Know your worth: Valuing a construction company

April 16, 2021

Selling a construction company has much in common with bidding on a construction project. To excel at both, the owner needs to establish the market value of the asset or service being offered.

To find out a company’s worth, valuation professionals consider a list of factors that vary by industry. Construction differs from manufacturing, which certainly differs from technology companies.

Construction companies often stumble not in valuing the company but in not valuing the company early enough. Many picture a sale as the outright purchase of the company by an outside entity. In truth, any transfer of shares qualifies as a sale—including a sale to employees or the next generation. The owner should know the company’s value before transferring any number of shares.

Private equity firms scout profitable companies in every industry—including construction. And larger construction companies do sometimes buy smaller or midsized companies with a construction specialty. However, valuations for small to mid-size construction company owners most often take place when they transfer the business to family members or employees.

SEE CONSTRUCTION REPORT

10 factors that determine a construction company’s value

Owners can anticipate their transition by enhancing their company’s value before sale. Valuations professionals consider 10 top factors when valuing a construction company:

Please make list items h4s (or h3s, please use your judgment):

1. Margins

With margins often tight in the industry, cost management is key, and prospective buyers need to understand the company’s cash flow. Are you working from project to project or adding profit and market share?

2. Business dependence on founder

The first generation of the business often maintains many core relationships with customers, suppliers, and key trades. Can the business preserve those relationships if you are no longer active?

3. The economy

Company values fluctuate between economic recession and upswing, and some parts of the economy are more vulnerable than others. Much depends on geography and construction type, but it may help to diversify the company’s customer base. Construction during the COVID-19 pandemic has fared better than some other industries; still, the outlook remains uncertain in the short to medium term. How are your customers poised to emerge from COVID-19?

4. Job pipeline

A strong job pipeline bodes well for the near future of the company. That said, also consider how much revenue is recurring, whether business is generated through word of mouth based on good reputation, past performance, and customer quality. As a result of COVID-19, companies should especially consider which projects in their pipeline are at risk of deferral, scope changes, or outright cancellation. One question to ponder at all times: Does your company need a business development professional to increase its pipeline?

5. Specialization

Buyers will place a greater premium on a company with a technical specialty—such as building for railroads—than on a construction company that pursues general construction projects. These niche companies can often bill work at a higher rate. Does your company enjoy an established niche?

6. Safety record

A company history littered with lawsuits indicates not only an operating risk. It also shows that the company is not run as well as other construction companies. The pandemic forced companies to add new layers of safety to protect their employees. Has your construction company instituted the necessary safety protocols on the job site?

7. Geography

Company valuations vary widely based on geography. In Canada, expect to see differences across the country, from province to province, from city to city, and even within cities. Is your company’s region of focus in demand?

8. Industry

Some companies perform most of their work for a specific industry, and that industry could impact the valuation. For example, construction of new mines may possess a smaller growth profile than other industries. Does your company focus on a specific industry? If so, what are its prospects?

9. Equipment and technology

If a purchaser needs to invest substantially in the business post-purchase, they will expect to pay less to buy the company. For capital equipment, consider the age and condition of the equipment fleet. For technology, remember that contech adoption may differentiate your company for purchasers. And in the coming years, you will most likely need to upgrade technology in your operations just to keep pace with the industry. Which technology adds the most value for a buyer?

10. Legislation and government investment opportunities

Governments focus their spending or incentives on a sector, subsector, or region. A government may prioritize investments in specific forms of infrastructure. The federal government has said it will do so to spur economic recovery from the COVID-19 pandemic. Also relevant are opportunities for public-private partnerships. On the other hand, new legislation could increase compliance requirements for a new owner. Does recent or future government activity impact your company?

For more on getting your construction company ready for sale to a family member, employee, or third party—see our industry report on construction.

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