How To Value Your Business

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How To Value Your Business

• Presented to the 43rd Annual Business
  Administration Conference
• NRMCA
• October 24,2001
• New Orleans

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How To Value Your Business

• What is Value?
• Everything is worth what its purchaser will
  pay for it
• Publius, 1st century BC
• Appraised Value
• Market Value
• These are two different numbers - affected by
  timing and the nature of the transaction
• The house next door story

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How To Value Your Business

• Why are Businesses Valued?
• Financing
• Internal sale
• Divorce/Stockholder suit
• Estate-planning purposes
• Tax purposes
• Property/Estate taxes
• Loss of management
• Buy-sell agreements
• ESOP
• Condemnation

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How To Value Your Business

• Appraised Valuation Methods
• Multiples of Earnings Before Interest, Taxes,
  Depreciation Amortization (EBITDA)
• Discounted Free Cash Flow Method
• Cost to Recreate (asset value approach)
• Price per annual production yard

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How To Value Your Business

• Appraised Valuation Methods Multiples of
  EBITDA
• EBITDA is defined as Earnings Before Interest,
  Taxes, Depreciation and Amortization
• It defines, in any single period, the amount of
  cash the business generates to pay principle,
  interest, taxes, and capital expenditures
• It is the single most reliable tool used today to
  measure the performance of a business

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How To Value Your Business

• Appraised Valuation Methods Multiples of
  EBITDA
• What period?
• Last 12 months?
• Average of the last three years?
• Two ways to examine EBITDA
• Actual
• Recast
• The results will be in a high-low range

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How To Value Your Business

• Appraised Valuation Methods Multiples of
  EBITDA
• Recast EBITDA will translate into these values
• 3.5 to 5 times for ready mixed and concrete
  products operations
• 5 to 9 times aggregate operations (maybe more?)

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How To Value Your Business

• Appraised Valuation Methods Discounted Free
  Cash Flow Method
• Defined as the future cash flows earned by the
  Companys assets, discounted to present value
• Or, the cash that is left after all expenses to
  service principle and interest.

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How To Value Your Business

• Appraised Valuation Methods Discounted Free
  Cash Flow Method
• Approaches
• Free Cash Flows - defined as earnings before
  interest and after taxes (EBIAT), plus
  depreciation, less capital expenditures and
  changes in working capital.
• This is calculated over ten years...or as long as
  possible
• Add the terminal value at the end of the
  projection period

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How To Value Your Business

• Appraised Valuation Methods Discounted Free
  Cash Flow Method
• Results are then discounted
• A discount rate range is applied, based on
  current market conditions (inflation rates are
  key)
• The net numbers based on these discount rates
  establishes a range of values called the Weighted
  Average Cost of Capital (WACC)
• This determines the total enterprise value -
  after deducting debt, it established the equity
  value to the owners.

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How To Value Your Business

• Appraised Valuation Methods Cost to
  Recreate (asset value approach)
• Examine price of both new and used equipment, in
  place
• cost of land/cost of erection
• working capital
• permitting period (and impact of opportunity
  cost)
• start-up losses
• Compare to actual market value of existing assets
• Not looking at appraised values (orderly/forced
  liquidation approaches.) Looking strictly at the
  market

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How To Value Your Business

• Appraised Valuation Methods Price Per
  Production Yard
• All methods combined lead to a range of
  appraised value
• This is compared to a rule of thumb value
  approach price per annual production yard
• This may range from 25 - 50

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How To Value Your Business

• Market Valuation Methods
• Always just a variation on appraisal methods, but
  with a much more subjective approach
• Variables include
• the Purchasers perception of the market
• the financial condition of the Seller
• cost of greenfielding as an option to a purchase

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How To Value Your Business

• Market Valuation Methods
• Multiples of EBITDA - may be affected by
• Fleet age and condition
• Condition of plants and other equipment
• Recent history/trends of Company revenues and
  earnings
• Recent market history/trends
• Local market outlook

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How To Value Your Business

• Market Valuation Methods
• Discounted Free Cash Flow Method - may be
  affected in the same ways
• Value can be manipulated by the Purchaser
• steeper discount rates for calculated Net Present
  Value
• Accelerating plant/truck demand schedules,
  affecting capex rates
• Adjustments in projected market growth

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How To Value Your Business
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How To Value Your Business

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How To Value Your Business
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How To Value Your Business

• Market Valuation Methods

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How To Value Your Business

• Market Valuation Methods
• Cost to Recreate (asset value approach) -
• May only be considered as an option to
  greenfielding, in the case of a new market
  entrant
• Often simply a comparative value analysis as a
  bolt-on acquisition in the case of an existing
  market player

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How To Value Your Business

• Market Valuation Methods
• Other Approaches
• Platform Opportunity - If the Seller is a larger
  player in the market, value can vary widely if
  the Purchaser is motivated enough to seek an
  entry into the market (remember the house next
  door story)
• Bolt-On Acquisition - If that is the perception,
  value is usually less than a Platform Opportunity
  

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How To Value Your Business

• Summary
• There is a difference between appraisal and
  market value methods
• Each has its own purpose and place in
  establishing how a business is valued
• The two approaches do not always produce the same
  value equation, particularly in changing market
  conditions