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Private Capital Markets, + Website
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Table of Contents

Foreword xv Preface xix Acknowledgments xxiii CHAPTER 1 Capital Markets 1 Market Structure 2 Information 2 Why Are Markets Segmented? 8 CHAPTER 2 Middle-Market Finance 17 Middle-Market Finance Theory 18 Triadic Logic 19 Middle-Market Finance Theory in Practice 19 Owner Motives 27 Authority 28 Triangulation 29 PART ONE Business Valuation CHAPTER 3 Private Business Valuation: Introduction 35 Private Investor Expectations Drive Private Valuation 36 Private Business Valuation Can Be Viewed through Value Worlds 39 Valuation as a Range Concept 51 Triangulation 54 CHAPTER 4 Market Value 57 Levels of Private Ownership 61 Triangulation 67 CHAPTER 5 Asset Subworld of Market Value 69 Steps to Derive Net Asset Value 73 Triangulation 73 CHAPTER 6 Financial Subworld of Market Value 75 Specific Investor Return 82 Specific Industry Return 84 General Investor Returns 87 Triangulation 90 CHAPTER 7 Synergy Subworld of Market Value 93 Synergies 97 Capitalization of Benefit Streams 104 Discounting of Benefit Streams 104 Seller/Buyer Market Valuation 105 Nonenterprise Market Valuations 108 Triangulation 108 CHAPTER 8 Fair Market Value 111 Appraisal Organizations 113 Business Appraisal Standards 114 Fair Market Value Process 115 Key Steps to Derive Fair Market Value 125 Does the Fair Market Value Process Make Sense? 126 Tearing Down the Buildup Models 129 Triangulation 130 CHAPTER 9 Fair Value 133 Dissenting and Oppressed Shareholders 133 Triggering Events 134 Determination of Fair Value 137 Triangulation 140 CHAPTER 10 Incremental Business Value 143 Nature of Incremental Business Value 144 Problems with Using Traditional Methods 146 Value-Based Approaches 146 Net Present Value 146 Incremental Business Value 148 Private Cost of Capital Model 151 Ramifications of Using PCOC 155 Investment 156 Project Decision Making 158 Problems with Incremental Business Value 158 Value-Creation Strategies 158 Increase Recast EBITDA 159 Reduce Risk 160 Employ High-Yielding Capital 160 Incremental Business Value versus Market Value 161 Triangulation 162 CHAPTER 11 Insurable Value 165 Risk and Insurance 165 Buy/Sell Agreements 167 Valuation Mechanics 168 Triggering Events 170 Key Person Insurance 172 Business Interruption 174 Triangulation 177 CHAPTER 12 FASB Value Worlds 179 FASB Fair Value (ASC 820, Formerly FAS 157) 179 Business Combinations (ASC 805, Formerly FAS 141R) 184 Impaired Goodwill (ASC 350-20) 186 Valuation 189 Triangulation 192 CHAPTER 13 Intangible Asset Value 195 Subworlds 197 Intellectual Property 201 Intellectual Capital 204 Triangulation 206 CHAPTER 14 Other Value Worlds 209 Investment Value World 209 Owner Value World 210 Collateral Value World 212 Early Equity Value World 215 Bankruptcy Value World 216 Public Value World 217 Triangulation 219 CHAPTER 15 Private Business Valuation: Conclusion 223 Private Investor Return Expectations 223 Value Worlds 225 Private Business Valuation Is a Range Concept 230 Triangulation 231 Final Thoughts on Valuation 232 PART TWO Capital Structure CHAPTER 16 Capital Structure: Introduction 235 Public Capital Markets 235 Private Capital Markets 240 Pepperdine Private Capital Market Line 244 Key Issues Regarding the Pepperdine Private Capital Market Line 249 Capital Structure Treatment 250 Triangulation 252 CHAPTER 17 Bank Lending 255 Types of Facilities 255 Interest Rates 259 Interest Rate Hedges 262 Loan Covenants 265 How Banks Deal with Covenant Violations 266 Loan Costs 266 Risk Ratings 270 Negotiating Points 270 Triangulation 274 CHAPTER 18 Government Lending Programs 275 Industrial Revenue Bonds 276 Business and Industry Loan Program 279 Small Business Administration Programs 281 7(a) Loan Guaranty Program 282 Certified Development Company 504 Loan Program 286 CAPLines Loan Program 289 Export Working Capital Program 291 Negotiating Points 294 Triangulation 294 CHAPTER 19 Equipment Leasing 297 Types of Leases 297 Lease Rate Factors 301 Lessor Types 302 Comparison of Leasing and Purchasing 306 Negotiating Points 310 Triangulation 312 CHAPTER 20 Asset-Based Lending 315 How Asset-Based Lending Works 315 Asset-Based Lenders 320 Tier 1 Asset-Based Lenders 322 Tier 2 Asset-Based Lenders 325 Tier 3 Asset-Based Lenders 328 Negotiating Points 331 Triangulation 333 CHAPTER 21 Factoring 335 How Factoring Works 335 Mechanics of Factoring 337 Fees and Terms 338 Negotiating Points 343 Triangulation 345 CHAPTER 22 Mezzanine