Do you want to sell your construction business and need a valuation? If YES, here are 7 smart tips on how to value a construction company and sell profitably.
A lot of construction business owners choose to sell their businesses when the market is at it’s peak. But it takes a great deal of time to decide if the market has truly reached its peak. The more reason you must be flexible with timing when looking to sell your company. This is very necessary to maximize the return you receive for your life’s work.
You don’t have to wait until you decide to retire to get your business ready to sell. Some preparations can be made immediately, but others should be done years before. Once your business is ready, several factors determine if the time is right, including the economy, your industry, your company and personal issues.
4 Factors to Consider Before Deciding to Sell your Construction Business
- The Company
It’s also necessary that you consider your company’s sales and profit trends. If a trend is down, you must understand why. Is this due to circumstances beyond your control? Or, is it in your control, such as the result of a poor management team?
If it is a result of a management lapse, it is without doubt not the best time to sell. You have to take enough time to build a solid management team that can increase sales, improve margins and also run the business well in your absence.
But before you start improving or restructuring your management team, put into consideration their tenure and whether or not they will be considering retirement around the same time as your own retirement. If they will be retiring, you might consider pushing back your retirement date while you expand your management team.
But if you have a concrete management team, and they do not plan on retiring anytime soon, you might consider moving your retirement date up and selling while you have this management team in place.
Meanwhile, if the negative trend is something you cannot control and easily reverse, it might be a better advice to sell quickly before it starts affecting sales. If you are approaching retirement, and large time and money investments will be required to turn the business around, you should examine your circumstances carefully to decide if you should undertake such a large investment.
- The Economy
According to experts, economic conditions affect how much you will receive for your Construction Company and how quickly it will sell. When the economy is down, buyers might be more concerned about survival than growth and acquisitions.
Also, credit can be tight in a down economy, making it very hard for buyers to get adequate financing. And higher interest rates reduce a buyer’s rate of return, which means they might offer to pay less to compensate for the higher interest rates.
Have it in mind that the economy runs in cycles. If you miss an up cycle, it could be years before the next one occurs. Most importantly, it is impossible to accurately predict cycles. We cannot be sure we are in a recession until we have been in one for a period of time.
And we only know a recession is over when it has been over for a while. It’s advisable that you should consider selling only when the economy is strong, interest rates are favourable and credit is available.
- The Industry
Just like the economy, industries move in cycles, but your industry might not move in the same direction or magnitude as the general economy. Regardless of the economy and industry type, all industries go through periods of growth and decline. Also note that industries fall in and out of favour with buyers. For instance, certain industries become hot for private equity firms to invest in, which drives up prices.
If you plan to sell in the next several years, it is crucial you know the future of the construction industry. Talk to customers. Ask your suppliers how they are doing. Attend trade shows and industry meetings. You can learn a lot about the market for business acquisitions if you ask questions and listen.
- Personal issues
Agreeably, personal reasons might be the most crucial factor to determine when to sell your business. It’s necessary that you answer several questions. Do you still enjoy working? Do you have other interests that will occupy you happily if you no longer go to your business every day?
Have you actually tried these pursuits to be sure the reality will be as good as your dream? If you have a business partner, you also must consider his or her plans. If your partner’s retirement plans do not line up with yours, you must talk about this in advance of your retirement.
Another personal factor to consider is your health and your spouse’s health. Indeed health issues can force you into a sale at the least opportune time and possibly damage your business’ value. Selling your business at the absolute peak time requires some luck in addition to a large amount of preparation. However, through planning, you can be sure you sell your business at a good time and secure the retirement you have always dreamed of.
3 Ways to Determine the Value of your Construction Company
It can be very difficult to determine the value of your company because traditional valuation methods do not take into account the value derived from human knowledge and skill, as well as an company’s reputation. While valuations that are critical to the business should always rely on a professional, the following tools are useful in arriving at a general idea of a business’s value.
Note that the three traditional valuation methods include asset-based, market-based and income-based. Irrespective of which method is used, it is very crucial that you have sufficient financial records, including tax returns, for at least the past five years.
- Asset-Based Valuation
This valuation relies on an assessment of the necessary costs to recreate, reassemble, redevelop, and/or redeploy all of the company’s assets using date-specific prices. A construction company’s estimated equity value is the total assessed asset costs minus its liabilities.
