Tarlton Beetroot Business Plan — Investment Returns and Valuation

The return profile for each tranche, valuation basis and exit assumptions.

Section 30 of 37

Investment Returns and Valuation

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A 24.9 per cent project IRR that neither equity tranche receives, because the capital structure and the timing of the raises distribute it unevenly.

Valuation approach

The Company is valued on a sum-of-the-parts basis at the Year 5 exit. This is the correct approach for a landholding agricultural business, because a single EBITDA multiple applied to a company that owns its land either double-counts the land or ignores it. The operating business is valued on a multiple of normalised EBITDA after charging a notional market rent for the land it occupies, and the land is then valued separately at market.

Table 50 Sum-of-the-parts valuation at Year 5

Component	R million	Basis
Reported Year 5 EBITDA	5.79	Base case as modelled
Normalisation adjustment	1.61	Year 4 land extension contributes only partially in Year 5; normalised to full-year contribution
Normalised EBITDA	7.40
Less notional land rent	(0.58)	5.5 per cent of land market value, charged so the operating multiple is not applied to owned land
Operating EBITDA	6.82
Operating enterprise value	40.89	6.0 times, consistent with South African fresh produce transactions
Land at market value	12.47	Cost appreciated at 5.5 per cent per annum
Enterprise value	53.36
Less net debt	(9.53)	Interest-bearing debt and overdraft less cash at Year 5
Equity value	43.83

Cost of capital and project return

Table 51 Cost of capital and unlevered project return

Measure	Value	Basis
Cost of equity	18.5%	Land-backed agricultural equity; below a venture rate because the asset base is real and collateralised
After-tax cost of debt	8.8%	Prime-linked blended, at 27 per cent tax shield
Weighted average cost of capital	15.4%	Target structure of approximately 68 per cent equity, 32 per cent debt
Project internal rate of return	24.9%	Unlevered free cash flow plus terminal enterprise value
Net present value at WACC	R4.93m	Positive, but thin relative to R35.5 million deployed

Figure 1. Return on invested capital against weighted average cost of capital.

Return on invested capital is the most unflattering measure in the plan and it is presented without qualification. ROIC is negative for three years, reaches 1.0 per cent in Year 4 and 9.3 per cent in Year 5, against a 15.4 per cent cost of capital. The business does not earn its cost of capital on operations within the plan horizon. The project IRR is positive only because of the terminal value, which is to say the return is realised on exit rather than generated by operations. That is a legitimate structure for an asset-building venture, but it is a different proposition from a business that compounds, and it should not be confused with one.

Returns by tranche

Table 52 Investor returns at Year 5 exit

Participant	Invested	Ownership	Proceeds	MOIC / IRR
Founders	R1.10m	14.4%	R6.30m	5.73x / n.m.
Seed investor	R2.85m	12.4%	R5.44m	1.91x / 13.8%
Series A investor	R20.50m	73.2%	R32.09m	1.57x / 17.3%
Total equity	R24.45m	100.0%	R43.83m	1.79x / 18.9%

Founder IRR is not meaningful because founder capital is nominal relative to the sweat contribution it represents. Returns are stated before any management ratchet.

Figure 2. Return allocation frontier: seed and Series A IRR across Series A pre-money valuations.

No entry price satisfies both tranches

The frontier exhibit is the most important page in this document for anyone negotiating terms. A low Series A pre-money valuation transfers return to the Series A investor and leaves the seed investor below 10 per cent. A high one does the reverse. At R7.5 million pre-money the split is 13.8 per cent to seed and 17.3 per cent to Series A.

Across the entire range tested, from R4 million to R16 million pre-money, there is no price at which both tranches clear 20 per cent. This is not a negotiating position or a modelling artefact. It is arithmetic: the enterprise does not generate enough value at exit to pay two sequential equity tranches a venture-grade return. A seed investor should understand that their return depends materially on a Series A price they will not control.

Figure 3. Sensitivity of equity value and tranche returns to the exit multiple.

The exit multiple is the second most powerful driver of returns after price. At 4.5 times the seed investor returns 7.9 per cent and the Series A investor 6.7 per cent. At 7.5 times both approach the low twenties. The 6.0 times base assumption sits at the midpoint of observed South African fresh produce transactions and is not aggressive, but the range of outcomes it sits within is wide, and a reader who believes 5.0 times is more realistic should read the plan as offering roughly 10 per cent to each tranche.