Valuation for M&A: Building Value in Private Companies, 2nd Edition


Praise for Valuation for M & A Second Edition

"Mellen and Evans have really 'nailed it' with their comprehensive but fluid, easy-to-read book on corporate valuations. No business owner, senior manager, or M&A advisor should be without this document, which focuses on value creation, company risks, competitive analysis, synergies, adjustments, etc, particularly as it pertains to exit planning. A great achievement!"
—Russell Robb, former president, Association for Corporate Growth

"Valuation for M&A is a wonderfully practical and thoughtful analysis of how to analyze the elements of value in the buying and selling of private middle-market companies. The authors allow readers to target those aspects of valuation that matter to them most, quickly and easily. This book is a great reference for sellers, investors, financing sources, professionals, and students of the subject involved in private M&A."
—Peter Blasier, Partner, Reed Smith LLP

"In this second edition of Valuation for M&A, Mellen and Evans respond to the impact that changing financial reporting standards, intangible assets, and globalization have had on M&A by adding an easy-to-understand, broad overview of these complex topics. The reader, for example, will gain a better understanding of the application of the valuation process to intangible assets, the companies that own them, and how valuation and accounting interact."
—James B. Lurie, Principal, CapVal, LLC

"We have subscribed to the approach to valuation presented to us by the authors for years. Specifically, their approach enables us to focus both on driving our own value and understanding the value (or lack of it) in M&A opportunities. Given the market opportunities of the past several years and those that most certainly lie ahead, we believe the disciplined approach they describe in this book is critical. In our privately held company, we are making these decisions with our own money, not someone else's, so we have to understand value."
—Kevin McCarter, Chief Executive Officer, PetroLiance LLC

"Provides an excellent road map for the M&A process and focuses on the elements critical to building value in private businesses. Don't enter into a negotiation without reading this!"
—Z. Christopher Mercer, Chief Executive Officer, Mercer Capital Management, Inc.

CHRIS M. MELLEN, ASA, MCBA, CM&AA, is president and founder of Delphi Valuation Advisors, Inc. (, located in Boston, Massachusetts and a principal in American Business Appraisers®. He is an Accredited Senior Appraiser (ASA), Master Certified Business Appraiser (MCBA), and Certified Merger & Acquisition Advisor (CM&AA). Chris also holds an MBA with a concentration in finance from Babson College and a bachelor of arts with a major in industrial relations and economics from McGill University. His experience includes completion of over 1,800 valuation assignments since 1989 in a wide range of industries for such purposes as strategic planning, mergers and acquisitions, tax and estate planning and compliance, financial reporting, financing, buy-sell agreements, litigation, and appraisal review. He can be contacted at

FRANK C. EVANS, ASA, CBA, is the founder of Evans and Associates Valuation Advisory Services (, in Pittsburgh, Pennsylvania, and a principal in American Business Appraisers®. He holds the Accredited Senior Appraiser (ASA) and Certified Business Appraiser (CBA) designations and held the Certified Public Accountant Accredited in Business Valuation (CPA/ABV) designation. With an MBA and a bachelor of arts degree in economics from the University of Pittsburgh, he performs valuations and related consultation for strategic planning, merger and acquisition, tax planning, shareholder agreements and disputes, and litigation support. He is the coauthor with David Bishop of the first edition of Valuation for M&A and can be reached at


Dedication and Acknowledgments.

CHAPTER 1 Winning through Merger and Acquisition.

Critical Values Shareholders Overlook.

Stand-alone Fair Market Value.

Investment Value to Strategic Buyers.

"Win-Win" Benefits of Merger and Acquisition.

CHAPTER 2 Building Value and Measuring Return on Investment in a Private Company.

Public Company Value Creation Model.

Computing Private Company Value Creation and ROI.

Analyzing Value Creation Strategies.

CHAPTER 3 Competitive Analysis.

Linking Strategic Planning to Building Value.

Assessing Specific-Company Risk

Competitive Factors Frequently Encountered in Nonpublic Entities.

Financial Analysis.


CHAPTER 4 Merger and Acquisition Market and Planning Process.

Common Seller and Buyer Motivations.

Why Mergers and Acquisitions Fail.

Sales Strategy and Process.

Acquisition Strategy and Process.

Due Diligence Preparation.

CHAPTER 5 Measuring Synergies.

Synergy Measurement Process.

Key Variables in Assessing Synergies.

Synergy and Advance Planning.

CHAPTER 6 Exit Planning.

Why Is Exit Planning So Difficult?

What Makes Planning for Your Private Company Investment Unique?