Appraisers typically use this method to value holding companies or companies whose assets are worth more separately than combined (i.e., the company consistently struggles to yield positive cash flows). Assets of a construction company include notes, accounts receivables, real property, tangible personal property and intangible assets. Financial and tangible assets can be valued at:
- Book value, which is the value of the asset as stated in the company’s financial and accounting records;
- Adjusted book value, which is the book value adjusted to more accurately reflect the assets’ true market value; and
- Liquidated value, which is the value of the assets if the company is liquidated immediately.
Liquidated value provides the lowest value of the assets and the adjusted book value generally provides the highest value.
Intangible assets are valued subjectively, and typically include contracts in progress, outstanding contract proposals, brand name recognition, trained workforce, relationship with clients, management employment contracts and important supplier contracts. A construction company that has pending legal issues or unfavourable long-term contracts may have a negative intangible value.
- Market-Based Valuation
A market-based valuation tells a company’s value using data from known transactions of either its private or publicly traded peers. For instance, price to earning indices are a common metric by which appraisers estimate a company’s value after weighing its performance to that of its peers. The appraiser often makes additional adjustments to the metrics to account for differences between the subject company’s operations and the peer group.
Although the comparable companies may differ in important respects, including size, location and market share, their financial ratios speak directly to the value of other companies in the same industry. These ratios often compare the price to earnings, sales, equity and cash flow. These ratios can be very convincing if the information about comparable companies is available.
- Income-Based Valuation
This valuation relies upon a company’s expected cash flows in assessing value. Note that this method is often applicable for contractors with a small fixed asset base, but a strong reputation or history of success. This valuation approaches include the discounted cash flow method and the capitalization of earnings method.
Have it in mind that the discounted cash flow method uses forecasted income statements, working capital and fixed assets for some discrete future period. At that point, the appraiser then refines the forecast so that future cash flows more reasonably represent what a prospective buyer may realize.
After that, the appraiser reduces the future cash flow amounts to a present value amount using a rate of return commensurate with the perceived riskiness of the company’s future cash flows. The higher the perceived risk, the lower the company’s present value.
While the capitalization of earnings relies on a singular normalized annual cash flow estimate, based on the assumption the company grows at a stable rate over time. Without doubts, the capitalization of earnings method is the simpler of the two methods because it only requires one cash flow estimate.
But, it may not always be applicable because a company’s expected cash flows may substantially change. While only one of these methods likely will be used to determine the value in a transaction, it can be useful to compare the values obtained in all three methods. Ultimately, the value is whatever a buyer is willing to pay or a lender is willing to accept in financing, but analysing a business with each method can help owners make the best case for their business.
7 Smart Tips on How to Sell a Construction Company Profitably
Indeed there are unique and complex set of considerations needed when appraising and selling a construction company. Reasonably reliable company cash flow forecasts are key to any meaningful income-based valuation results.
Developing reliable forecasts tend to be difficult, but not impossible, given the wide array of industry factors (such as lending rates, consumer and producer confidence, labour rates, material prices) that can change seemingly overnight.
Also, a construction company’s value beyond its tangible asset value—its machinery, equipment and real estate—is directly dependent on its ability to create persistent and meaningful cash flows. Have it in mind that this ability is often tied directly to a construction company’s reputation for service, finish quality, on-time delivery and worker-friendly policies.
This could mean focusing all of the company’s energies on a particular strategy or niche market that may result in above average profit margins. Clearly, there are a variety of ways a construction company can maximize its marketplace reputation, and regardless of the method(s) chosen, sound management is the key to making that happen. Below are five factors you need to consider and put together before selling your Construction Company.
This is very important to the success of any business, especially in our digital age where internet marketing is becoming a must. Reports have it that nearly 85% of consumers use the internet to find local service providers and if you don’t have a presence on the web, you are not even on your prospect’s radar. Note that the first step will be to develop a website and leveraging all social media pages, including pages on sites such as Angie’s List and Yelp.
Due to certain general contracting firms, some consumers have a hard time trusting businesses in this arena. But by making yourself noticed on review sites and directing satisfied clients to the pages to leave reviews, you can build trust in your community and set your business apart as a trusted firm. A strong marketing campaign also includes email communications, Google AdWords campaigns, direct mail and social media updates.
