Business Valuation Blog | Understanding Buying / Selling a Company

With succession planning or selling a business, you must know the value of your construction company. A business valuation can help with that. Find out what you need to know when valuing a construction company for transition purposes. 

Timing 

All too often, business owners don't think about selling their business until something catastrophic happens, such as disability or divorce. Perhaps you've heard that the worst time to go car shopping is when you need a car ASAP, such as after an auto accident. Well, the same analogy holds true for transitioning your business. The worst time to seek a valuation is when you need to sell your company immediately due to a change in circumstances. 

Savvy construction firm owners begin the process of seeking valuation up to seven years before they actively get out of their business. This extended time frame allows business owners to develop a transition plan, make changes to the company structure to boost attractiveness, and prepare the construction company for transition. 

Partnerships

Your partner in valuing a business is an appraiser who has demonstrated experience with construction companies. The right appraiser will have experience valuing other construction companies and will understand the equipment you use. Since you will be acting upon the valuation to prepare your business for transition, it's important to choose someone who communicates clearly. If you don't understand the business valuation, how can you act on it? 

To complete the transition, you will also need a business attorney and tax specialist. If you don't have an attorney or tax preparer, find partners while you are still in the planning stages of transitioning your construction company. 

Preparation 

Valuing a construction company provides a snapshot of the company's worth at a moment in time. Your appraiser will explain why the company has the value it has and how you can boost the value, which would increase profits in a sale.

Your appraiser will also explain the method used in valuing your construction company, which can help you prepare for a successful transition. While income-based methods, which include discounted cash flow and EBITDA, are traditionally used when valuing a construction company, there may be times when other methods (like an asset-based approach) are more appropriate. 

After your business valuation, identify what steps you will take to position your business for transition and increase value accordingly. Boosting business value in the years before you transition means you make more money when you cash out.  

For instance, your business may be more attractive on the open market if you are keeping your employees and assets, so a new owners can jump right in with a team of skilled laborers. You would need to determine when, what, and how often to communicate with employees regarding the transition. Clear communication reduces rumors and gossip, which can create a toxic work environment if left unchecked. 

If you've been skating by with old equipment, your business might look more attractive if you replaced legacy equipment with newer models. By budgeting for this ahead of time, you can position your business for a smooth transition while maximizing your profits. 

By preparing ahead of time for the transition, you can pave the way for the company you worked hard to build to change hands successfully. You may also be able to get a better price for your business, because you know the true value of your company and can better communicate it to others. 

You've worked hard to build that construction company, and now you're preparing to sell it. This is often a bittersweet time for business owners, especially those who founded the business and who remember firsthand all of the hard work in getting their construction firm off the ground. Before you seek buyers, get an objective valuation of the construction firm, so you understand how much your construction company is worth to others. Then you can set your price, seek buyers, and move forward with a sale that honors the business yo have worked so hard to create. See below for the best ways of valuing a construction company when the time has come to sell. 

Asset-Based Valuation 

An asset-based valuation works well for construction companies that hold assets, whether that's equipment or real estate. If your construction company owns a lot of equipment but there is not much income then the business may be worth more being sold off as assets. To get an asset-based value for your company, an appraiser will sum up the value of all of your assets, then subtract liabilities to show the value as a snapshot in time. A formal equipment appraisal is suggested for situations like this.

Income-Based Valuation 

An income-based valuation is a reliable way to gauge the value of a construction company when the company is generating a profit to where there is value above just tangible asset value. Either the discounted cash flow or capitalization of earnings method can be used here. In discounted cash flow, appraisers look forward five years to estimate the business's future revenue and spending, then extrapolate a current value that accounts for risk in going forward. With capitalization, the appraiser normalizes the construction company's earnings and divides by a capitalization rate, which reflects for anticipated growth and risk.

You only get one chance to sell your business, so take the time to do it right. Search for an appraiser with experience in construction company valuation, ask questions before you hire them (so you know what to expect), and make sure you understand what their business valuation really means -- not just the final number.   

