How To Value Your Business Presented to the 43rd Annual Business Administration Conference NRMCA October 24,2001 New Orleans

How To Value Your How To Value Your BusinessBusiness

Presented to the 43rd Annual Business Administration Conference

NRMCA

October 24,2001

New Orleans

How To Value Your BusinessHow 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


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


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


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



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



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?)


Appraised Valuation Methods: Discounted Free Cash Flow Method

Defined as the future cash flows earned by the Company’s assets, discounted to present value

Or, “the cash that is left after all expenses to service principle and interest”.



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



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.


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


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


Market Valuation Methods

Always just a variation on appraisal methods, but with a much more subjective approach

Variables include: the Purchaser’s perception of the market the financial condition of the Seller cost of greenfielding as an option to a purchase



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

How To Value Your BusinessHow To Value Your BusinessABC CONCRETE

SUMMARY OF READY MIX PROJECTIONS

"MOST PROBABLE SENARIO" READY MIX OPERATION

2002 THRU 2011(000)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 AVG

SALES & PRODUCTIONYARDS 500 494 489 499 514 532 543 556 568 579 528% CHANGE NA -1.1% -1.0% 2.0% 3.0% 3.5% 2.0% 2.5% 2.0% 2.0% 1.7%SELL PRICE $57.66 $58.31 $58.89 $60.07 $61.87 $64.03 $65.32 $66.95 $68.29 $69.65 $63.10% CHANGE NA 1.1% 1.0% 2.0% 3.0% 3.5% 2.0% 2.5% 2.0% 2.0% 2.1%NET SALES $34,186 $28,826 $28,824 $29,988 $31,814 $34,080 $35,457 $37,252 $38,757 $40,323 $33,951% CHANGE NA -15.7% 0.0% 4.0% 6.1% 7.1% 4.0% 5.1% 4.0% 4.0% 2.1%

CAPITAL EXPTRUCKS $0 $0 $0 $0 $0 $0 $716 $1,309 $1,181 $1,198 $440PLT & EQPT $20 $20 $20 $20 $20 $100 $20 $20 $20 $20 $28TOTAL CAP EXP $20 $20 $20 $20 $20 $100 $736 $1,329 $1,201 $1,218 $468% CHANGE NA 0.0% 0.0% 0.0% 0.0% 400.0% 636.2% 80.5% -9.6% 1.5% 123.2%

DEPRECIATIONTRUCKS $1,243 $1,160 $609 $21 $12 $3 $286 $695 $889 $1,013 $593PLT & EQPT $872 $732 $720 $505 $290 $166 $34 $31 $27 $25 $340TOTAL DEPR $2,115 $1,891 $1,329 $526 $303 $169 $321 $726 $917 $1,038 $933% CHANGE NA -10.6% -29.7% -60.4% -42.5% -44.1% 89.7% 126.2% 26.3% 13.2% 7.6%

VARIABLE COSTSMATERIAL $16,190 $16,238 $16,529 $16,986 $17,975 $18,743 $19,628 $20,269 $21,340 $21,927 $18,582UNIT $32.38 $32.84 $33.77 $34.02 $34.96 $35.22 $36.16 $36.43 $37.60 $37.88 $35.23%CHANGE NA 0.3% 1.8% 2.8% 5.8% 4.3% 4.7% 3.3% 5.3% 2.8% 3.4%DELIVERY $4,960 $4,756 $4,756 $4,948 $5,249 $5,623 $5,850 $6,147 $6,395 $6,653 $5,534UNIT $9.92 $9.62 $9.72 $9.91 $10.21 $10.57 $10.78 $11.05 $11.27 $11.49 $10.49%CHANGE NA -4.1% 0.0% 4.0% 6.1% 7.1% 4.0% 5.1% 4.0% 4.0% 3.4%PLANT $1,945 $1,730 $1,729 $1,799 $1,909 $2,045 $2,127 $2,235 $2,325 $2,419 $2,026UNIT $3.89 $3.50 $3.53 $3.60 $3.71 $3.84 $3.92 $4.02 $4.10 $4.18 $3.84%CHANGE NA -11.1% 0.0% 4.0% 6.1% 7.1% 4.0% 5.1% 4.0% 4.0% 2.6%TOTAL VAR CSTS $23,095 $22,724 $23,014 $23,733 $25,133 $26,411 $27,606 $28,650 $30,060 $31,000 $26,143UNIT $46.19 $45.96 $47.02 $47.54 $48.88 $49.62 $50.85 $51.49 $52.96 $53.55 $49.56% CHANGE NA -1.6% 1.3% 3.1% 5.9% 5.1% 4.5% 3.8% 4.9% 3.1% 3.3%


