Book Review: Middle Market M&A: Handbook for Investment Banking and Business Consulting

40 Percent of the U.S. GDP is in Privately Held Businesses. Here’s What You Need to Understand and Operate in This Market.

Performing business valuation and mergers and acquisition work requires understanding a number of core discipline areas. With the expanded understanding of middle market finance, it is helpful to have a roadmap to complete any successful transaction or engagement. 

Navigating the growing middle market is critical to economic success in the coming decades. The recently published book Middle Market M&A by authors Marks, Slee, Blees, and Nall answers critical questions regarding this key market area and more.

While not a textbook, the book provides a holistic overview and guide to mergers, acquisitions, divestitures, and strategic transactions for middle market companies. It provides hard-hitting advice that is unique to the private capital markets and particularly for smaller closely held companies. As a guide for any transaction, it is a necessary reference manual complete with case studies, economic analysis, technical explanations, and best practices within the industry.

The authors begin the book by first describing the content and makeup of the private capital markets. This information is largely taken from Slee’s pioneering work in defining the unique characteristics of the field. This opening discussion provides a solid backdrop upon which to view middle market M&A. Key dynamics are discussed showing the importance of understanding the private capital markets, to which middle market M&A is inextricably tied. This overview highlights the unique segmentation of privately held companies ranging from $5.4 million to$2.0 billion, types of potential buyers in this market, and the importance of understanding the different value worlds.

The United States is estimated to have 40% of its Gross Domestic Product (GDP) coming from this market. A handbook to both understand this market and to operate practically in this market is a valuable resource. When performing valuations, we often reference the information in value worlds. When doing M&A work, we use the book as a guidepost to understand where we are in the process. Applying this economic model will allow the practitioner to be successful in many areas of valuation.

Following the discussion on private capital markets, the authors do a good job of bringing together the different disciplines surrounding M&A work to present a realistic picture of doing transactions, representing transactions and analyzing transactions, as well as understanding the current transaction environment. These practice areas may vary in importance to the reader based on his or her perspective of the deal. Reaching a broader market, the book also has a section on corporate development since many large companies grow through acquiring companies within the middle market. Integrating operations and understanding causes of deal failure are important issues affecting large public or private companies with departments dedicated to performing M&A work.

Another trend of importance that the book discusses is the global perspective of M&A deals.  The globalizing economy has fueled many M&A deals and thinking cross-border leads to unique nuances in executing deals successfully. Located close to Canada, we often have clients doing transactions in different markets with numerous cultural and regulatory requirements. The book discusses key challenges, items not to be overlooked, and the importance of “cultural tune-in” during these types of deals. This discussion concludes with a brief presentation of the Foreign Corrupt Services Act and key points to be aware of for ensuring compliance.

The  handbook then delves into how an M&A practice works and key processes every practice should have, including information on fees, types of services, negotiation methods,  selling techniques, and a review of definitive agreements. The discussion is a general based overview, and the practitioner may need to reference other materials for more detail, such as how to draft a specific definitive agreement. Key areas discussed are the following:

•    Sell side representation   and process
•    Buy side representation and process
•    Mergers

In our opinion, the authors provide a solid illustration of key technical issues one must consider in closing a successful transaction. The following is a broad description of the areas in which the book goes into greater detail:

•     Doing financial analysis on the selling company with necessary key adjustments to  EBITDA, working capital, and balance sheet normalization
•     Deal structure decisions, asset purchases, stock sales, and pre- v. post-deal views
•     The role of the attorney in the M&A process and  key legal documentation
•     Tax structure and strategy from both the buyer’s and the seller’s perspective within multiple entities, different tax rates, and allocating purchase price
•     Types of tax provisions used in M&A including installment sales, Section 1031 exchanges, and merger types
•     Detail on the regulation and compliance governing bodies for M&A transactions in the United States
•     Using financing sources and structures, as well as the ideal mix between the cost of capital and debt/equity ratio
•     Performing due diligence within an M&A transaction. The book goes into compensation and benefits, the diligence team, and quality of earnings issues

Understanding the difference between market valuation and other types of valuations is critical for the valuation expert. Many novices assume that valuation work should end with one number. Due to the different perspectives of value, market value may differ substantially from an independent, third-party valuation. We have to remind clients of this fact. It is important to understand the many purposes of valuation while planning to work on transactions that are most likely to close. In the market-value world, value is in the eye of the beholder. This book eloquently explains the difference and how to navigate the various value worlds.

For the serious or casual M&A practitioner, this is a valuable guide no matter which side of the transaction in which you participate. It reads easily and covers a large number of subjects to help in building a successful transaction. One may need to delve into greater detail while looking at specific issues; however, this book does a great job of presenting the critical issues involved and the current market for M&A activity. We highly recommend the book to anyone in the field or related fields.

Synergetic Finance is an integrated financial services firm located in Seattle, WA, specializing in financial management, business valuation and consulting, and mergers & acquisitions. Mark Girouard is the Director M&A/Valuations and Joseph Maas is the founder/CEO of Synergetic Finance.

By Kenneth H. Marks, Robert T. Slee, Christian W. Blees, Michael R. Nall