Module II· WACC & Capital StructureAdvanced
Question
What are the special features of the capital structure of middle-market / family-owned businesses versus large public companies?
Answer
Special features vs. large public companies
- Bank-centric financing: a relationship-bank model, private placements instead of bonds, and less high-yield market depth.
- Conservative ownership: family owners typically keep lower leverage (net debt/EBITDA <2.0x vs. >3.0x for large public companies).
- Pension liabilities: unfunded direct pension commitments are 'hidden debt' — historically 5–15% of EV in some markets.
- Participation rights, silent partnerships, and mezzanine are common hybrid instruments. WACC implication: a standard public-comps WACC can be too low for a family-owned middle-market business, because the actual financing mix is more complex and the risk is priced higher.
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Pitch tip
When valuing a middle-market business, compute WACC on a 'realistic' capital structure, not the industry median without adjustment.
Founder note
This card originally compared a specific regional middle-market model with large listed US companies; the mechanics above generalize to family-owned middle-market businesses versus large public companies in any market. Flagged so a reviewer can confirm the generalization holds for the intended audience.