Are you wondering how to calculate a business valuation? Valuing any business can be challenging and overwhelming be it a construction trade or general contracting business. In the business valuation industry, valuing construction companies can be particularly difficult due to factors such as demand cycles, work in process valuation and bid versus time and material estimating/billing. Thus, it requires a professional, experienced construction valuation professional or a Construction Trade Business Broker who understands industry factors and can help you get the best valuation possible. So, to understand the valuation of a construction trade business, let’s learn about some of the key factors that influence the valuation.
Key Factors to Consider in Valuation of Construction Trades
Do you want to get a valuation of a general contracting business or construction trades business valuation? There are many factors that might affect how much your construction company is worth. Some of the important ones are listed below.
1.Income-Based Valuations
Maximizing owners cash flow (eg total compensation to owner including perqs and adjusting for non-recurring income-expense) is one of the most crucial factors in considering how to calculate a business valuation using these methods. The historical and predicted cash flows of the company are used in income-based appraisals to calculate value. Appraisers can employ either the capitalization of earnings method or the discounted cash flow method with this approach. The cash flow method enables appraisers to predict future earnings over a predetermined period. The capitalization of earnings technique uses a single normalized annual cash flow estimate to assume a constant growth rate.
2. Valuations Based on Assets
The asset-based approach determines a company’s estimated equity value by subtracting liabilities from assets adjusted to market values. Assets can include real property, tangible personal property, intangible assets, notes, work in process, backlog, and accounts receivable. An equipment appraisal is sometimes recommended when using this approach. This method is particularly important in heavy construction which often heavily invests in large, expensive or specialized earth-moving equipment
3. Valuations Based on Market
The performance of the business is assessed using transaction data from similar industry and sized companies (competitors). For instance, an appraiser may study performance data from related or comparable construction firms to create a fair market value assessment. The end goal is to evaluate a company’s value by applying various ratios of value to financial indicators or non-financial variables of roughly comparable benchmark companies based on actual sales of comparable companies.
What Factors Drive Value in the Construction Trade?
So far, we have gotten to know some of the basics of how valuation of a construction business is calculated. Next, we will learn about factors that drive value. These will help business owners prioritize, plan and execute accordingly.
1. Fixed Assets of the Company
Fixed assets, such as furniture, machinery, structures, and land, must be considered when valuing a business. If a business has a lot of assets, debt financing may be used. The procedure may include a qualified equipment appraisal to establish fair market value based on age and condition. CapEx (capital expenditures) need to be estimated for future replacement of these fixed assets.
- Backlog and Estimating Pipeline
As the intention of any valuation is a picture of the future company’s work, the organization’s backlog including awarded contracts and Work in Progress (WIP) is a key metric. In particular, if the appraiser employs an asset-based strategy, backlog must be considered as the business can count on future profit from these jobs. Similarly, outstanding estimated jobs and historical estimate win percentage are important data.
3. Company Leaders’ Relationship and Role
What is the role of the Company Leaders? Are they also owners? Family members? Are they active in the business? Relationships between business executives, client base, and important project partners can materially affect a company’s value. Spreading customer relationships among employees (versus owners) can increase the value of the business, while reducing potential buyers’ fears of customer loss. When evaluating a company, contractual agreements should be considered, particularly those that produce a competitive advantage.
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4. Customer Base
Does the business have a diverse customer base, or does most of its income come from a small number of important clients? A concentrated customer base increases risk, which could impact value. Are the customers in diverse industries, or mainly concentrated in one or two? If there are large customer concentrations, are there multiple and distinct decision-makers at the customer? This can mitigate buyer risk or concern if analyzed and demonstrated. Depending on the size of the contractor, blue chip customers (large, stable companies with good financial track records of paying their bills) can also drive higher valuations.
5. Risk of Litigation
In the construction industry, litigation is a real possibility. The appraisal will need to consider liabilities related to past, ongoing, or upcoming litigation. And it can also play an important role in the valuation of the construction trade business. What has been historical litigation? Are there outstanding cases, or threats? Are claims covered by insurance?
6. Source of Work – Owners or General Contractors
Construction trades work may come from owners or general contractors. GC work is typically less favorable as the relationship can turn based on a poor bid. It will also play an important role in the valuation of the construction trade business or general contracting business valuation.
7.Bid Versus Negotiated Time and Materials Pricing
Pricing in the construction trades industry is driven by many factors. Open, competitive bids typically result in reduced margins. Negotiated time and materials pricing, based on trusted relationships with the customer, usually are the best for all parties. The customer is provided dedicated service and skilled trades; the construction company earns higher margins for providing a long term commitment.
7.New Ground-up Construction Versus Recurring Maintenance/Upgrade Construction
New Ground-up construction typically is one-time for each project. Ongoing service, maintenance, upgrade and insurance construction work typically results in higher valuations.
Need Help with Your Construction Trade Business Valuation? We Got You!
Adam Noble Group, LLC is a leading national M&A advisory firm that helps qualified strategic, corporate, private equity, partners, management, and first-time buyers acquire valuable firms from exit-minded business owners. As business owners prepare for and complete their company’s discrete, confidential exit, we develop a rapport, create trust, and instruct them in the processes to achieve their exit goals. Construction trades, manufacturers, aerospace and defense industry, oilfield services, craft breweries, partnership buyouts, manufacturing, service, and wholesale distributors are just a few of our M&A and business broker specialties. Confidentially contact us regarding how to calculate a construction business valuation.
For 3 decades, we have been guiding business owners and their families CONFIDENTIALLY to exit their construction trade businesses with the BIGGEST paycheck of their life!
During 3 decades of M&A service, Jeff Adam has successfully completed the sale of over 825 businesses and advised or completed 1,000’s of business valuations and exit plans. An entrepreneur in his own right, Jeff has started and grown 12 companies in fields including international finance, B2B services, business valuation, construction, screen printing, Mergers & Acquisitions, engineering, and manufacturing. Jeff has donated his time as a distinguished speaker at numerous national & international conferences since 1977 covering topics such as environmental services, engineering, media, craft breweries, exit planning, business valuation, charitable giving, management, business brokerage and M&A fields.
Jeff is President of Adam Noble Group, LLC, a national M&A Advisory firm, professionally valuing and confidentially selling profitable businesses owned by exit-motivated business owners to qualified strategic, corporate, private equity, partners, management, and first-time buyers. Jeff establishes rapport, builds trust, and educates business owners in the steps to meet their goals as they prepare and achieve the discreet, confidential exit of their business. Jeff exclusively represents sellers of $1M-50M value enterprises and endeavors to transfer their businesses to qualified, capable acquirers who will build upon the seller’s vision, goals, culture, and history. Jeff maintains lifelong repeat and referral relationships with sellers, their acquirers, and service providers.
Adam Noble Group has multiple M&A and business broker specialties: Manufacturing, Defense Industry, Oilfield services, Construction trades, Craft Breweries, Partnership Buyouts, Manufacturing, Service, and Wholesale Distributors.
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