Business Valuation Blog | Understanding Buying / Selling a Company

Valuing a construction company involves many factors, including financial, operational, industry, and market considerations. Here is some insight into the key variables that are reviewed and analyzed when an experienced professional completes a business appraisal for this type of operation:

Financial Performance

This includes an in-depth review of historical income statements and balance sheets to determine revenue trends, profitability, cash flow, assets, and liabilities.

Workforce and Management

Understanding a construction company’s skilled labor force and management team is important when valuing the overall business. The appraiser will review owners salaries and overall personnel compensation while making adjustments to normalize the data if necessary to bring it closer to competition in the industry.

Market Position and Relationships

The value of the company will be determined in part by its long-term reputation in the market, as well as vendor and supplier relationships, and its customer base.

Construction Industry and Market Trends

The overall health and landscape of the current markets and industries directly pertaining to the construction business are critical to developing an accurate appraisal.

Capital Equipment and Inventory

Construction companies will have a significant amount of machinery & equipment (M&E) as well as fixed and consumable inventory. Knowing the market value of these tangible assets will be crucial in the context of the overall business. Ask your business appraiser if they have the personnel capable of completing an accredited M&E valuation along with an inventory analysis.

Key Ratios

Debt-to-Equity, Working Capital, and Return on Assets are common ratios to measure within the business. These will assist in determining how leveraged the company is as well as their operational efficiency.

These are just a few of the factors that will be measured when valuing a construction business. Other variables such as legal and regulatory compliance, environmental and safety concerns, and even technology use are others that are important to understand. When your construction company is in need of a current valuation, ensure that you work with an independent, experienced, and credentialed valuation professional to get the job done.

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.