Construction business owners from Main Street to mid-market and above have one big thing in common: When they’re thinking about selling, they want to optimize value and maximize net proceeds from the sale.
After investing a career’s worth of time, money, and hard work, it should seem fair to want to turn the page on a high note. But given current economic conditions, private equity and third-party buyers might not be the most enthusiastic buyers.
So, what is your construction business worth, and what can you expect to net from the sale?
Selling a construction company can be complex, and the variable factors that influence the final sale price can be complicated, too.
In this article, we’ll examine factors that can impact a construction company’s expected selling price, and how you can address them to help plan your exit strategy and prepare for maximum value at sale.
And if you’re just starting to think about selling, focusing on the business factors outlined here can help you grow and strengthen your business ahead of your sale initiative.
Potential Buyers and Business Valuation Methods
One consideration that’s obvious but sometimes overlooked is your likely buyer, their cash position and access to credit. If you’re considering selling to a competitor, a key employee, or another interested third party, financing costs can impact what an individual buyer is willing to accept as a price. Down or volatile markets typically depress valuation outcomes, too.
It’s also vital to understand the differences between the most common valuation methods:
| Income-based Valuation | Market-based Valuation | Asset-based Valuation |
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It’s easy to see that no one valuation method can capture every factor. By and large in ESOP transactions, independent valuation professionals use income- and market-based valuation methods to evaluate business risk and arrive at an assessment of fair market value.
And as for capital equipment and other tangible company assets, the selling owner has options—such as selling the business entity separately, maintaining ownership of the assets, and leasing them to the ESOP company.
Basic Risk Factors That Affect Valuation
- EBITDA Size
- Customer Base Size and Quality
- Management Team
- Potential for Future Growth
- Trends Within Your Industry
- Sustainability & Scalability of Your Business Model
- General Market Conditions
Considerations for Construction Businesses
- Tangible Assets Are Often More Significant
- Business Seasonality
- Subcontractor Relationships: Assets or Liabilities?
- Regulatory Compliance Matters
Seven Basic Business Valuation Factors
Before we delve into construction-industry-specific business elements, there are several factors that impact virtually every company’s valuation potential:
1. EBITDA Size
A company’s total fair market value, or enterprise value, is often expressed as a multiple of EBITDA, or earnings before interest, taxes, depreciation, and amortization. Multiples vary by industry, and larger company EBITDAs often correlate with higher multiples.
Expect any buyer to scrutinize financial statements and key financial ratios as your financial health and profitability go under the microscope. Get your financials in order and study the details. You’ll want to be able to call out areas of growth in negotiations.
2. Customer Base Size and Quality
It’s important to have a stable or growing base of customers—but it’s just as important to diversify to address customer concentration and other risks. Build your business book for diversity across industries, verticals, business sizes, and geographic regions, as appropriate for your company.
3. Management Team
The importance of your management team depends on your buyer. They could choose to keep all your employees in place, replace everyone, or something in between. But a strong management team can give certain buyers confidence that your company will continue to operate profitably after your exit.
4. Potential for Future Growth
Most individual buyers seek a company with plenty of potential for future revenue growth. What kind of information can help make the case? Highlight your unique value proposition, your competitive edge or innovations, continuous improvements, and a demonstrated record of profitability.
5. Trends Within Your Industry
Every industry has its highs and lows, and overall industry conditions can influence company value. Problems with spiking costs, labor shortages, and supply chain disruptions can all have an impact on business value. Differentiate by highlighting how your company has adapted to changes and stayed ahead of trends.
6. Sustainability & Scalability of Your Business Model
This can vary by buyer, but most entrepreneurs are in it for growth. Demonstrate how your diversified revenue streams support long-term sustainability, and identify processes and standards that could help the business speed growth to scale.
7. General Market Conditions
General economic conditions impact virtually every transaction in an economy. These days, that means everything from interest rates and inflation to geopolitics. It can be helpful to focus on unique strengths and distinguishing features to highlight how your business stands out from others on the market.
Four More Considerations for Construction Businesses
It’s fair to say business valuation isn’t a simple process for any company. Every industry has its nuances, and the construction industry is no exception. Here are four special considerations that affect construction companies more than other business types:
1. Assets Can Be Separated
Where other companies’ value often lies in intellectual property, customer relationships, and brand recognition and trust, construction businesses typically also own equipment, vehicles, and real estate. Selling business owners often choose to sell the company but maintain ownership of assets, and lease them to the business.
2. Business Seasonality
In many regions, construction is a highly seasonal industry. A winter slowdown may be normal, so historical data on revenue and profits is really important for estimating projections.
3. Subcontractor Relationships: Assets or Liabilities?
Subcontractors often play a critical role in completing construction projects, and your business reputation can be impacted positively or negatively by the professional company you keep. Valuation professionals—as well as buyers—should be expected to scrutinize vendor, supplier, and subcontractor contracts or agreements.
The better and more reliable your partners, the better you look. On the other hand, subcontractor turnover or a history of disputes needs to be addressed.
4. Regulatory Compliance Matters
You already know construction is a highly regulated industry and you strive to comply with federal, state, and local regulations. Your success demonstrating compliance matters. A construction company with a history of safety violations, compliance issues, or fines could see a lower valuation than a similar company with a stronger compliance track record.
Do All You Can to Maximize Your Construction Company’s Value
Business valuation for a construction company is unique in various ways, but an understanding of these factors can help selling owners better prepare in advance of a sale.
In fact, other choices can have an impact on the outcome of your business sale. Selling your company to an employee stock ownership plan (ESOP) is one such example. Because of its unique tax benefits and flexibility in structuring the sale, an ESOP transaction can net a selling business owner up to 90-110% of the company sale price—and an ESOP pays fair market value. Learn more by downloading our free ebook. Just click below.