FIXED COSTS$6,570 $6,413 $5,919 $5,185 $5,031 $4,969 $5,192 $5,670 $5,935 $6,132 $5,702

% CHANGE NA -2.4% -7.7% -12.4% -3.0% -1.2% 4.5% 9.2% 4.7% 3.3% -0.6%

MARGIN$22.18 $12.34 $11.87 $12.53 $12.99 $14.41 $14.46 $15.46 $15.32 $16.10 $14.77

% CHANGE NA -44.4% -3.8% 5.6% 3.7% 10.9% 0.4% 6.9% -0.9% 5.1% -1.8%

EBIAT$2,796 -$11 $174 $822 $1,200 $1,775 $1,742 $1,907 $1,814 $4,504 $1,672

% CHANGE NA -100.4% -1656.9% 371.4% 46.0% 47.9% -1.9% 9.5% -4.8% 148.2% -126.8%

WORKING CAPITAL$1,630 $1,166 $1,290 $1,365 $1,453 $1,612 $1,663 $1,786 $1,830 $1,934 $1,573

% CHANGE NA NA 10.6% 5.8% 6.4% 10.9% 3.2% 7.4% 2.5% 5.7% 6.6%

TERMINAL VALUE$11,734 $11,734

FREE CASH FLOWS$4,891 $2,324 $1,360 $1,253 $1,395 $1,686 $1,275 $1,182 $1,485 $1,795 $1,865

% CHANGE NA -52.5% -41.5% -7.8% 11.3% 20.9% -24.4% -7.3% 25.7% 20.9% -6.1%

NPV OF FCFWACC 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0%NPV $13,934 $13,217 $12,553 $11,937 $11,366 $10,835 $10,341


ABC CONCRETESUMMARY OF READY MIX PROJECTIONS

"BEST CASE SENARIO" READY MIX OPERATION

2002 THRU 2011(000)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 AVG

SALES & PRODUCTIONYARDS 575 583 589 601 619 640 666 682 696 710 636% CHANGE NA 1.4% 1.0% 2.0% 3.0% 3.5% 4.0% 2.5% 2.0% 2.0% 2.4%SELL PRICE $59.45 $60.27 $60.87 $62.09 $63.95 $66.19 $68.84 $70.56 $71.97 $73.41 $65.76% CHANGE NA 1.4% 1.0% 2.0% 3.0% 3.5% 4.0% 2.5% 2.0% 2.0% 2.4%NET SALES $34,186 $35,133 $35,840 $37,287 $39,558 $42,376 $45,834 $48,154 $50,099 $52,123 $42,059% CHANGE NA 2.8% 2.0% 4.0% 6.1% 7.1% 8.2% 5.1% 4.0% 4.0% 4.8%

CAPITAL EXPTRUCKS $0 $0 $0 $0 $834 $1,270 $1,432 $1,309 $1,328 $1,348 $752PLT & EQPT $20 $20 $20 $20 $20 $100 $20 $20 $20 $20 $28TOTAL CAP EXP $20 $20 $20 $20 $854 $1,370 $1,452 $1,329 $1,348 $1,368 $780% CHANGE NA 0.0% 0.0% 0.0% 4171.2% 60.4% 6.0% -8.5% 1.5% 1.5% 470.2%