Capital 347 Loan Structure 347 Mezzanine Investors 351 Targeted Investments 353 Pricing 354 Debt Mezzanine Capital 354 Equity Mezzanine Capital 356 Other Deal Terms 358 Negotiating Points 360 Triangulation 363 CHAPTER 23 Owners, Angels, and Venture Capitalists 365 Stages of Private Equity Investor Involvement 366 Private Placements 368 Financial Barn Raisings 368 Within Existing Business Relationships 369 Why Private Placements Fail 369 Pre- and Postmoney Valuation 379 Negotiating Points 380 Triangulation 383 CHAPTER 24 Private Equity 385 Stages of Private Equity Investor Involvement 386 Hedge Funds 392 Family Offices 394 Term Sheet 396 Negotiating Points 397 Triangulation 399 CHAPTER 25 Capital Structure: Conclusion 401 Capital Providers Manage Risk and Return in Their Portfolios 401 The Pepperdine Private Capital Market Line Comprises Expected Returns 402 Private Cost of Capital Emanates from the Private Capital Markets 404 High Cost of Capital Limits Private Company Value Creation 405 Intermediation Is Relatively Ineffective in the Middle Market 406 Triangulation 407 PART THREE Business Transfer CHAPTER 26 Business Transfer: Introduction 411 Public Manager and Owner Motives 411 Private Business Ownership Transfer Spectrum 413 Employee Transfer Channel 415 Charitable Trusts Transfer Channel 416 Family Transfer Channel 417 Co-Owner Transfer Channel 418 Outside, Retire, Transfer Channel 418 Outside, Continue, Transfer Channel 419 Going Public, Going Private Transfer Channel 419 Exit Planning 420 Triangulation 421 CHAPTER 27 Employee Stock Ownership Plans 423 Overview 424 Leveraged ESOPs 429 ESOPs in S Corporations 431 Setting Up an ESOP 431 Points to Consider 436 Bottom Line on ESOPs 438 Triangulation 438 CHAPTER 28 Management Transfers 441 Differences between Management Buyouts and Management Buy-Ins 443 Likely Deal Structures 444 Deals 447 Points to Consider 456 Triangulation 459 CHAPTER 29 Charitable Trusts 461 Structure of Charitable Trusts 461 Charitable Remainder Trusts 461 Points to Consider for CRTs 466 Charitable Lead Trusts 468 Points to Consider for CLTs 471 Comparison of CRTs and CLTs 473 Triangulation 473 CHAPTER 30 Family Transfers 475 Stock Gifts 476 Private Annuities 480 Self-Canceling Installment Notes 482 Grantor-Retained Annuity Trusts 483 Family Limited Partnerships 487 Intentionally Defective Grantor Trusts 489 Comparison of Family Transfer Methods 492 Role of Insurance in Family Transfers 493 Triangulation 493 CHAPTER 31 Co-Owner Transfers 495 Buy/Sell Agreements 495 Buy/Sell Types 497 Triggering Events 499 Funding Techniques 501 Ways to Handle Deadlocks 502 When No Buy/Sell Agreement Exists 502 Triangulation 503 CHAPTER 32 Outside Transfers: Retire 505 Preparation for a Transfer 506 Transfer Players 507 Marketing Processes 508 Negotiated Transfers 509 Private Auctions 512 Two-Step Private Auctions 517 Closing the Deal 519 After the Transfer 521 Triangulation 521 CHAPTER 33 Outside Transfers: Continue 523 Consolidations 523 Roll-Ups 526 Buy and Build or Recapitalizations 528 Recapitalization Points to Consider 533 Triangulation 533 CHAPTER 34 Going Public, Going Private 535 Direct Public Offerings 536 Which Companies Are Public? 538 Initial Public Offering Team 539 IPO Process 541 Advantages of Going Public 544 Disadvantages of Going Public 544 Going Public Key Points to Consider 545 Going Public on Foreign Exchanges 546 Reverse Mergers 547 Going Private 548 Going Private Key Points to Consider 549 Triangulation 551 CHAPTER 35 Business Transfer: Conclusion 553 Segmented Transfer Activity and Arbitrage 553 Owner Motives Choose the Range of Values 556 Creating Value in a Private Business Requires Planning 560 Triangulation 566 CHAPTER 36 Conclusion 569 Theme 1 569 Theme 2 570 Theme 3 571 Theme 4 571 Theme 5 572 Private Capital Markets 573 What We Do Not Know 575 A Final Thought 578 APPENDIX A Corporate Finance Theory: Application to Private Capital Markets 579 APPENDIX B Principle of Substitution www.wiley.com/go/privatecapital APPENDIX C IBA Standards: Business Appraisal Standards www.wiley.com/go/privatecapital APPENDIX D Private Equity Securities www.wiley.com/go/privatecapital APPENDIX E Sample Preferred Stock Offering Term Sheet www.wiley.com/go/privatecapital APPENDIX F Private Placements www.wiley.com/go/privatecapital APPENDIX G Sample Management Buyout Letter of Intent www.wiley.com/go/privatecapital About the Web Site 597 Index 599

About the Author

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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