Valuation for M&A

Valuation for M&A : Building Value in Private Companies

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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 mergers 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. This groundbreaking work led directly to authors Chris M. Mellen and Franck C. Evans being named the joint 2010 AM&AA Middle Market Thought Leader of the Year by the Alliance of Merger & Acquisition Advisors, and its thorough overview of the subject:






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 companies



Showing 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.
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Product details

  • Hardback | 400 pages
  • 163 x 236 x 27mm | 718g
  • John Wiley & Sons Ltd
  • Chichester, United Kingdom
  • English
  • 2nd Edition
  • 0470604417
  • 9780470604410
  • 607,933

Flap copy

Most owners and managers operate their businesses year after year without ever knowing what their company is worth, how much more a strategic buyer would pay to acquire it, what factors affect the company's stock value, whether they would be better off selling, and if so, how and when?

Having provided valuation advisory services to thousands of companies and corporate executives, authors and valuation experts Chris Mellen and Frank Evans have developed proven techniques for accurately measuring and successfully building value in your company. Now in a second edition, Valuation for M&A: Building Value in Private Companies provides you with the tools to determine what your company's value is, what drives that value, and how to enhance that value during an M&A transaction and in daily operations--even when no stock price exists.



Now covering fair value accounting and the impact of SFAS Nos. 141 and 157, as well as private capital markets, exit planning, cross-border M&As, and venture-backed/early stage companies, this clear and concise new edition is written for business appraisers, CPAs, investment bankers, venture capitalists, and consultants, as well as for investors and managers of closely held entities.



Complete with a comprehensive case study to illustrate concepts and calculations, Valuation for M&A, Second Edition fills a gap that has long stymied both sides of the M&A equation, handing owners, managers, and strategic buyers the first effective methodology for measuring and building the value of a private company and ensuring that everyone gains the maximum benefit from the deals they make.



The only book to focus on valuation specifically for mergers and acquisitions, Valuation for M&A, Second Edition lays out the steps for measuring and managing value creation in nonpublicly traded entities, and helps investors, executives, and their advisors maximize return on investment and determine the optimum strategy to enhance both market value and strategic value. It provides you with a detailed guide to prepare for the sale and acquisition of your firm, spelling out how to identify, quantify, and qualify the synergies that increase its value to strategic buyers.
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Back cover copy

Praise for Valuation for M & A Second Edition

"Mellen and Evans have really 'nailed it' with their comprehensive but fluid, easy-to-read book on corporate valuations. No business owner, senior manager, or M&A advisor should be without this document, which focuses on value creation, company risks, competitive analysis, synergies, adjustments, etc, particularly as it pertains to exit planning. A great achievement!"
--Russell Robb, former president, Association for Corporate Growth



"Valuation for M&A is a wonderfully practical and thoughtful analysis of how to analyze the elements of value in the buying and selling of private middle-market companies. The authors allow readers to target those aspects of valuation that matter to them most, quickly and easily. This book is a great reference for sellers, investors, financing sources, professionals, and students of the subject involved in private M&A."
--Peter Blasier, Partner, Reed Smith LLP



"In this second edition of Valuation for M&A, Mellen and Evans respond to the impact that changing financial reporting standards, intangible assets, and globalization have had on M&A by adding an easy-to-understand, broad overview of these complex topics. The reader, for example, will gain a better understanding of the application of the valuation process to intangible assets, the companies that own them, and how valuation and accounting interact."
--James B. Lurie, Principal, CapVal, LLC



"We have subscribed to the approach to valuation presented to us by the authors for years. Specifically, their approach enables us to focus both on driving our own value and understanding the value (or lack of it) in M&A opportunities. Given the market opportunities of the past several years and those that most certainly lie ahead, we believe the disciplined approach they describe in this book is critical. In our privately held company, we are making these decisions with our own money, not someone else's, so we have to understand value."
--Kevin McCarter, Chief Executive Officer, PetroLiance LLC



"Provides an excellent road map for the M&A process and focuses on the elements critical to building value in private businesses. Don't enter into a negotiation without reading this!"
--Z. Christopher Mercer, Chief Executive Officer, Mercer Capital Management, Inc.
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Table of contents

Preface xi


Dedication and Acknowledgments xv


CHAPTER 1 Winning through Merger and Acquisition 1


Critical Values Shareholders Overlook 2


Stand-alone Fair Market Value 4


Investment Value to Strategic Buyers 5


Win-Win Benefits of Merger and Acquisition 7


CHAPTER 2 Building Value and Measuring Return on Investment in a Private Company 13