Though construction can often be a boom or bust business, the current outlook for construction nationally and internationally is looking very promising. Are you ready to take advantage of this growth by growing your company? Valuing a construction company is often a task left for selling a business or merging with another company, but by using a valuation report as a tool for business improvement and growth, you can see phenomenal opportunities during this next upturn. Here's a look at some statistics around the world and how a business valuation helps you take advantage of the next boom cycle.

Industry Growth: How valuing a construction company helps you compete

Recent projections by Markets and Markets is predicting a 7% compounded rate of growth per year until 2021 in the international construction industry. That's a change from $121 billion in 2015 to an astounding $180 billion by 2021. Why this big change? Governments are shaking off the dust of the recession and investing in infrastructure again. Developing countries are building as the standard of living rises. Businesses are investing in future growth as they see rapid changes in the market.

But where is your construction company during this boom cycle? When you get a business valuation, you're doing more than just determining your company's sale price or buyout value. A business valuation report starts by looking at your company overall. Do you have a good cash flow, or do you have longer than average accounts receivables or bad debt? Is your equipment in good condition or will it need replacing soon? Are you a leader in your sector of construction for your region or is your business just one of a dozen mom and pop operations in the area? By knowing where you stand, you can figure out where you need to make changes to improve your business overall.

Where does your competition stand? A good business appraiser will take into account goodwill in your community and the value of a solid reputation. Are you the go-to commercial electrical contractor in your area or are you known for rock bottom prices that aren't paying your bills? Knowing where your business stands in the community makes a big difference in how it will perform during both boom and bust cycles.

Let's not forget the market. With the market as strong as it is, how will you best benefit from this cycle? A business appraiser will consider the value of your company based on upcoming projections, which means what your company was worth during the worst of the recession may be much lower than it is worth going into a boom cycle. Wouldn't you like to take that extra value and equity and be able to roll it into growth for your company?

As you can see, there's a lot of opportunity beginning to open up in construction, but only if you're in the right position to take advantage of it. Valuing a construction company provides you with the details you need to make wise decisions for your business and ensure that you won't be taking unnecessary risks during this boom cycle.

Whether you want to buy or sell a construction company, you need to know how much the company is truly worth. There are many methods for doing business appraisals, and not all are right for taking the value of a construction firm. Learn which methods to use and which to avoid when figuring out, "how much is a construction company worth?"

Market-Based Approaches to Construction Business Valuations

For an active construction company, a market approach is useful to demonstrate the construction firm's fair market value and position vis-a-vis competitors. An appraiser might use the "Guideline Company Transactions Method," reviewing sales transaction data for other construction firms in similar locations. By comparing the value of these companies on the market, an appraiser can estimate how much the construction company could command in a sale. 

If the construction company is small -- say, a family-owned firm with fewer than 10 employees -- the Multiple of Discretionary Earnings Method is a good choice. When taking the valuation of a company using this method, an appraiser will adjust the company's earnings, then divide the value of transactions by the discretionary earnings. By taking the multiple of the resulting number, a fair market value can be determined. 

An income perspective can be useful to value construction companies of all sizes, and is particularly effective for construction firms that operate from lines of credit, as many general contractors do. With the Discounted Cash Flow method, an appraiser can gauge future revenue five years down the road, then discount this to determine the present value and approximate a fair sale price. 

Capitalization using EBITDA (which stands for earnings before interest, taxes, depreciation, and amortization) can take a single point-in-time value for the company using its cash flow. This method can work for construction companies, but will be most accurate for those construction firms that have a steady cash flow and have demonstrated consistent, steady growth. 

Approaches to Avoid When Taking the Value of a Construction Company 

While construction firms do tend to have a lot of expensive equipment that is valuable, an asset-based approach to the valuation of a company does not factor intangibles. The firm is only as good as its staff members, contacts, and customer base. If a company is sold, will the existing customers and employers be loyal to the new owner? Since hiring and training new employers, or recruiting new customers, would represent a significant challenge to the business value as represented by asset ownership, this method is not a good choice for construction companies.

Especially for construction companies, the intangible, human values for employee skill and employer reputation affect business worth. A reputable business appraiser should be able to select a business valuation method that factors in these intangible assets to reflect the real value of the construction company.

