Rock Products is the aggregates industry's leading source for market analysis and technology solutions, delivering critical content focusing on aggregates-processing equipment; operational efficiencies; management best practices; comprehensive market
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22 • ROCK products • May 2016 www.rockproducts.com Y ou've put years into building a quality aggregates busi- ness, but the economy and markets have been on a roller coaster ride the past 6-8 years. Are you curious about what your company is worth now? Do you want to know how to maximize that value? For any private business owner, change is inevitable and a good valuation can help you better respond to that change. For example, are you: • Thinking about selling or retiring? • Looking for funds to expand? • Considering ownership restructuring or succession? • Wanting to convert or reallocate assets (partner buy-out or divorce)? There are many reasons for aggregates operations to be curi- ous about value, but determining that value is not easy if the company is privately owned. If the company is publicly held, it is pretty easy to determine what the stock market thinks the company is worth by multiplying the number of shares outstanding by the market price per share. But a privately held company has no market price, so this method doesn't work. For private companies, there are three commonly used methods for determining value: asset values, profit multi- ples, and cash flow modeling. Asset Value One potential way to value a company is to total the value of all the company's assets. For tangible assets, this is fairly straight- forward, with values for equipment and real estate relatively easy to determine by looking at recent sales of similar assets. Other assets such as aggregate reserves can be more difficult to value because the location and quality of the material dif- fers, and there may be large differences in the costs of extract- ing, processing and transporting the aggregate. And the value of some intangible assets like customer and community relationships may be very difficult to measure. Plus, simply adding together the value of all the assets ignores the value of the business as a going-concern, generally a sig- nificant contributor to overall value. So valuing a company by adding together asset values is generally not very useful. Moreover, just owning a bunch of assets does not necessarily make a business worth a bunch of money. To create real val- ue, assets must be used to earn profit and cash flows, which can be returned to the owners of the assets. And an import- ant part of estimating value is judging the risk of whether the expected profit will actually occur. That is, if there is substan- tial risk that expected profit may not be realized, a higher rate of return will be required to compensate for that risk, so the business will have a lower value. Profits and cash flows in the construction materials industry have historically been relatively predictable, which indicates relatively low risk and therefore requires relatively low rates of return. This is not to say that the industry is without risk – there can still be substantial market, management, environ- mental and other risks for specific companies in the industry. Thus, there are three primary issues a useful valuation meth- od must address – profitability, risk and rate of return. In the construction materials industry there are two widely used methods of addressing these issues. The first method uses historical profit and knowledge of prices paid on recent transactions of similar risk to determine value – the "profit multiple" method. The second method estimates future cash flows and required rates of return for similar risks to deter- mine value – the "cash flow modeling" method. Profit Multiple To use the profit multiple method, you must know what prices have been paid for companies of similar risk and you must know the profitability of those companies. Knowing What is Your Company Worth? For Any Private Business Owner, Change Is Inevitable And A Good Valuation Can Help You Better Respond To That Change. By Chuck Eaton COMPANY VALUATION