“Value” is an expression of the worth of something, measured using two metrics: return and rate of return. To create and build value, businesses must pursue strategies that raise the return, reduce the risk, or combine the two. Conceptually, this seems obvious, but application is more difficult.

The mystery surrounding a company's value often causes executives to make bad investment and operational decisions. But these poor choices can be avoided. Accurate valuations are possible, and M&A deals can succeed for both buyers and sellers. The keys to success are in the pages that follow.

Through providing valuation advisory services to thousands of companies and corporate executives, we have developed the tools to accurately measure and successfully build value in companies. By employing these techniques, owners and managers can determine their company's value, what drives it, and how to enhance that value both in M&A and through daily operations.

In M&A transactions, sellers, buyers, and even their advisors struggle over the value of a business. Often they are frustrated by what they see as the other side's unrealistic expectations. These uncertainties abound:

• Do profits, often computed as EBIT or EBITDA, represent the company's true return to shareholders?
• Is the forecasted performance realistic?
• What is an appropriate rate of return or multiple, considering the investment's risk?
• Should the transaction be structured as an asset or stock deal?
• Has the seller properly prepared and packaged the company to get the best price?
• What personal issues are of critical importance to the seller?
• Has the buyer found the best target and accurately quantified potential synergies?
• Does the deal make sense at the quoted price?

Greater fundamental mystery exists in private companies – those not traded on a public stock market, including thinly traded public companies or divisions of large corporations. Most owners and managers operate these companies year after year without ever knowing the answers to these basic questions:

• What is the company worth?
• How much more would a strategic buyer pay to acquire it?
• What factors most affect the company's stock value?
• What is the owners' real return on investment and rate of return?
• Does that return justify the risk?
• Are owners better off selling, and if so, how and when?

Selling is just one of many options available to a business owner to exit the business. This third edition again takes a step back to discuss the now‐maturing field of exit planning, explain the unique challenges of private company owner exit decisions and the exit‐planning process, and discuss some exit alternatives in cases where selling may not currently be the right option for the business owner.

• What financial, nonfinancial, professional, and personal issues must an owner consider in evaluating whether to exit, and, if so, how?
• What exit options other than a sale are available to the business owner?
• What makes planning a private company investment different?
• Why should exit planning for a private company begin now?

There have been considerable changes in the economy since the prior editions were written. The economy has rapidly become more knowledge‐based, where intangible assets are a more significant portion of a company's value, and more global. Financial reporting standards pertaining to M&A transactions have responded – and this third edition has also responded.

• What are the unique characteristics of foreign companies to consider in cross‐border M&A?
• What are some of the key intangible assets owned by companies, and how are they valued?
• What are the important financial reporting considerations that must be addressed when completing a transaction?
• What are the unique challenges of measuring and managing value in high‐tech start‐ups to maximize shareholder value?
• What is a fairness opinion and why should a private company consider obtaining one in advance of an M&A transaction?

This book provides the tools to answer these and related questions. It is written for business owners, investors, and managers of private companies in the lower middle markets (i.e. companies generating between $3 million and $250 million in revenues) who lack the guidance of a stock price set by a free and active market. It does so in five new sections. The introductory chapter that comprises Part I introduces many of the concepts covered in this book on how both buyer and seller can win from an M&A transaction. Part II focuses on factors to consider when doing both a quantitative and qualitative assessment of a business in an effort to build company value in preparation for an M&A transaction. This part's four chapters introduce and explain how to measure private company return on investment, factors to consider in a market and competitive analysis, specific steps to take in preparing for an M&A transaction, and how to measure synergies to be gained following a successful transaction. Part III explains the valuation process for M&A purposes over eight chapters, which cover the three approaches to value and how to reconcile results when conducting a valuation analysis for a potential or actual M&A transaction. Part IV introduces and explains seven specialty issues as they relate to valuation for M&A, including: exit planning, deal structure, fairness opinions, financial reporting, intangible assets, start‐ups, and cross‐border M&A. Finally, Part V pulls together many of the concepts covered in this book with two case studies – one involving a distribution business and a second involving a public relations agency (professional services firm).

Our solutions to valuation and return on investment questions create accountability and discipline in the M&A process. Our techniques incorporate value enhancement into a private company's annual strategic planning to provide direction to shareholders in their investment decisions. In short, our book is a roadmap to building and measuring value in both operating a company and selling or buying one.

Many investors have heard about building value in a public company where the stock price provides the market's reaction to the company's performance. It is much more difficult to develop a successful strategy and measure performance and ROI accurately when no stock price exists. Difficult, but not impossible.

We invite our readers to employ these techniques to achieve accurate M&A valuations for private companies and to build value in daily operations. Trade the mystery for this roadmap to wealth.

This book is dedicated to our dear friend and mentor, David Bishop, coauthor of the first edition. Through his formation of the American Business Appraisers national network, David brought us together and provided countless hours of education and guidance to elevate us in the business valuation profession. For that we are deeply grateful.

In addition to David, this book would not have been completed successfully without the help and support of many of our colleagues and of Sheck Cho at John Wiley & Sons. We would also like to thank Sid Shaver for his contribution of Chapter 20, “Cross‐Border M&A”; Ken Sanginario for his contribution of Appendix 8A, “Using Specific Company Risk Strategically”; and Justin Johnson for his contribution of Appendix 13A, “Disciplined and Thorough Valuation Analysis Key to Avoiding Failed M&A Deals.”

My thanks to exit planning advisor extraordinaire John Leonetti for his invaluable feedback and many suggestions on the exit planning chapter. I would also like to thank Roger Grabowski for his comments on the cost of capital chapter; Ray Rath, René Hlousek, and Darren Cordier for their edits and feedback on the initial financial reporting and intangible asset chapters in the second edition; Ed Hamilton for his update of the financial reporting chapter in this third edition; Charles Costa for his math checks on the exhibits and some general research; Patrice Radogna for her review of the new case study on the professional services firm; and Frank Mainville and Andrew Reddington for their critique and enhancements to the high‐tech start‐up chapter. And, most important, I owe my deepest gratitude to my family. To my wife, Kim, and my daughters, Sophia and Julia, thank you for your tolerance of my long hours while I was working on both the second and third editions of this book, and for the love, light, and support you bring to me every day!

My continuing thanks to my brother, Harry Evans, who helped so much with the first edition; to my friend and colleague, Frank Mindicino, for his unique knowledge and insights; and to my assistant, Shelly Myers, and my partner and daughter, Sarah DeKreek. Finally, to my wife, Lin, thanks for your love and support in so many ways.