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Corporate Finance in 30 Minutes

For Private Company Owners and Directors

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.

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Where is the Boom in Business Sales by Aging Business Owners?

Are You Ready for Sale Anyhow?

More than a decade ago, Richard Jackim and Peter Christman wrote a book called The $10 Trillion Opportunity. In the book, the authors forecasted massive future sales of private businesses because of the aging of baby boomer business owners. They were right in that there were millions of aging business owners. However, they were early in their prediction of a tsunami of private company sales by those baby boomer owners. Now, more than ever, business owners should be preparing themselves, and their businesses, for the next transaction wave.

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Buy-Sell Agreements for 100% Owned Companies

A Better Idea Than You May Think

In a recent conversation with an author, lawyer and business transition planner, the topic of buy-sell agreements for companies that are 100% owned by a single shareholder came up. Nick Niemann, author of The Next Move for Business Owners, was talking about transition and exit planning when the broad topic of buy-sell agreements arose. I’m not sure who mentioned the subject first, but we both agreed that it is a very good idea for a company to have a buy-sell agreement with its shareholder, even if there is only a single owner.

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Overview of Corporate Finance for Private Businesses

#5: Handbook on Business Valuation for Business Owners

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.

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Shotgun Buy-Sell Agreements Are Not Ideal

Shotgun agreements are found in some buy-sell agreements, but we do not see them regularly. Often used to break deadlocks between owners, a shotgun buy-sell agreement is an agreement where, upon the occurrence of a trigger event, one party makes a determination of price and the other party chooses whether to buy or sell at the given price. While I don’t recommend this type of agreement, in this post, we discuss some of their common characteristics as well as their advantages and disadvantages.

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#4: Handbook on Business Valuation for Business Owners

Direct Derivation of the EBITDA Multiple

Did you ever wonder where EBITDA multiples for private companies come from? Everyone talks about transaction pricing in terms of multiples of EBITDA. Transactions in many industries for attractive private businesses often occur in the range of 4.0x to 6.0x EBITDA, plus or minus a bit. Why? Every business owner should have an idea.

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#3: Handbook on Business Valuation for Business Owners

EBITDA, Enterprise Value and Enterprise Value Multiples

In this post, we look at what are called total capital, or enterprise-level earnings indications like Earnings Before Interest and Taxes (EBIT) and Earnings Before Interest, Taxes, Depreciation and Amortization (EBIDTA). In addition, we will look at EBIT and EBITDA multiples to see how they compare with equity-based multiples like the net income and pre-tax earnings multiples.

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#2: Handbook on Business Valuation for Business Owners

The Gordon Model and Equity-Based Multiples

In the last post, we talked about the basic valuation equation. This equation is derived from something called the Gordon Model (and a couple of other names). We said before that valuation is a combination of art and science. It is time for a bit of the science. We’ll introduce a few equations in support of the basic valuation equation, so don’t let this bother you. After we see the “science” underlying this equation and understand a few more things about valuation, we can talk about more interesting questions.

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#1: Handbook on Business Valuation for Business Owners

Value is [Not] Easy and Fair Market Value

While the basic valuation equation is simplistic, business valuation is not as easy as the equation may suggest. In this post we discuss some of the basics and how it intersects with fair market value, a prevalent standard of value that business owners are commonly required (or find desirable) to obtain in their normal course of business.

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Trump’s Proposed Corporate Tax Cuts and Private Company Values

Will EBITDA Multiples Increase 25%?

With the election of Donald Trump as the 45th President of the United States, the stock market has rallied in what has come to be called the Trump Rally. The Trump Rally has been fueled in part by the anticipation of cuts in corporate taxes, which was a campaign and early-presidency goal. Something is happening with the multiples of earnings placed on public shares. So what is likely to happen to multiples for successful private companies if the Trump tax cut is implemented? Let’s take a look.