Table Of Content(continued from front flap)
Trottier
strategies that drive better decisions, Middle
which are only possible when owners The middle market—businesses
Break down the walls that stand in the way of business growth M
fully understand the overall market in with revenue between $5 mil-
which their companies swim. with the effective middle market strategies found in lion and $500 million—makes up less
i than 1% of U.S. businesses, but employs
Providing a comprehensive framework Middle Market Strategies d
thirty-nine million people or over one-
for understanding the market for pri-
d third of the workforce. Mid-size busi-
vate mid-sized businesses, Middle Market
nesses are big enough to get the job
Strategies explores: l
e Market done and small enough to seize oppor-
• How Do the Markets Work? The middle market represents about 1% of all U.S. businesses tunities quickly. Both fragile and vital,
• Market Windows but produces about 40% of the gross domestic product. Win- M their significance in today’s volatile
ning the middle market is critical to business owners, and vital economy is even greater as a procession
• M iddle Market by Industry
to the U.S. economy. Providing a comprehensive framework for of larger, more familiar companies, once
• Monetizing the Market a
understanding the market for private mid-sized businesses, Middle thought too big to fail, close their doors
• Traffic Cops, Regulators, and r permanently.
Market Strategies helps owners avoid unnecessary risks and enjoy some
Rule Makers k
well-deserved returns by sharing the lessons learned from hundreds of So, why do some mid-market business-
• Who Gets What, When, Where, featured business owners. e Strategies es win and others lose? Middle Market
and How?
Strategies answers that question by pro-
t
• New Rules of the Game Using ninety real-world case studies, Middle Market Strategies helps viding an in-depth look at the market,
• Market Walls inform better business decisions by providing answers to the most press- S the obstacles today’s owners face, and
ing questions, including: the strategies successful companies have
• Motivational Walls
t
employed to succeed.
• C apital Walls • H ow do the markets work? r
a Sharing his decades of strategic expe-
• O perational Walls • H ow can they be used to improve business value?
rience, author Richard Trottier helps
• And much more • Which strategies work best? te How Private Companies readers come to grips with the private
A must-read for CEOs and presidents of capital markets and their impact on the
• What are the rules and how do you work with them? g
mid-market companies as well as busi- Use the Markets to Create Value businesses within them. The book explores
ness appraisers and capital providers, • How are middle market businesses different from larger and i these markets from the viewpoint of
e
Middle Market Strategies shows readers smaller businesses? their key participants—business owners.
how to turn obstacles into equity. s Readers will discover how winners use
• What separates successful businesses from others?
market rules, patterns, and mechanisms to
RICHARD M. TROTTIER is President Author Richard Trottier’s reader-friendly anecdotes depict owners U overcome walls and create value, and how
s
of Sundial Partners. He has over twenty caught in the daily struggle to survive and the choices they made to e tH they turn long-term trends into real-time
years of experience in advising clients in break down the walls that stood in the way of their growth. Their sto- heow competitive advantages.
acquisition, divestiture, mergers, busi- ries, and the market rules that grew out of them, help to provide CEOs M P Featuring over ninety case studies,
ness valuation, strategic planning, and and presidents of mid-market companies, business appraisers, and capi- arkriv Middle Market Strategies is the first book
turnaround planning. He has written tal providers with a solid understanding of the market to help them etsate to view the mid-market as a whole from
numerous articles that have appeared in t C
make better business decisions. oo as many different vantage points as pos-
such publications as Business Appraisal Cm
Practice, The Tampa Bay Economy, and rep sible. In addition to examining the trends
Mergers & Acquisitions. ate Vanies tThroattt iderri veex atmhein ems atrhkee rti, sea uotfh tohre Rmicahrkaertd,
a
lu what separates it from other markets,
e its structure and what binds it together,
as well as how mid-market companies
operate successfully in various industries.
By providing this 360º overview, read-
ers will develop effective middle market
Richard M. Trottier
(continued on back flap)
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Middle Market Strategies
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Middle Market Strategies
How Private Companies Use the
Markets to Create Value
RICHARD M. TROTTIER
JohnWiley&Sons,Inc.
iii
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Copyright(cid:1)C 2009byRichardM.Trottier.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Trottier,RichardM.,1956–
Middlemarketstrategies:howprivatecompaniesusethemarketsto
createvalue/RichardM.Trottier.
p.cm.
Includesindex.
