1

GREENFIELD VS ACQUISITION

Presented To The CIM Capstone Students

atMiddle Tennessee State University

by

William B. AllenAllen & Associates

2

WHY DO IT ?

EXPAND YOUR MARKET COMPLIMENT YOUR MARKET CONSOLIDATE THE MARKET MAKE MORE MONEY INFLATE EGOS REVENGE (GET EVEN WITH THE

BASTARDS) SOUND BUSINESS DECISION

3

TYPES OF DECISIONS

MANAGEMENT (WHY)

FINANCIAL (MONEY)

MANAGEMENT (GOOD BUSINESS)

4

ESSENTIAL STEPS

MARKET RESEARCH STUDY

ECONOMIC FEASIBILTY ANALYSIS

ANALYSIS OF MARKET & MONEY

5

MARKET STUDYY

SIZE TRENDS PLAYERS CAPACITY DEMAND VS SUPPLY OPPORTUNITIES FORECAST PROFITABILITY

6

PLAYERS

STRATEGIES

STRENGTHS

WEAKNESSES

MANAGEMENT

7

READY MIX MARKET

YARDS (PRODUCTION & SP LAST 5 YRS-NEXT 10)

PLANTS (NUMBER &CONDITION)

TRUCKS (NUMBER & CONDITION)

LABOR (WAGE RATES/UNION/NON UNION)

RAW MATERIALS (AVAILABILITY/COST)

8

AGGREGATES

TYPE QUALITY TONS & SP (LAST 5 YRS-NEXT 10YRS) PLANTS CAPACITY RESERVES

9

CEMENT

NUMBER OF SUPPLIERS

COST

AVAILABILITY

10

SOURCES OF INFORMATION

PCA/CEMENT COMPANIES ADMIX COMPANIES CHAMBER OF COMMERCE POWER COMPANIES EDUCATIONAL INSTITUTIONS INTERNET PLAYERS

11

GO - NO - GO DECISION BASED ON MARKET

PLUS VALUE MINUS

SIZE 4 5 PRICE

TRENDS 4 4 PROFIT

PLAY ERS 3 3 LABOR

DEMAND 4 3 PLAY ERS

GROWTH 5 5 SUPPLY

20 20

12

ECONOMIC FEASIBILTYGREENFIELD

COSTS LAND PERMITING EQUIPMENT CONSTRUCTION PERSONNEL STARTUP LOSSES

13

GREENFIELD VS ACQUISITION

Presented To The CIM Capstone Students

atMiddle Tennessee State University

by

William B. AllenAllen & Associates

14

GREENFIELD VS ACQUISITION

Presented To The CIM Capstone Students

atMiddle Tennessee State University

by

William B. AllenAllen & Associates

15

WHY DO IT ?

EXPAND YOUR MARKET COMPLIMENT YOUR MARKET CONSOLIDATE THE MARKET MAKE MORE MONEY INFLATE EGOS REVENGE (GET EVEN WITH THE

BASTARDS) SOUND BUSINESS DECISION

16

TYPES OF DECISIONS

MANAGEMENT (WHY)

FINANCIAL (MONEY)

MANAGEMENT (GOOD BUSINESS)

17

ESSENTIAL STEPS

MARKET RESEARCH STUDY

ECONOMIC FEASIBILTY ANALYSIS

ANALYSIS OF MARKET & MONEY

18

MARKET STUDYY

SIZE TRENDS PLAYERS CAPACITY DEMAND VS SUPPLY OPPORTUNITIES FORECAST PROFITABILITY

19

PLAYERS

STRATEGIES

STRENGTHS

WEAKNESSES

MANAGEMENT

20

READY MIX MARKET

YARDS (PRODUCTION & SP LAST 5 YRS-NEXT 10)

PLANTS (NUMBER &CONDITION)

TRUCKS (NUMBER & CONDITION)

LABOR (WAGE RATES/UNION/NON UNION)

RAW MATERIALS (AVAILABILITY/COST)

21

AGGREGATES

TYPE QUALITY TONS & SP (LAST 5 YRS-NEXT 10YRS) PLANTS CAPACITY RESERVES

22

CEMENT

NUMBER OF SUPPLIERS

COST

AVAILABILITY

23

SOURCES OF INFORMATION

PCA/CEMENT COMPANIES ADMIX COMPANIES CHAMBER OF COMMERCE POWER COMPANIES EDUCATIONAL INSTITUTIONS INTERNET PLAYERS

24

GO - NO - GO DECISION BASED ON MARKET

PLUS VALUE MINUS

SIZE 4 5 PRICE

TRENDS 4 4 PROFIT

PLAY ERS 3 3 LABOR

DEMAND 4 3 PLAY ERS

GROWTH 5 5 SUPPLY

20 20

25

ECONOMIC FEASIBILTYGREENFIELD

COSTS LAND PERMITING EQUIPMENT CONSTRUCTION PERSONNEL STARTUP LOSSES

26

WHY DO IT ?

