Middle Market M & A, 2nd Edition

CHAPTER 5Value Growth and Optimization^a

As mentioned in Chapter 4, a common theme throughout this book is the need for owners and shareholders to increase the value of their businesses and position them to capture that value in a future transaction—value growth and optimization. Value growth and optimization are important whatever the transaction—whether the company is being sold or is making an acquisition, whether it is seeking financing for growth or for recapitalization as a sale. In this chapter we discuss some of the key levers or factors that impact value and that might allow a company to increase the realizable multiple applied to cash flow by a buyer or investor in a transaction, or allow it to obtain more capital to fund its future plans. For private middle market companies, value creation is principally based on long‐term, expected future cash flow. In practice, the activities that lead to value creation are nearly the same whether preparing for a financing, a wave of growth, or an M&A transaction.

Owners of private companies tend to avoid debt and manage the business to minimize taxes and maximize the current cash benefit to the shareholders. While this approach makes sense in the short term, it often overweights decisions and strategies for immediate impact at the expense of what outside investors or lenders would consider long‐term value creation. Many times, improving the realizable value of a company means shifting its approach and pursuing value creation in ...