ISBN978-0-470-46457-1(cloth)
1.Smallbusiness–Finance. 2.Privatecompanies–Finance. I.Title.
HG4027.7.T762009
658.15(cid:2)2–dc22
2008054908
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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Contents
Preface xi
Acknowledgments xiii
CHAPTER1 Market Overview 1
Confluent Trends 3
Overcoming Walls 7
Winning the Middle Market 8
Why Is Winning Important? 9
PART I MARKET WINDOWS 11
CHAPTER2 Rise of the Middle Market 15
Evolution of Small Companies 15
Restructuring of Large Companies 20
The Globalization Paradox 23
Winning the Middle Market 25
CHAPTER3 Market Segmentation Matters 27
Investor Return Expectations 29
Capital Access and Costs 29
Market Works and Institutions 30
Behavior of Players 32
Capital Market Theories 33
Diverse Players Provide Capital Needs 33
Capital Providers’ View of Risk and Return 35
Owners and Managers’ View of Risk and Return 37
Capital Market Segmentation Matters 38
Winning the Middle Market 40
Notes 40
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CHAPTER4 Middle Market Structure 41
What This Market Needs 42
Using the Theory 43
Valuation 45
Capitalization 48
Transfer 50
Triangulating Vince’s Position 52
Note 53
CHAPTER5 Middle Market by Industry 55
Changing Definition of Industries 55
Service Sector 56
Wholesale Distribution Sector 60
Retail Sector 64
Manufacturing Sector 67
Construction Sector 71
PART II MARKET WORKS 77
What Went Wrong? 78
CHAPTER6 Monetizing the Middle Market 81
Private Equity 82
Individual Shareholder Equity 85
Mezzanine Capital 86
Impact of Monetization 91
CHAPTER7 The Information Imperative 93
Financial Statements as a Base 94
Owners, Managers, and Industry Specialists 95
Business Valuation Professionals 97
Intermediaries or Infomediaries 98
Data-Gathering Institutions 100
Impact of Information on the Market 101
Information Attracts Capital 102
The Information Insurgency 103
CHAPTER8 Traffic Cops, Regulators, and Rule Makers 105
Governmental Regulation 105
Regulation by Capital Market Authorities 109
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Contents vii
Regulation by Mutual Adjustment and Cooperation 114
Regulation by Competition 115
CHAPTER9 Who Gets What, When, Where, and How 119
Assigning Resources within a Firm 120
Allotting Resources within Industries 122
Distributing Resources among Market Segments 125
Allocation by Society 126
Winning the Middle Market 127
Note 127
CHAPTER10 Transfer Trends 129
More Deals 130
More Sellers 130
More Buyers 131
More Transfer Methods 132
Transfer Complexity 133
Transfers among Those within the Company 135
Transfers to Those Outside the Company 136
More Complexity 137
Impact of Transfer Trends 139
CHAPTER11 Market Makers and Matchmakers 141
A Historical Precedent 142
Purveyors of Debt and Equity 144
Market Makers, Matchmakers 146
Turnaround Artists 148
Winning the Middle Market 148
CHAPTER12 Market Cycles 149
Business and Transfer Cycles 150
Recession 154
Recovery 156
Growth 157
Decline 158
Winning the Middle Market 161
CHAPTER13 New Rules of the Game 163
Motivational Rule Changes 163
Capital Rule Changes 167
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Informational Rule Changes 169
Operational Rule Changes 171
Market Rule Changes 176
Transfer Rule Changes 179
PART III WALLS 181
The Devil in the Demographic Details 182
CHAPTER14 Motivational Walls 185
The Will to Win 186
The Risk Barrier 188
The Priority Wall 189
The Timing Wall 192
Overcoming Motivational Walls 193
CHAPTER15 Capital Walls 195
Sales and Earnings Walls 196
Access to Capital Walls 199
The Cost of Capital Wall 203
The Only Wall That Matters 207
CHAPTER16 Operational Walls 209
Management Team Walls 211
The Productivity Wall 214
That Vision Thing 218
Strategic Planning Wall 219
The Only Wall That Matters 222
CHAPTER17 Market Walls 223
Limited Ability to Make Markets 225
Supply Chain Walls 228
Path-to-Market Walls 230
The Only Wall That Matters 234
CHAPTER18 Transfer Walls 235
The Wall of Complexity 236
The War of the Worlds Wall 238