Business appraisers often take a few valuations using different methods, then compare the values they determine to arrive at a fair value of the company that reflects its tangible and intangible assets, liabilities, income, and position in the market. Any appraiser taking the valuation of a company should be able to clearly explain which methods they used, why they used them, and what the data means, then answer any questions you have have before you proceed with the purchase or sale of a construction company. 

Construction is and has always been a boom/bust business. Either business is so great that you can't keep enough people hired or so poor that you're barely keeping the lights on. How can you ensure your construction company will make it through the hard times and get the best out of the good times? A quality business valuation performed by a certified business appraiser provides you with amazing insights into where and how your company is profitable and how to plan for coasting through the rough patches. Here's how:

Valuing a construction company to navigate industry slumps

Many business owners consider the valuation of a company using serious business appraisal methods to be something for Wall Street. But how do you think the big companies got there? The owners, executives and managers paid close attention to what was going on in the business and made good decisions. Much like the stock market, construction has a lot of ups and downs, and to take advantage of market conditions, you need to know what shape your business is in first.

If the market is going into a slump and there's a competitor considering selling out, is it a good time to buy? It could be, even if the market is going into a decline, if both your business and the other business are on solid financial footing. The best tool to use to make a smart decision, especially if you don't have a solid background in business yourself, is having business valuations performed by an experienced business appraiser. But why wouldn't you use the asking price as a point for negotiations? Surely the owner wouldn't be asking too much for the business, right? Not necessarily. An asking price is just that. It's an opening point for negotiations and represents what the owner hopes will come from the sale of the business. A business appraiser takes many more considerations into account when valuing a business.

What about the new machinery you're considering buying during an upswing? A business appraiser's recommendation might be to get an equipment appraisal to give you a better idea of what your assets are actually worth rather than a random estimate. This can help qualify you for better financing and lower interest rates, which allows you to put even more into your business. Basing your assets only on what a balance sheet says after tax time can leave you under- or over-estimating the value of your assets. Why? A tax accountant takes the value of your assets and depreciates them over a certain amount of time. The  2-ton box truck you use may be completely depreciated in five to seven years, showing a zero value in your accounting system. But what if it dies after three years and you lose money because it wasn't completely depreciated? What if it lasts 12 years and still has value after being completely depreciated? A formalequipment appraisl will take these factors into account.

Having a business valuation performed on your construction company helps you navigate the rough times and take advantage of the good times. It allows you to take your business further while protecting your investment against unnecessary risk. Are you ready to improve your construction company and your chances at real success? If you're not currently working with a certified business appraiser with experience in construction, you're leaving yourself open to risk.

In construction, we tend to think in terms of board feet, squares and yards of concrete. But what about the business side of your construction enterprise? Valuing a construction company is a vastly underrated practice that helps ensure your company will stay solvent for years to come. Why? Here are some ways you can use quality business appraisals to get more out of your business, reduce your overhead and improve your outlook.

A Good Estimate: Why Valuing a Construction Company is Vital to Growth

The construction industry is one fraught with risks to your business. From economic downturns to bursting housing bubbles to constantly shifting market prices, it's hard to stay ahead of the curve in construction. With today's rapid changes in economic growth, how do you stay ahead of it all? Though business owners often associate business valuations with selling or closing a business, these tools deserve a place in your business toolkit right next to your circular saw, impact driver and trusty old hammer.

Business valuations help you gauge your company's fiscal health and determine where it needs improvement. A qualified business appraisal specialist can spot areas in your operation that are wasteful of resources or opportunities to improve efficiency. They can take a look at your finances and determine whether you're able to continue in that fashion or whether you need to take a good, hard look at your cash flow situation.

A business valuation specialist can also determine where your company is strong and where it is weak. They can compare your operation to the industry average and suggest improvements. A certified business valuation appraiser can help you make good business decisions based on current market conditions.

A quality valuation also helps you determine the heath of the industry and current market as a whole compared to your company. A certified business appraiser spends their days appraising companies, so they have a good idea of how you compare to other businesses of similar size to your company.  You may also want them to perform an equipment appraisal to get a good understanding of the equipment value in case you are considering upgrading your fleet of equipment.

By valuing a construction company, you can ensure that your business will remain successful and avoid the worst risks the construction industry can throw at you. If you haven't determined the valuation of a company yet, what's holding you back?