Why Should Exit Planning for Your Private Company Begin Now?

Exit Planning Process.

Step 1: Setting Exit Goals.

Step 2: Owner Readiness.

Step 3: Type of Exiting Owner.

Step 4: Exit Options.

Step 5: Range of Values.

Step 6: Execution of Exit Plan.

CHAPTER 7 Valuation Approaches and Fundamentals.

Business Valuation Approaches.

Using the Invested Capital Model to Define the Investment Being Appraised.

Why Net Cash Flow Measures Value Most Accurately.

Frequent Need to Negotiate from Earnings Measures.

Financial Statement Adjustments.

Managing Investment Risk in Merger and Acquisition.


CHAPTER 8 Income Approach: Using Rates and Returns to Establish Value.

Why Values for Merger and Acquisition Should Be Driven by the Income Approach.

Two Methods within the Income Approach.

Three-Stage DCF Model.

Establishing Defendable Long-term Growth Rates and Terminal Values.

CHAPTER 9 Cost of Capital Essentials for Accurate Valuations.

Cost of Debt Capital.

Cost of Preferred Stock.

Cost of Common Stock.

Fundamentals and Limitations of the Capital Asset Pricing Model.

Modified Capital Asset Pricing Model.

Build-up Model.

Summary of Ibbotson Rate of Return Data.

Private Cost of Capital.

International Cost of Capital.

How to Develop an Equity Cost for a Target Company.

CHAPTER 10 Weighted Average Cost of Capital.

Iterative Weighted Average Cost of Capital Process.

Shortcut Weighted Average Cost of Capital Formula.

Common Errors in Computing Cost of Capital.

CHAPTER 11 Market Approach: Using Guideline Companies and Strategic Transactions.

Merger and Acquisition Transactional Data Method.

Guideline Public Company Method.

Selection of Valuation Multiples.

Market Multiples Commonly Used.

CHAPTER 12 Asset Approach.

Book Value versus Market Value.

Premises of Value.

Use of the Asset Approach to Value Lack-of-Control Interests.

Adjusted Book Value Method.

Treatment of Nonoperating Assets or Asset Surpluses or Shortages.

Specific Steps in Computing Adjusted Book Value.

CHAPTER 13 Adjusting Value through Premiums and Discounts.

Applicability of Premiums and Discounts.

Application and Derivation of Premiums and Discounts.

Apply Discretion in the Size of the Adjustment.

Control versus Lack of Control in Income-driven Methods.

Fair Market Value versus Investment Value.

CHAPTER 14 Reconciling Initial Value Estimates and Determining Value Conclusion.

Essential Need for Broad Perspective.

Income Approach Review.

Market Approach Review.

Asset Approach Review.

Value Reconciliation and Conclusion.

Checks to Value.

Candidly Assess Valuation Capabilities.

CHAPTER 15 Art of the Deal.

Unique Negotiation Challenges.

Deal Structure: Stock versus Assets.

Terms of Sale: Cash versus Stock.

Bridging the Gap.

See the Deal from the Other Side.

CHAPTER 16 M&A and Financial Reporting.


Relevant FASB and IFRS Statements.

Reviews by the Audit Firm.

ASC 820: Fair Value Measurements (SFAS 157).

ASC 805: Business Combinations (SFAS 141(R)).

ASC 350: Goodwill and Other Intangible Assets (SFAS 142).

Incorporating ASC 805 (SFAS 141(R)) into the Due Diligence Process.


CHAPTER 17 Intangible Asset Valuation.

Approaches to Valuing Intangible Assets.

Key Components to Intangible Asset Valuation.

Intangible Asset Valuation Methods.


CHAPTER 18 Measuring and Managing Value in High-Tech Start-ups.

Why Appraisals of High-Tech Start-ups Are Essential.

Key Differences in High-Tech Start-ups.

Value Management Begins with Competitive Analysis.

Stages of Development.

Risk and Discount Rates.

Start-ups and Traditional Valuation Methods.

QED Survey of Valuation Methods Used by Venture Capitalists.

A Probability-Weighted Scenario Method to Value Start-ups.

Equity Allocation Methods.


CHAPTER 19 Cross-Border M&A.

Strategic Buy-Side Considerations.

Due Diligence.

Sell-Side Considerations.

CHAPTER 20 Merger and Acquisition Valuation Case Study.

History and Competitive Conditions.

Potential Buyers.

General Economic Conditions.

Specific Industry Conditions.


Computation of the Stand-alone Fair Market Value.

Computation of Investment Value.

Suggested Considerations to Case Conclusion.

About the Authors.