I regularly receive phone calls or am approached at industry conferences with the same basic question: “What are ready-mixed concrete producers selling for on a production yard basis?” or “What multiples are being used in today’s market for ready-mixed producers?”
What they are really asking me, in a veiled way, is “What is my company worth?”
This is like asking how much a house is worth on a per-square-foot basis. There is no stock answer, as there are too many variables. What type of neighborhood is it in? How big is the lot? Does it have a designer kitchen and bathrooms, or are the kitchens and baths tired and need replacement? Does it have a swimming pool? Does it have a garage for one car or three?
“There are many variables to consider when determining value.”
Just as these variables dictate whether a house is worth $50 per-square-foot or into the thousands, variables also hold true in determining what a ready-mixed concrete producer is worth.
Companies undertake valuations of their business for a variety of different reasons. Often, it is to establish the market value of the business as a going concern to determine whether the owners wish to consider selling their company in this era of rapid consolidation.
Other times selling is not a motivator. Valuations are often done for estate and succession planning purposes, valuing minority shares for buyout purposes, divorces, partner buyouts, and eminent domain proceedings.
It is important to understand what a valuation is, and what it isn’t. If a ready-mixed concrete producer has recently appraised his equipment for his bank, this does not indicate the value of the businesses as an enterprise. In valuing businesses, we do use certain “thumbnail” measures that are nothing more than guidelines, or even reality checks.
These measures include a value on a production yard basis, or a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization), a universal measure used throughout the global financial markets to measure the cash a business generates.
But these do not measure value, as they do not reflect the unique variables that generate value within a business. The method we employ to help understand these variables is the “Discounted Free Cash Flow” (DFCF) Method.
How DFCF works
We begin with a sales forecast, and then develop pro forma cash flow statements for the next 10 years. These forecasts make assumptions about pricing strength, materials costs, market presence, market and client-specific growth potential, capital expenditure requirements, depreciation, and working capital projections.
These assumptions are based on an analysis of the client’s financial statements, industry and local market studies, and management opinions. The reliability of the DFCF method rests directly with the accuracy of the forecast, the income-expense relationships, the amount and timing of capital expenditures and depreciation, and the discount rate.
We attempt to view the business as a pool of unencumbered assets, separating the financing decision regarding assets from their intrinsic value, or the discounted present value of cash flows earned by those assets. Once these assumptions are developed, we apply a specific discount rate, which we call the “weighted average cost of capital” (WACC), from which we derive the value of the enterprise in today’s dollars.
The final value is the intrinsic, or “enterprise”, value of the assets, which is really the value of the business as a going concern. From there, we can derive values specific to the client’s needs, whether it be minority shares, loss of value due to an eminent domain proceeding, or any of the other variables the client may wish to examine.
A DFCF-based valuation is an invaluable tool, as it is the only way to accurately measure what your business is truly worth.
Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at firstname.lastname@example.org or telephone 985-727-4310.
© 2006 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “What’s Your Company Worth?” (The Concrete Producer, March 2006) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “What’s Your Company Worth?” under license from Hanley Wood, LLC.