How Much is Your Business Worth?

When preparing to sell your construction company, it’s a good time to put on a “buyer’s hat” and look at the operation with a fresh pair of eyes. This exercise can help you assess the true value of your business while identifying information that you’ll need to respond to buyer questions. With advanced preparation, you increase the likelihood of sale at a competitive price within a reasonable time frame.

Here are some things you might consider if you were sitting on the other side of the transaction.

An initial screening of the company’s finances will serve as the launching pad for further investigation. Ideally, the business demonstrates:

• A consistent record of growth in revenue and profits
• Cash flow sufficient to fund current requirements as well as growth projections
• Operating margins that are equal to or better than industry norms
• Relatively low overhead costs to further demonstrate operational efficiency
• Average days accounts receivable consistent with industry norms no material history of bad debt write-offs
• Timely payment of accounts payable and other liabilities
• Debt load consistent with industry averages and the age of the company’s property and equipment
• Timely payment of all relevant taxes with no unresolved actions by tax authorities

A window into the company’s future also defines its ability to generate value for a new owner. Factors favorable to this assessment include:

• Credible market forecasts for commercial and residential construction
• Documented (and realistic) business plans that are consistent with the company’s market share, competitive strengths, and financial health

While a comparison between the company’s historical and projected performance provides one measure of realism, the astute buyer will take a deeper dive into the company’s customer relationships to gain a better sense of its prospects. If the business is concentrated among a few major customers, the tenure and strength of those relationships impacts the credibility of the revenue forecasts. Even with a stellar track record of mutually beneficial interactions, the customers’ future need for services has to be taken into consideration.

Buyers will also look for a consistent pattern of adding new customers to the mix. Ideally, this form of growth reflects successful outreach efforts by a sales team, a strong base of referral business, and the company’s overall standing in the market.

Finally, a new owner would need some assurance that the clientele is drawn to the company on its own merits, not as a function of relationship with the owner. If such dependence exists, a transition plan would need to allow for establishing new loyalties.

The ease with which an owner can step away from a business depends on the strength and experience of the management team and their loyalty to the company. While the new owner may bring a host of skills and experience, there’s less likelihood of business disruption when a successful team can continue to ply their trades.

Ideally, the company has access to qualified, competitively priced labor. Both salaried and hourly employees should be compensated at market rates with appropriate incentives to retain key personnel. Proper investment in training along with fair treatment on the job should manifest in low turnover.

As buyers get serious about the deal, they take a close look at the company’s fixed assets. This examination will address current valuation as well as capital requirements to meet future needs. The following considerations come into play:

• The condition of the buildings, the potential for growth, the efficiency with which they are used, and their compliance with building regulations and codes
• Building valuation (if owned) and terms of lease (if rented), including renewal options
• Age, quality, and state of repair of major equipment, including the likelihood and timing of purchasing replacements
• Quality, age, and support requirements of the data processing systems and their capacity to meet the company’s needs over the ensuing years
• Other contracts and their terms, highlighting any restrictions involved with assignment to a new owner

The foregoing preparation should provide you with a sense of the important factors impacting the value of your business. At a minimum, it provides fair warning of the many considerations most buyers will analyze for a purchase. To remove remaining bias and secure a reasonable market valuation, consider getting a business valuation from an independent third party who specializes in such transactions within your industry and scope of operation.