Middle Market M & A, 2nd Edition

CHAPTER 12Financial Analysis

One of the first 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. Reporting financial performance and disclosing risk factors is mandated to comply with U.S. Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), and rules of the Securities and Exchange Commission (SEC). In the private capital markets, this uniform approach of reporting business performance does not exist. Many private businesses do not have GAAP reporting requirements and therefore report financial performance in a number of ways dependent on their size, industry, and the motivations and sophistication 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 the 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 to report that performance to the public shareholders along with sharing ...