Communicating Valuation: Tools, Tips & Examples

Transcription

1 Communicating Valuation: Presented by: Tim Jamison Prairie Capital Advisors 312 S. 4 th Street Suite 700 Louisville, KY tjamison@prairiecap.com Tools, Tips & Examples

2 Agenda What is Value? General Valuation Concepts & Methods Key Valuation Drivers Successful Pillars For Internal Value Creation Internal Value Drivers Transparency ESOP Communication Committee Incentive Plans Celebrate Achievements 2

3 What is Value? Fair Market Value Definition the price at which an asset would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties being able, as well as willing, to trade and being well-informed about the asset and the market for the asset. - Source: DOL Prop. Reg. Section (b)(2)(i). Definition utilized by two regulatory agencies: Department of Labor (DOL) ERISA Internal Revenue Services (IRS) Taxes 3

4 General Valuation Concepts & Methods Income Approach There are two widely accepted methods used under this approach: Discounted cash flow method Capitalized earnings method Discounted Cash Flow Method ( DCF ) The DCF method involves projecting normalized free cash flows and discounting them back to present value using a discount rate The discount rate should reflect the degree of perceived risk associated with achieving the Company s earnings expectations Capitalized Earnings Method This approach determines the value of a business by looking at the historical cash flow results instead of expected future cash flows This is done by taking historical earnings and dividing them by the capitalization rate: discount rate growth rate 4

5 General Valuation Concepts & Methods Market Approach There are two widely accepted methods used under this approach: Guideline public company method M&A comparable method Guideline Public Company Method This method assesses the subject company relative to a group of similar, publicly traded companies Applies valuation multiples derived from this public company group to the subject company s earnings M&A Comparable Method This is another commonly used method that focuses on the terms, prices and conditions found in sales of companies in the subject company s respective industry Transactions multiples are screened and then applied to the subject company s earnings 5

6 General Valuation Concepts & Methods Asset-Based Approach The most widely accepted method used under this approach: Underlying asset method Underlying Asset Method This method analyzes the individual assets and liabilities comprising the business Involves the estimation of the current reproduction cost of the assets, less an estimate of accrued depreciation to reflect physical, functional and economic obsolescence This approach is typically not applied in the valuation of a going concern Reserved for companies that are often in the liquidation process or comprised of large fixed assets (i.e. REITS) 6

7 Key Valuation Drivers What do we look for Value reflects the current characteristics of The Company itself Its competitive marketplace The general economy and capital markets Our goal is to think like investors, as such, we must look inside and outside of the Company We want to MIMIC the marketplace 7

8 Key Valuation Drivers What Drives Company Value External Drivers Market multiples Lending conditions Interest rates Industry trends Investor psychology Capital markets debt/equity Economic policies Political environment International markets Competition Internal Drivers Growth prospects Profitability Revenue sources Balance sheet Intangible assets Management team Customer diversification Size Capital requirements Litigation & Environmental 8

9 Key Valuation Drivers Revenue Internal Value Driver Example 1 General Contractor -A Forecast General Contractor -B Forecast Revenue $ 1 00,000 $ 1 04,000 $ 1 08,1 60 $ 1 1 2,486 $ 1 1 6,986 Gross Profit 7,000 7,280 7,571 7,874 8,1 89 Operating Expenses 2,000 2,080 2,1 63 2,250 2,340 EBITDA 5,000 5,200 5,408 5,624 5,849 Selected Performance Metrics Revenue Growth n/a 4.0% 4.0% 4.0% 4.0% Gross Profit (%) 7.0% 7.0% 7.0% 7.0% 7.0% Operating Expenses (%) 2.0% 2.0% 2.0% 2.0% 2.0% EBITDA (%) 5.0% 5.0% 5.0% 5.0% 5.0% (%) - Percent of sales Revenue $ 200,000 $ 208,000 $ 21 6,320 $ 224,973 $ 233,972 Gross Profit 1 4, , , , ,378 Operating Expenses 4,000 4,1 60 4,326 4,499 4,679 EBITDA 1 0, , , , ,699 Selected Performance Metrics Revenue Growth n/a 4.0% 4.0% 4.0% 4.0% Gross Profit (%) 7.0% 7.0% 7.0% 7.0% 7.0% Operating Expenses (%) 2.0% 2.0% 2.0% 2.0% 2.0% EBITDA (%) 5.0% 5.0% 5.0% 5.0% 5.0% (%) - Percent of sales Higher Revenue = Higher EBITDA = Higher Valuation 9

10 Key Valuation Drivers Revenue Internal Value Driver Example 2 General Contractor -A Forecast General Contractor -B Forecast Revenue $ 1 00,000 $ 1 04,000 $ 1 08,1 60 $ 1 1 2,486 $ 1 1 6,986 Gross Profit 7,000 7,280 7,571 7,874 8,1 89 Operating Expenses 2,000 2,080 2,1 63 2,250 2,340 EBITDA 5,000 5,200 5,408 5,624 5,849 Revenue $ 1 00,000 $ 1 1 0,000 $ 1 21,000 $ 1 33,1 00 $ 1 46,41 0 Gross Profit 7,000 7,700 8,470 9, ,249 Operating Expenses 2,000 2,200 2,420 2,662 2,928 EBITDA 5,000 5,500 6,050 6,655 7,321 Selected Performance Metrics Revenue Growth n/a 4.0% 4.0% 4.0% Selected Performance Metrics 4.0% Revenue Growth n/a 1 0.0% 1 0.0% 1 0.0% 1 0.0% Gross Profit (%) 7.0% 7.0% 7.0% 7.0% 7.0% Gross Profit (%) 7.0% 7.0% 7.0% 7.0% 7.0% Operating Expenses (%) 2.0% 2.0% 2.0% 2.0% 2.0% Operating Expenses (%) 2.0% 2.0% 2.0% 2.0% 2.0% EBITDA (%) 5.0% 5.0% 5.0% 5.0% 5.0% EBITDA (%) 5.0% 5.0% 5.0% 5.0% 5.0% (%) - Percent of sales (%) - Percent of sales Higher Growth = Higher EBITDA = Higher Valuation 10

