Tool # 3 - Shareholder Value Analysis

How much shareholder value could you generate?

The Shareholder Value Analysis tool forecasts your company's Equity Value over 5 years and demonstrates the potential shareholder value you can unlock with the successful execution of high-return projects. The tool relies on three sets of assumptions: Operating Assumptions, Valuation Assumptions, and Investment Assumptions.

Operating Assumptions:

1) Business Revenue: Your company's Revenue for the most recent trailing twelve-month period

2) EBITDA Margin: Your company’s EBITDA margin

3) Base Revenue Growth Rate: The expected annual growth rate for your company's revenue

4) Current Net Debt: Your current outstanding net debt, including lines of credit, mortgages, term loans, and other forms of interest-bearing debt, less cash

5) Current Net Working Capital: The current Net Working Capital of your company

6) Maintenance CAPEX: Your company's Maintenance CAPEX

7) Tax Rate: Your company's effective tax rate

8) Depreciation & Amortization: Your company's Depreciation & Amortization for the most recent trailing twelve-month period

9) Interest on Debt: The interest rate at which a bank would lend you money. We use 12% in our example

10) Interest on Cash: The interest rate a bank offers on your deposits. We use 1% in our example

Valuation Assumptions:

1) Current EBITDA Multiple: The industry multiple relevant to companies within your industry. We use 6.0x in our example

2) Exit EBITDA Multiple: As your company demonstrates growth and increases in size, your company’s EBITDA multiple will increase. We use 8.0x in our example

Investment Assumptions:

1) Year 1-5 Investments: Size of investments in each year for 1 to 5

2) Project Payback: The typical period your company expects to regain its investment. We use 28 months in our example, based on our CEO surveys

From a shareholder’s perspective, ensuring that your company earns its cost of capital is the most important thing. For private firms, this cost of capital is typically 25%. This implies that to meet the cost of capital requirements, a private company must triple its share value every five years, as expressed by the formula: (1+25%)5 = 3.05.

Anything less is underperformance. If the management team is not confident it can deliver these results, it might be best for the shareholders to sell their company and deploy their capital to earn returns appropriate for the risk of the investment. Now, the question becomes how can a business owner triple the value of their company’s shares?

The answer lies in exploiting high-return investment opportunities that are available to the business. Many businesses are hesitant to borrow to fund these opportunities, however, our Shareholder Value Analysis tool shows that the opportunity cost of foregoing those opportunities far exceeds the cost of funding them.

In our example, even with a 12% interest on borrowed funds, the company increases its equity value by more than 5 times over five years. This growth in equity value is achieved in two ways: incremental EBITDA generated from the investments pursued, and expansion of the EBITDA multiple at exit. This illustrates that pursuing growth opportunities rewards you not once, but twice. Moreover, the company’s Debt/EBITDA ratio declined over the five-year period and was only 1.1x in Year 5.

The model includes three sensitivity tables that highlight the impact of the four most important inputs on shareholder value: New Investment, Payback Period, Exit EBITDA Multiple, and Interest on Debt. When we change the interest on debt and payback period, note that the cost of debt has a minimal impact on shareholder value. On the other hand, the payback period has a more pronounced impact on shareholder value. This underscores that the opportunity cost of foregoing these investments is significantly greater than the cost of debt.

Ready to Triple the Value of Your Business?

Use our Shareholder Valuation Analysis tool below to explore your company’s value-creation path.

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