EXPAND YOUR MARKET COMPLIMENT YOUR MARKET CONSOLIDATE THE MARKET MAKE MORE MONEY INFLATE EGOS REVENGE (GET EVEN WITH THE

BASTARDS) SOUND BUSINESS DECISION

27

TYPES OF DECISIONS

MANAGEMENT (WHY)

FINANCIAL (MONEY)

MANAGEMENT (GOOD BUSINESS)

28

ESSENTIAL STEPS

MARKET RESEARCH STUDY

ECONOMIC FEASIBILTY ANALYSIS

ANALYSIS OF MARKET & MONEY

29

MARKET STUDYY

SIZE TRENDS PLAYERS CAPACITY DEMAND VS SUPPLY OPPORTUNITIES FORECAST PROFITABILITY

30

PLAYERS

STRATEGIES

STRENGTHS

WEAKNESSES

MANAGEMENT

31

READY MIX MARKET

YARDS (PRODUCTION & SP LAST 5 YRS-NEXT 10)

PLANTS (NUMBER &CONDITION)

TRUCKS (NUMBER & CONDITION)

LABOR (WAGE RATES/UNION/NON UNION)

RAW MATERIALS (AVAILABILITY/COST)

32

AGGREGATES

TYPE QUALITY TONS & SP (LAST 5 YRS-NEXT 10YRS) PLANTS CAPACITY RESERVES

33

CEMENT

NUMBER OF SUPPLIERS

COST

AVAILABILITY

34

SOURCES OF INFORMATION

PCA/CEMENT COMPANIES ADMIX COMPANIES CHAMBER OF COMMERCE POWER COMPANIES EDUCATIONAL INSTITUTIONS INTERNET PLAYERS

35

GO - NO - GO DECISION BASED ON MARKET

PLUS VALUE MINUS

SIZE 4 5 PRICE

TRENDS 4 4 PROFIT

PLAY ERS 3 3 LABOR

DEMAND 4 3 PLAY ERS

GROWTH 5 5 SUPPLY

20 20

36

ECONOMIC FEASIBILTYGREENFIELD

COSTS LAND PERMITING EQUIPMENT CONSTRUCTION PERSONNEL STARTUP LOSSES

37

ECONOMIC FEASIBILTYACQUSITION

COSTS PURCHASE PROFESSIONAL FEES EQUIPMENT CHANGE/UPDATE PERSONNEL CHANGES SYSTEMS CHANGES/UPDATE SYNERGIES

38

DETERMINE THE VALUE OF EACH METHOD

CASH FLOWS GENERATED

NPV OF CASH FLOWS

39

VALUE

THE TRUE VALUE OF ANY COMPANY IS THE NET PRESENT VALUE (NPV) OF THE FUTURE CASH FLOWS GENERATED BY THE COMPANY’S ASSETS

40

SOME BASIC ANALITICAL METHODS USED

METHODS• PAYBACK

• INTERNAL RATE OF RETURN (IRR)

• PROFITABILITY INDEX

• NET PRESENT VALUE (NPV)

41

PAYBACK

-Co+ C1 + C2 + C3 + C4 = 0 -10,000 + 5,000 +5,000 =0 Payback = 2 years Weaknesses:

• Time value of money• Future cash flows past payback

42

DICOUNTED CASH FLOW RATE OF RETURN OR INTERNAL RATE OF RETURN

(DCFRR OR IRR)

DISCOUNT RATE THAT MAKES NPV = 0 IS THE IRR

43

PROFITABILITY INDEX(BENEFIT-COST RATIO)

Profitability Index = PV ÷ (-Co)

If index is greater than 1 project is acceptable

44

NPV-(DISCOUNTED FREE CASH FLOW) METHOD

LOOKS AT BUSINESS AS A POOL OF UNENCUMBERED ASSETS

SEPARATES THE FINANCING DECISION OF ASSETS FROM THEIR INTRINSIC VALUE

DISCOUNTED PRESENT VALUE OF CASH FLOWS EARNED BY THOSE ASSETS

45

FREE CASH FLOW

FREE CASH FLOWS CONSIST OF EBIAT PLUS

DEPRECIATION & DEPLETION & ITC PLUS

TERMINAL VALUE OF THE ASSETS

LESS CAPITAL EXPENDITURES AND

CHANGES IN WORKING CAPITAL

46

SCHEDULES REQUIRED

REVENUE FORECAST EQUIPMENT DEMAND CAPITAL EXPENDITURES DEPRECIATION EQUIPMENT SOLD RAW MATERIAL COST/PIT COSTS PLANT & DELIVERY VARIABLE COSTS FIXED COSTS PROFORMA INCOME STATEMENT WORKING CAPITAL TERMINAL VALUE

47

CONTRIBUTION & PROFIT SUMMARY

REQUIRED INFO: SALES & YARDS VARIABLE COSTS MARGIN FIXED COSTS PROFIT EBITDA

48

SUMMARY

DO YOUR HOME WORK

TOUCH ALL THE BASES• MARKET• ECONOMICS

ANALYZE MARKET & ECONOMICS

49

SUGGESTED READINGS

VALUING A BUSINESS by Shannon P. Pratt REVIEWING A BUSINESS APPRAISAL REPORT by Shannon

P. Pratt BUSINESS VALUATION HANDBOOK by Desmond & Kelly HOW TO PRICE A BUSINESS by Raymond C. Miles PRINCIPLES OF CORPORATE FINANCE by Richard A.

Brealey & Stewart C. Myers THE ART OF M&A by Reed & Lane and Edson VALUATION “Measuring & Managing the Value of

Companies” by Copeland, Koller & Murrin