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Middle Market M: Handbook for Investment Banking and Business Consulting by Michael R. Nall, Christian W. Blees, Robert T. Slee, Kenneth H. Marks

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CHAPTER 10

Financial Analysis

One of the first deep-dive steps in the deal process, whether on the buy side or the sell side, is to understand the real financial performance of the target company. In the public capital markets, companies have audited financial statements, and the reporting of their financial performance and making disclosures about assumptions and risk factors is mandated to comply with Generally Accepted Accounting Principles (GAAP), and, in some cases, International Financial Reporting Standards (IFRS) and certain rules of the Securities and Exchange Commission (SEC). In the private capital markets, this uniform approach of reporting business performance does not exist—or at least not at the level of rigor of the public environment. Private businesses report financial performance in a number of ways dependent on their size, industry, and, once again, the motivations of the owners.

This chapter addresses the practical analysis of private company financial performance as it relates to M&A and financing transactions.

FINANCIAL REPORTING MOTIVATION

One primary difference in understanding financial performance of a privately held company as opposed to that of a public company is the motivation and purpose for maintaining and disseminating financial statements. In a public company the mandate of management is to increase shareholder value, which should be largely impacted by increasing earnings per share and paying dividends. Their financial statements are maintained ...

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