Corporate Finance in 30 Minutes

For Private Company Owners and Directors

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Mercer Capital’s Travis Harms wrote a series of four whitepapers under the umbrella of Corporate Finance in 30 Minutes. In this series of white papers, Travis makes something that can sound arcane and difficult, like corporate finance, accessible for business owners and advisers. The first paper is an introduction to corporate finance for private businesses and introduces the three key questions of corporate finance that owners of private businesses face. The subsequent whitepapers address these key questions.

Overview of Corporate Finance for Private Businesses

#5: Handbook on Business Valuation for Business Owners

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We continue the series today with the topic of Corporate Finance, which is about maximizing the value of a firm or business. The three parts of the corporate finance decision tree for public and private businesses are: an investment (or reinvestment decision), also called capital budgeting; the financing decision, also called capital structure; and the dividend or distribution decision. By addressing each of these decisions, corporate managers and boards determine what will be done with available cash flows. The effectiveness with which they make these decisions determines, in large measure, the success of value creation for private firms.

Yahoo’s Demise and Lessons for Private Business Owners

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On Monday, July 25, 2016, Verizon announced the acquisition of the operations of Yahoo for $4.8 billion. I waited on this post because it really isn’t about Yahoo, but about lessons for closely held business owners and their advisers. In any event, that $4.8 billion value for Yahoo’s operation was a far cry from previous indications of value for Yahoo.

11 Potential Private Company Dividend (or Distribution) Policies

Your Company Does Have a Dividend Policy

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Two standard questions business appraisers ask clients in the management interview process include: What has been your dividend (or distribution) policy leading to the present?  Now this is something of a trick question, because we can infer what the dividend policy has been in the past based on examining financial statements. What do you expect […]

Leveraged Dividend Recapitalizations and Leveraged Share Repurchases

Understand the Similarities and Differences and Which Transaction May be Right for Your Company

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Leveraged dividend recapitalizations and leveraged share repurchases are two corporate finance tools that are available to owners of private companies. These tools can be used to create liquidity outside the ownership of private businesses. Interestingly, as we will see, leveraged dividends and leveraged repurchases have very similar impacts on companies (assuming similar companies and same-sized transactions), and quite different impacts on the owners of the companies. In this post, we will illustrate the impact of a leveraged share repurchase and a leveraged dividend on the same company. This analysis will enable us to see the impact leverage has on the company and also, the different impacts the transactions have on owners.

Your Company Has a Dividend Policy

Even If You Don't Think So

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When speaking to business owners in management interviews, I always ask a couple of question: What has been your dividend policy in the past? And, what do you expect it to be going forward? Interestingly, many business owners reply that they don’t have a dividend policy. At that point, I reply that they have had a dividend policy historically, and that they will have a dividend policy prospectively. Considering this, we seek to answer what is a dividend payout ratio and what are the types of dividends?

Dividends and Earnings Retention, Expected Growth and Business Value

The Earnings Retention Rate Determines Reinvestment Which Determines Growth

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This post focuses on the earnings retention rate and its impact on growth. In many previous posts, we have discussed the concept of dividends and dividend policy. Dividends represent the portion of earnings that is available for distribution after the payment of all taxes and accounting for all net reinvestment in the business.

The idea for business owners is to get both sides of this balancing act right. It is good to reinvest for future growth. It is not good to reinvest in unproductive assets. This lowers expected returns and postpones current returns in the form of dividends.

If a business has productive reinvestment opportunities, it is good to try to grow through reinvestment. Reinvestment, as we see, lowers the potential for current returns in favor of future returns gained through growth.

Take your pick. Current returns or future returns or both. Your results will be determined by your earnings retention policy and the mirror dividend policy.

Would You Rather Sell up to Half Your Company to Get Liquidity or Engage in a Leveraged Dividend Recapitalization and Keep All of it for Your Owners

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Recently I spoke with a business owner who had almost sold about half of his company to a private equity investor a few years ago.  The facts will be changed in this story so that neither he nor I should be able to recognize his company.  However, the conversation highlights a potential opportunity for owners […]