DEPRECIATIONTRUCKS $1,243 $1,160 $609 $21 $346 $712 $998 $1,122 $1,205 $1,236 $865PLT & EQPT $872 $732 $720 $505 $290 $166 $34 $31 $27 $25 $340TOTAL DEPR $2,115 $1,891 $1,329 $526 $636 $877 $1,032 $1,153 $1,232 $1,261 $1,205% CHANGE NA -10.6% -29.7% -60.4% 21.0% 37.9% 17.6% 11.7% 6.9% 2.4% -0.4%

VARIABLE COSTSMATERIAL $18,618 $19,146 $19,882 $20,432 $21,621 $22,545 $24,073 $24,858 $26,172 $26,892 $22,424UNIT $32.38 $32.84 $33.77 $34.02 $34.96 $35.22 $36.16 $36.43 $37.60 $37.88 $35.26%CHANGE NA 2.8% 3.8% 2.8% 5.8% 4.3% 6.8% 3.3% 5.3% 2.8% 4.2%DELIVERY $5,704 $5,797 $5,734 $5,593 $5,934 $6,356 $6,875 $7,223 $7,515 $7,818 $6,455UNIT $9.92 $9.94 $9.74 $9.31 $9.59 $9.93 $10.33 $10.58 $10.80 $11.01 $10.15%CHANGE NA 1.6% -1.1% -2.5% 6.1% 7.1% 8.2% 5.1% 4.0% 4.0% 3.6%PLANT $2,237 $2,108 $1,971 $1,864 $1,978 $2,119 $2,292 $2,408 $2,505 $2,606 $2,209UNIT $3.89 $3.62 $3.35 $3.10 $3.20 $3.31 $3.44 $3.53 $3.60 $3.67 $3.47%CHANGE NA -5.8% -6.5% -5.4% 6.1% 7.1% 8.2% 5.1% 4.0% 4.0% 1.9%TOTAL VAR CSTS $26,559 $27,051 $27,588 $27,889 $29,533 $31,020 $33,240 $34,489 $36,192 $37,317 $31,088UNIT $46.19 $46.41 $46.86 $46.44 $47.75 $48.46 $49.93 $50.54 $51.99 $52.56 $48.88% CHANGE NA 1.9% 2.0% 1.1% 5.9% 5.0% 7.2% 3.8% 4.9% 3.1% 3.9%


Market Valuation MethodsFIXED COSTS$6,570 $6,369 $5,873 $5,139 $5,318 $5,630 $5,856 $6,048 $6,201 $6,305 $5,931

% CHANGE NA -3.1% -7.8% -12.5% 3.5% 5.9% 4.0% 3.3% 2.5% 1.7% -0.3%

MARGIN$13.26 $13.87 $14.02 $15.65 $16.21 $17.74 $18.92 $20.02 $19.98 $20.85 $17.05

% CHANGE NA 4.5% 1.1% 11.7% 3.6% 9.4% 6.6% 5.9% -0.2% 4.4% 5.2%

EBIAT$718 $1,328 $1,787 $2,976 $3,149 $3,578 $4,195 $4,733 $4,796 $10,066 $3,733

% CHANGE NA 85.1% 34.5% 66.5% 5.8% 13.6% 17.2% 12.8% 1.3% 109.9% 38.5%

WORKING CAPITAL$1,161 $1,305 $1,721 $1,888 $2,009 $2,219 $2,434 $2,604 $2,676 $2,820 $2,084

% CHANGE NA NA 31.9% 9.7% 6.4% 10.4% 9.7% 7.0% 2.8% 5.4% 10.4%

TERMINAL VALUE$14,639 $14,639

FREE CASH FLOWS$2,813 $3,055 $2,680 $3,315 $2,810 $2,876 $3,560 $4,387 $4,608 $5,031 $3,514

% CHANGE NA 8.6% -12.3% 23.7% -15.2% 2.4% 23.8% 23.2% 5.0% 9.2% 7.6%

NPV OF FCFWACC 10.0% 11.0% 12.0% 13.0% 14.0% 15.0% 16.0%NPV $25,940 $24,615 $23,384 $22,240 $21,176 $20,185 $19,262



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



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


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

Documents

How To Value Your Business Presented to the 43rd Annual Business Administration Conference NRMCA October 24,2001 New Orleans