A Financial Management System to Measure and Manage the Value of Your Business

1. A Financial Management System to Measure and Manage the Value of Your Business

2. Goal • Observed Weaknesses of Privately Held Agribusinesses • Ways to Overcome the Weaknesses • EVA Financial Management System to Focus on Maximizing Shareholder Value and Motivating Employees

3. Observed Strategic Weaknesses of Privately Owned Agribusinesses • Ownership Structure • Breadth/Depth of Management Team • Inadequate Strategic Business Plan • Inadequate Financial Management Plan • Need to develop a strategic plan and a framework to measure and manage the value of your business • Key to maximizing long-term shareholder wealth

4. POTENTIAL ENTRANTS SUPPLIERS CUSTOMERS SUBSTITUTES Five Forces That Determine Industry Profitability INDUSTRY COMPETITORS Rivalry Amount Existing Firms

5. Type of Competition Determines Industry Returns High Rate of Return Large, economies of scale Small and niche-focused Low Market Share

6. Breadth/Depth Documented Of Management Business Plan Flexibility Discipline Publicly Traded (“Big”) Privately Held (“Small”) Comparison of Publicly Traded and Privately Held Companies Key managers in all aspects of the business with a strong leader: operations, sales, marketing, and finance Strong overall leader with weaker individual managers. Rely on outside advisors. Strategic plan in place to guide management and measure results. Typically operate on a year-to-year or season-to-season basis Tendency to be inflexible due to organizational structure and public reporting requirements. Flexible, can quickly adapt to changes in the marketplace. Shareholder and analyst scrutiny focuses mgmt. on maximizing shareholder value. Stock market creates discipline. Managers not focused on maximizing shareholder value. Owners focused on minimizing taxes. • Privately held, middle market companies fail to systematically measure and manage the value of their businesses. LIQUIDITY

7. Focus on Maximizing Terminal Value Cash Flows from a 10-yr. $1000 Bond at 10% • 40% of total present value is recognized in the final year of the bond. • Same relationship in exists in valuing a company.

8. Typical Accounting Measures Income Statement Balance Sheet • Gross Profit Margin • Operating Profit Margin • (EBIT/Sales) • Net Profit Margin • Earnings per Share • Accounts Receivable Turnover • Inventory Turnover • Asset Turnover • Working Capital to Sales • Debt to Equity Return on Capital Employed Return on Assets ROE = Profit Margin x Asset Turnover x Financial Leverage

9. Shortcomings of Accounting Measures • Fragile association between accounting returns and creation of shareholder wealth. • Improvements in accounting measures may actual destroy shareholder value. • Wide array of performance measures creates confusion and conflicts among managers.

10. Economic Value Added (EVA®) • Residual income measure that subtracts the cost of capital from the operating profits generated in the business • Accounts properly for all the ways in which corporate value may be created or destroyed • Only performance measure to tie directly to the intrinsic market value of a company EVA = [rate of return (r) – cost of capital (c*)] x Capital Employed EVA = NOPAT – c* x Capital Employed EVA = Operating Profits – a Capital Charge

11. EVA Basics …one should as soon compute earnings without a capital charge “as play tennis with the net down.” All EVA does is simply lift the net back up where it belongs.

12. EVA Value Creation Strategies EVA = ( r – c*) x Capital Employed • Improve operating profits without tying up any more capital. • Increase capital only if return on investment more than covers the charge for additional capital. • Liquidate capital where the earnings lost are more than offset by a savings on the capital charge. • Structure balance sheet in a way that lowers the cost of capital.

13. EVA Example - 3 Ways to Add Value Each Adds Shareholder Value in a Different Way….Only Performance Measure to Identify Each

14. EVA Example – Stop Destroying Value Turning off the spigot on unrewarding projects is the last way to add value.

15. The EVA Valuation Formula • Market Value Added (MVA) = Market Value – Capital • MVA = Present Value of all Future EVA • Market Value = Capital + Present Value of all Future EVA • r / c* > 1.0 company will be valued at a premium to its economic book value (capital) • r / c* < 1.0 then company will be valued at a discount to its economic book value (capital)

16. B A C Graphical Example of EVA and Value Creation r = 15% & c* = 15% EVA = $0 Value = Capital A r = 25% & c* = 15% EVA = $100 Value > Capital Return on Capital - r B r = 5% & c* = 15% EVA = ($100) Value < Capital C Capital Employed Cost of Capital - c*

17. Links strategic, operating, and financial planning Helps managers make better decisions Capital charge converts the balance sheet into another line-item expense EVA = Sales – Operating Costs – Capital Costs Easy to communicate to all employees Performance expressed in a single profit measure expressed in dollars Key Benefits of EVA Framework EVA IS THE MOST RELIABLE UNAMBIGUOUS CONTINUOUS-IMPROVEMENT METRIC

18. Four Applications of EVA • MEASUREMENT • Most accurate measure of corporate performance • Translates accounting profits to economic reality • MANAGEMENT • Four ways to increase value • MOTIVATION • Cause managers to think and act like owners • “Bank” bonuses to insure sustainability and long-term thinking • MINDSET • Transforms corporate culture • Internal corporate governance

19. KENT GROUP INC.Investment Bankers Specializing in the Agribusiness and Food Industries 18000 W. Sarah Lane, Suite 175 Brookfield, WI 53045-5886 Tele: 262-792-0440 Fax: 262-792-0445 www.kentgroupinc.com