Chapter_10 - Analyzing Privately Held Companies Course...

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Analyzing Privately Held Companies
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Course Layout: M&A & Other Restructuring Activities Part IV: Deal Structuring & Financing Part II: M&A Process Part I: M&A Environment Payment & Legal Considerations Public Company Valuation Financial Modeling Techniques M&A Integration Business & Acquisition Plans Search through Closing Activities Part V: Alternative Strategies Accounting & Tax Considerations Business Alliances Divestitures, Spin-Offs & Carve-Outs Bankruptcy & Liquidation Regulatory Considerations Motivations for M&A Part III: M&A Valuation & Modeling Takeover Tactics and Defenses Financing Strategies Private Company Valuation Cross-Border Transactions
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Learning Objectives Primary learning objective: Provide students with a knowledge of how to analyze and value privately held firms Secondary learning objectives: Provide students with a knowledge of Characteristics of privately held businesses Challenges of valuing and analyzing privately held firms; Why and how private company financial statements may have to be recast; and How to adjust maximum offer prices for liquidity risk, the value of control, and minority risk
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What is a Private Firm? A firm whose securities are not registered with state or federal authorities Without registration, their shares cannot be traded in the public securities markets. Share ownership usually heavily concentrated (i.e., firms “closely held”)
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Key Characteristics of Privately Held U.S. Firms There are more than 28 million firms in the U.S. Of these, 7.4 million have employees, with the rest largely self-employed, unincorporated businesses M&A market in U.S concentrated among smaller, family-owned firms -- Firms with 99 or fewer employees account for 98% of all firms with employees
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Percent Distribution of U.S. Firms Filing Income Taxes in 2004 Proprietorships Partnerships Corporations 72% 9% 19%
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Family-Owned Firms 89% of U.S. businesses family owned Major challenges include: succession, lack of corporate governance, informal management structure, less skilled lower level management, and a preference for ownership over growth.
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Governance Issues What works for public firms may not for private companies “Market model” relies on dispersed ownership with ownership & control separate “Control model” more applicable where ownership tends to be concentrated and the right to control the business is not fully separate from ownership (e.g., small businesses)
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Challenges of Analyzing and Valuing Privately Held Firms Lack of externally generated information Lack of adequate documentation of key intangible assets such as software, chemical formulae, recipes, etc. Lack of internal controls and rigorous reporting systems Firm specific problems Narrow product offering Lack of management depth Lack of leverage with customers and vendors Limited ability to finance future growth Common forms of manipulating reported income Revenue may be understated and expenses overstated to minimize tax liabilities The opposite may be true if the firm is for sale
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