11 Key Valuation Drivers Profitability Internal Value Driver Example 3 General Contractor -A Forecast General Contractor -B Forecast Revenue $ 1 00,000 $ 1 04,000 $ 1 08,1 60 $ 1 1 2,486 $ 1 1 6,986 Gross Profit 7,000 7,280 7,571 7,874 8,1 89 Operating Expenses 2,000 2,080 2,1 63 2,250 2,340 EBITDA 5,000 5,200 5,408 5,624 5,849 Revenue $ 1 00,000 $ 1 04,000 $ 1 08,1 60 $ 1 1 2,486 $ 1 1 6,986 Gross Profit 1 0, , , , ,699 Operating Expenses 2,000 2,080 2,1 63 2,250 2,340 EBITDA 8,000 8,320 8,653 8,999 9,359 Selected Performance Metrics Revenue Growth n/a 4.0% 4.0% 4.0% Selected Performance Metrics 4.0% Revenue Growth n/a 4.0% 4.0% 4.0% 4.0% Gross Profit (%) 7.0% 7.0% 7.0% 7.0% 7.0% Gross Profit (%) 1 0.0% 1 0.0% 1 0.0% 1 0.0% 1 0.0% Operating Expenses (%) 2.0% 2.0% 2.0% 2.0% 2.0% Operating Expenses (%) 2.0% 2.0% 2.0% 2.0% 2.0% EBITDA (%) 5.0% 5.0% 5.0% 5.0% 5.0% EBITDA (%) 8.0% 8.0% 8.0% 8.0% 8.0% (%) - Percent of sales (%) - Percent of sales Higher Profit = Higher EBITDA = Higher Valuation 11

12 EBITDA Multiples Key Valuation Drivers The Bigger You Are, The Bigger The Multiple 11.0X 8.0X 5.0X Size, high growth, high profitability, high visibility, etc. 12

13 Successful Pillars For Internal Value Creation Internal Value Creation Check List Communication Education Consistency 13

14 Successful Pillars For Internal Value Creation Required Communication Annual participant statements Summary Plan Documents Summary Annual Report on the Activity in the Plan Additional disclosure requirement for public companies PPA requirement regarding diversification Going Beyond Required Communication Education about the ESOP Fundamentals What ownership means Financial metrics & results Strategic business plans 14

15 Successful Pillars For Internal Value Creation When to Communicate New hires Annual statement distribution Reaching eligibility Becoming vested Distribution/Diversification Be consistent with your communication! How Much Communication? Whatever is right for you Successful ESOP cultures are all different Timing can change objectives Company culture can change Change in leadership/management Change in business climate Change in economy 15

16 Internal Value Drivers ESOP Communicati on Committee(s) Celebrate Achievements Internal Value Drivers Incentive Plans Transparency 16

17 Transparency Helps build trust within the organization Helps maintain an engaged and motivated workforce Transparency communication examples: Share overall business strategy Share performance data Transparency within focused group meetings: Small group monthly meetings sales team, customer service team, production line worker, etc. Quarterly business review meetings entire company The lesson here is clear: It s hard to win the game of business if your team has no idea the score or worse, even what game they re playing. 17

18 ESOP Communication Committee Major benefits of an ESOP Committee(s): Communicates how the Company s ESOP works (e.g. Newsletter) Coordinates ESOP celebration events Resource for new and existing employees (ESOP Training, ABC s of the ESOP, etc.) Helps create an ownership culture Keys to a successful ESOP Committee: A strategic mission Necessary resources Held accountable on executing its mission Comprised of employees throughout the organization 18

19 Incentive Plans Major benefits of an incentive plan: Helps attract, retain and motivate key employees Can be discriminatory Flexible terms Performance based: fundamental alignment of interests Examples of incentive plans: Cash based bonus plan Stock Appreciation Rights Plan ( SARs ) Sustained growth in a business comes about primarily because key employees are focused on performance factors they can impact - and they feel motivated to do so. That focus leads to execution. When sustained, such a productivity pattern brings about the results and success the business plan is seeking. 19

20 Celebrate Achievements The Company achieved a milestone, now what? Its time to celebrate! Don t let your company achievements go unnoticed Out of sight, out of mind Utilize company achievements as another method to communicate internal value drivers Major benefits of celebrating achievements: It reminds employees that goal setting and contribution works Unifies the company around a positive outcome Creates an opportunity to look at the big picture (Value Creation) Helps align the success of the company with the ESOP Helps create an ownership culture 20

21 Questions? Tim Jamison Prairie Capital Advisors 312 S. 4th Street Suite 700 Louisville, KY