Public Company Value Creation Model 13


Computing Private Company Value Creation and ROI 15


Analyzing Value Creation Strategies 30


CHAPTER 3 Competitive Analysis 37


Linking Strategic Planning to Building Value 39


Assessing Specific-Company Risk 40


Competitive Factors Frequently Encountered in Nonpublic Entities 45


Financial Analysis 46


Conclusion 51


CHAPTER 4 Merger and Acquisition Market and Planning Process 53


Common Seller and Buyer Motivations 55


Why Mergers and Acquisitions Fail 57


Sales Strategy and Process 58


Acquisition Strategy and Process 66


Due Diligence Preparation 77


CHAPTER 5 Measuring Synergies 81


Synergy Measurement Process 82


Key Variables in Assessing Synergies 85


Synergy and Advance Planning 86


CHAPTER 6 Exit Planning 89


Why Is Exit Planning So Difficult? 90


What Makes Planning for Your Private Company Investment Unique? 93


Why Should Exit Planning for Your Private Company Begin Now? 95


Exit Planning Process 96


Step 1: Setting Exit Goals 98


Step 2: Owner Readiness 99


Step 3: Type of Exiting Owner 100


Step 4: Exit Options 101


Step 5: Range of Values 105


Step 6: Execution of Exit Plan 107


CHAPTER 7 Valuation Approaches and Fundamentals 109


Business Valuation Approaches 109


Using the Invested Capital Model to Define the Investment Being Appraised 111


Why Net Cash Flow Measures Value Most Accurately 112


Frequent Need to Negotiate from Earnings Measures 114


Financial Statement Adjustments 117


Managing Investment Risk in Merger and Acquisition 120


Conclusion 125


CHAPTER 8 Income Approach: Using Rates and Returns to Establish Value 127


Why Values for Merger and Acquisition Should Be Driven by the Income Approach 127


Two Methods within the Income Approach 129


Three-Stage DCF Model 134


Establishing Defendable Long-term Growth Rates and Terminal Values 135


CHAPTER 9 Cost of Capital Essentials for Accurate Valuations 141


Cost of Debt Capital 142


Cost of Preferred Stock 143


Cost of Common Stock 144


Fundamentals and Limitations of the Capital Asset Pricing Model 145


Modified Capital Asset Pricing Model 148


Build-up Model 149


Summary of Ibbotson Rate of Return Data 155


Private Cost of Capital 156


International Cost of Capital 158


How to Develop an Equity Cost for a Target Company 158


CHAPTER 10 Weighted Average Cost of Capital 163


Iterative Weighted Average Cost of Capital Process 164


Shortcut Weighted Average Cost of Capital Formula 168


Common Errors in Computing Cost of Capital 170


CHAPTER 11 Market Approach: Using Guideline Companies and Strategic Transactions 173


Merger and Acquisition Transactional Data Method 174


Guideline Public Company Method 178


Selection of Valuation Multiples 181


Market Multiples Commonly Used 183


CHAPTER 12 Asset Approach 189


Book Value versus Market Value 190


Premises of Value 191


Use of the Asset Approach to Value Lack-of-Control Interests 191


Adjusted Book Value Method 192


Treatment of Nonoperating Assets or Asset Surpluses or Shortages 197


Specific Steps in Computing Adjusted Book Value 197


CHAPTER 13 Adjusting Value through Premiums and Discounts 199


Applicability of Premiums and Discounts 200


Application and Derivation of Premiums and Discounts 201


Apply Discretion in the Size of the Adjustment 203


Control versus Lack of Control in Income-driven Methods 204


Fair Market Value versus Investment Value 205


CHAPTER 14 Reconciling Initial Value Estimates and Determining Value Conclusion 207


Essential Need for Broad Perspective 207


Income Approach Review 210


Market Approach Review 215


Asset Approach Review 216


Value Reconciliation and Conclusion 218


Checks to Value 220


Candidly Assess Valuation Capabilities 221


CHAPTER 15 Art of the Deal 223


Unique Negotiation Challenges 223


Deal Structure: Stock versus Assets 225


Terms of Sale: Cash versus Stock 231


Bridging the Gap 233


See the Deal from the Other Side 236


CHAPTER 16 M&A and Financial Reporting 239


U.S. GAAP and IFRS 240


Relevant FASB and IFRS Statements 241


Reviews by the Audit Firm 242


ASC 820: Fair Value Measurements (SFAS 157) 243


ASC 805: Business Combinations (SFAS 141(R)) 246


ASC 350: Goodwill and Other Intangible Assets (SFAS 142) 255


Incorporating ASC 805 (SFAS 141(R)) into the Due Diligence Process 257


References 260


CHAPTER 17 Intangible Asset Valuation 263


Approaches to Valuing Intangible Assets 264


Key Components to Intangible Asset Valuation 266


Intangible Asset Valuation Methods 275


Conclusion 284


CHAPTER 18 Measuring and Managing Value in High-Tech Start-ups 285


Why Appraisals of High-Tech Start-ups Are Essential 285


Key Differences in High-Tech Start-ups 287


Value Management Begins with Competitive Analysis 288


Stages of Development 290


Risk and Discount Rates 292


Start-ups and Traditional Valuation Methods 293


QED Survey of Valuation Methods Used by Venture Capitalists 298


A Probability-Weighted Scenario Method to Value Start-ups 303


Equity Allocation Methods 309


Conclusion 311


CHAPTER 19 Cross-Border M&A 313


Strategic Buy-Side Considerations 313


Due Diligence 322


Sell-Side Considerations 326


CHAPTER 20 Merger and Acquisition Valuation Case Study 329


History and Competitive Conditions 330


Potential Buyers 331


General Economic Conditions 332


Specific Industry Conditions 333


Growth 334


Computation of the Stand-alone Fair Market Value 334


Computation of Investment Value 348


Suggested Considerations to Case Conclusion 356


About the Authors 359


Index 361
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About Chris M. Mellen

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 (R). 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 (R). 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.
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