leases. 
Lease Rate Factors. 
Lessor Types. 
Comparison of Leasing and Purchasing. 
Negotiating Points. 
Triangulation. 

Chapter 20 Asset-Based Lending.
 
How Asset-Based Lending Works. 
Asset-Based Lenders. 
Tier 1 Asset-Based Lenders. 
Tier 2 Asset-Based Lenders. 
Tier 3 Asset-Based Lenders. 
Negotiating Points. 
Triangulation. 

Chapter 21 Factoring.
 
How Factoring Works. 
Mechanics of Factoring. 
Fees and Terms. 
Negotiating Points. 
Triangulation. 

Chapter 22 Mezzanine Capital.
 
Loan Structure. 
Mezzanine Investors. 
Targeted Investments. 
Pricing. 
Debt Mezzanine Capital. 
Equity Mezzanine Capital. 
Other Deal Terms. 
Negotiating Points. 
Triangulation. 

Chapter 23 Owners, Angels, and Venture Capitalists.
 
Stages of Private Equity Investor Involvement. 
Private Placements. 
Financial Barn Raisings. 
Within Existing Business Relationships. 
Why Private Placements Fail. 
Pre- and Postmoney Valuation. 
Negotiating Points. 
Triangulation. 

Chapter 24 Private Equity.
 
Stages of Private Equity Investor Involvement. 
Hedge Funds. 
Family Offices. 
Term Sheet. 
Negotiating Points. 
Triangulation. 

Chapter 25 Capital Structure: Conclusion.
 
Capital Providers Manage Risk and Return in Their Portfolios. 
The Pepperdine Private Capital Market Line Comprises Expected Returns. 
Private Cost of Capital Emanates from the Private Capital Markets. 
High Cost of Capital Limits Private Company Value Creation. 
Intermediation Is Relatively Ineffective in the Middle Market. 
Triangulation. 

Part Three Business Transfer.
 

Chapter 26 Business Transfer: Introduction.
 
Public Manager and Owner Motives. 
Private Business Ownership Transfer Spectrum. 
Employee Transfer Channel. 
Charitable Trusts Transfer Channel. 
Family Transfer Channel. 
Co-Owner Transfer Channel. 
Outside, Retire, Transfer Channel. 
Outside, Continue, Transfer Channel. 
Going Public, Going Private Transfer Channel. 
Exit Planning. 
Triangulation. 

Chapter 27 Employee Stock Ownership Plans.
 
Overview. 
Leveraged ESOPs. 
ESOPs in S Corporations. 
Setting Up an ESOP. 
Points to Consider. 
Bottom Line on ESOPs. 
Triangulation. 

Chapter 28 Management Transfers.
 
Differences between Management Buyouts and Management Buyins. 
Likely Deal Structures. 
Deals. 
Points to Consider. 
Triangulation. 

Chapter 29 Charitable Trusts.
 
Structure of Charitable Trusts. 
Charitable Remainder Trusts. 
Points to Consider for CRTs. 
Charitable Lead Trusts. 
Points to Consider for CLTs. 
Comparison of CRTs and CLTs. 
Triangulation. 

Chapter 30 Family Transfers.
 
Stock Gifts. 
Private Annuities. 
Self-Canceling Installment Notes. 
Grantor Retained Annuity Trusts. 
Family Limited Partnerships. 
Intentionally Defective Grantor Trusts. 
Comparison of Family Transfer Methods. 
Role of Insurance in Family Transfers. 
Triangulation. 

Chapter 31 Co-Owner Transfers.
 
Buy/Sell Agreements. 
Buy/Sell Types. 
Triggering Events. 
Funding Techniques. 
Ways to Handle Deadlocks. 
When No Buy/Sell Agreement Exists. 
Triangulation. 

Chapter 32 Outside Transfers: Retire.
 
Preparation for a Transfer. 
Transfer Players. 
Marketing Processes. 
Negotiated Transfers. 
Private Auctions. 
Two-Step Private Auctions. 
Closing the Deal. 
After the Transfer. 
Triangulation. 

Chapter 33 Outside Transfers: Continue.
 
Consolidations. 
Roll-Ups. 
Buy and Build or Recapitalizations. 
Recapitalization Points to Consider. 
Triangulation. 

Chapter 34 Going Public, Going Private.
 
Direct Public Offerings. 
Which Companies Are Public? 
Initial Public Offering Team. 
IPO Process. 
Advantages of Going Public. 
Disadvantages of Going Public. 
Going Public Key Points to Consider. 
Going Public on Foreign Exchanges. 
Reverse Mergers. 
Going Private. 
Going Private Key Points to Consider. 
Triangulation. 

Chapter 35 Business Transfer: Conclusion.
 
Segmented Transfer Activity and Arbitrage. 
Owner Motives Choose the Range of Values. 
Creating Value in a Private Business Requires Planning. 
Triangulation. 

Chapter 36
 Conclusion. 
Theme 1. 
Theme 2. 
Theme 3. 
Theme 4. 
Theme 5. 
Private Capital Markets. 
What We Do Not Know. 
A Final Thought. 
Appendix A Corporate Finance Theory: Application to Private Capital Markets. 
Appendix B Principle of Substitution www.wiley.com//go. 
Appendix C IBA Standards: Business Appraisals Standards  
Appendix D Private Equity Securities  
Appendix E Sample Preferred Stock Offering Term Sheet  
Appendix F Private Placements  
Appendix G Sample Management Buyout Letter of Intent  
About the Web Site. 
Index.