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 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.
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.
The issue of whether private companies should pay dividends is an important one. Many private company business owners (and boards) resist paying dividends because they desire to retain flexibility at their companies and do not desire to incur risk from leverage (or slower ability to repay debt). The interesting thing about this position is that it creates polar opposite effects on private companies and their shareholders. What follows are ten good reasons to consider paying private company dividends and five things that some folks say represent the downside.
This post addresses the so-called Mandelbaum “benchmark analysis” which was created by Judge David Laro in his decision in Mandelbaum v. Commissioner. This analysis has received considerable valuation press. It is time that we examine it on a current basis.
The levels of value chart is one of the most important descriptive figures for business valuation. In a previous post, we gave names to the “spaces” on this chart, which are familiar valuation discounts and premiums used by business appraisers. This post focuses on why those “spaces” exist and the economic factors that create the familiar discounts and premiums.
BV Resources recently published a DLOM Survey. It had 10 questions and 202 responders. This post looks at several of the questions to infer the current state of the art in valuation regarding DLOMs. The post is longer than most but is worth your investment of time to read it and hopefully comment since the issue is key in all valuations of illiquid minority interests of companies.
When I was a young business appraiser, or well, when I was a new but not so young business appraiser, the valuation of illiquid minority interests involved developing a base value for a business and then applying two big discounts, a minority interest discount (MID), and then, a marketability discount, aka DLOM. This post is about the first, now disappearing, minority interest discount.
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.
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.
