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The Role of Business Valuation

Posted by on in Business Valuation
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A common misconception regarding the measurement of business and shareholder value is that it only matters when considering the sale of the organization. Shouldn’t the value of the business to shareholders as well as the factors that most affect it be important considerations in any strategic or financial planning discussion? With a shared understanding of the value of the organization and the drivers behind that value, the company is much better positioned to determine how best to protect and enhance that value going forward. Not all gallons are created equal--know how your plant creates value!

 

The market timing for exploring business valuation is good as plant values and interest have improved. Plant values have increased, reflecting improved projects and industry conditions with increasing interest in minority investments as well.

 

What drives value for Ethanol plants? Cash flow is king. Not only must you understand how to drive cash in order to maximize value, you must also be able to defend the sustainability of those value drivers.

 

  • EBITDA 
  • Location

       -  Origination: Market Access & Availability

           ~  Stability and sustainability in corn basis; local supply/demand fundamentals; long-term

                outlook on availability and basis 
        -  Outbound Markets: access, transportation costs, pricing, co-product revenue generation

            along with cost reduction opportunities (example - WDGS reduces natural gas costs and

            opens up premium end-markets/LCFS) 

  • Technology & Historical Operational Performance

       -  Yields, Conversions
       -  Plant Technology
       -  Performance Management & Optimization Systems 

  • Infrastructure (or lack thereof) 
  • Management Capabilities & Leadership 
  • Contracts – viewed as a net negative or net positive depending on buyer (Strategic vs. Financial Buyer) and terms of contract

       -  Origination, Ethanol, Co-Products, Management/Operations 

  • Synergies with Buyer’s Existing Assets 
  • Plant Size

 

There are several building blocks to defining business value and they include: 

  • Preparing an interactive financial model with which to quantify business and shareholder value now and in the future

      -  Ground the model using the company’s historical financial and operating performance to

          solidify the assumptions
      -  Define expected capital requirements going forward as well as the preferred capital strategy

          and structure
      -  Conduct sensitivity analyses to stress test projections
      -  Prepare baseline set of projections and an implied value range 

  • Determining prospective sale value, not necessarily as a strategy but as an option for comparison

      -  Comparable transactions and value drivers
      -  Review and make adjustments to the company’s value
      -  Review market timing and factors that may affect value going forward 

  • Defining and comparing baseline value metrics, including:

      -  Sharing trading value and history
      -  Historical returns and current Book Value
      -  Intrinsic Cash Value (cumulative value of discounted future cash flows)
      -  Market or prospective Sale Value 

  • Delivering Business Valuation findings and conclusions to Board and Management to ensure shared understanding and to determine best approach to protecting and improving that value going forward

 

Conducting a Business Valuation Assessment can provide decision makers with useful insight into options for protecting and enhancing shareholder value. Defining the value of the business to shareholders and understanding the options and factors that drive that value doesn’t commit the company to any particular course of action, but can help inform decision makers. The benefits of valuation planning include ensuring a shared understanding and approach to valuation and the expected range of values; allowing the Board and Management to build their plant, or investment value, around a clearly defined opportunity and the plant’s unique competitive advantages; bringing potential challenges and issues to the forefront in a disciplined and quantifiable manner; and allowing the Board and Management to be prepared, informed, aligned, transparent and responsive, whether going through a sale or planning and positioning for long-term success.

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Guest Monday, 23 October 2017