2. Management Team
This particular factor tends to be overlooked by construction entrepreneurs and they always pay dearly for it when the time comes. The reasoning behind this is that when the owner of a business is heavily involved in all facets of the company, including client relationships, sales or operations, it can be very hard for a new owner to seamlessly transition into the business.
Reports have it that buyers often view this situation as high-risk due to the potential outcomes of the owner leaving the company. For instance: if the owner manages most of the large accounts, it could be risky for a new buyer to take over since the customers mainly work with the owner.
If you see this problem within your own construction company, the solution is to build your management team. Once you have identified your management team, begin transitioning your responsibilities to them so that when the new owner comes on board, there will be virtually no responsibilities to transfer.
3. Repeat Clients
Have it in mind that the fun of owning a construction company is that it’s easy to build a base of repeat clients. For instance, you may have helped a client rebuild a deck and they were so satisfied with your work that they remember you when they need new lighting installed. Note that doing good work in this industry will generate future work for your business and build a “word of mouth” marketing campaign.
But unfortunately, a lot of people have had a negative experience with a contractors or construction companies, and before choosing someone they have never worked with, they may ask friends or neighbours for a recommendation. Immediately you establish few repeat clients, you can market your various service offerings to them and offer specials to generate new jobs.
4. Equipment upkeep
Have it in mind that your inventory value is a crucial part of determining the worth of your business. That is why to ensure a top sales price, it’s necessary that you make sure your equipment is at its maximum value prior to the valuation. Although this is expensive, you’ll get that money back when the deal closes.
It’s advisable that you spend a little more now (or over time) to ensure your equipment is always on schedule for routine maintenance, make sure repairs are being done, and equipment is being swapped out when the time comes.
The ideal way to maintain your equipment is to spread the cost of maintenance over the lifespan of the unit, instead of cramming in a ton of repairs when you’re preparing to sell. Equipment value is so important in this industry, and not only will it increase the sales price of your business, but an impressive inventory will attract more buyers.
5. Eco-friendly Materials
In this modern era, our society and government are beginning to place a higher value on environmentally friendly products and services, but here’s something you may not know. Millennials are the next generation of home-buyers and this demographic is currently the biggest group in the united states, and part of their culture is taking care of the planet. That is the more reason your business will benefit well if it offers eco-friendly options to your clients.
Sometimes, greener options cost more money but the younger generations are willing to pay it for the sake of the planet. Offering green supplies also gives you a great new marketing point and will help build your reputation as an ethical business. The construction industry in the United States is massive and is constantly adapting to new technology, demand and trends within a domestic and global market.
The industry is also heavily reliant on several other sectors, many of which dictate the financial state of the industry and the small businesses within in. Because of these facts, construction business owners are always looking to the future and when the unforeseeable strikes, it’s essential that you have a plan in place to salvage your business.
When you are going to sell your construction company, it is important to remember that timing is everything. If you wait till the market is struggling and you know the next few years will be difficult, then you are not going to get as much for your business; however, if you are experiencing rapid growth, new contractual relationships, and your business is beginning to branch out into new markets then you could profit from unearned future revenue.
When starting or building your business, try to establish an organization with the right foremen, executives, and leaders that can make difficult decisions that will expand your company. Although you may not always make the same decisions, getting the leaders that can make good decisions and move a business forward will have a huge impact on the value of your business.
Also, when you are ready to pull the trigger and sell your company, you may need to consider sticking around for a few years. Some investing companies will want you to remain with your business to ensure a smooth transition in management after the sell.
They will probably even structure the buyout with a clause that will pay out dependent on the company’s performance one or two years after you close the deal. You will probably want to be there to ensure it pays what you want it to.
Agreeably, selling a family owned and built business can be a very emotional transaction, especially when you have spent most of your life building the business. To some people, it is more like marrying off your eldest daughter.
If you don’t think you are getting what it is worth, yet the market believes it is worth what you are offered, then you may have some struggles. It’s advisable or highly recommend that you speak with one or two advisors so you have the right expectations, otherwise you may spend a lot of time and money only to retract an offer that you believe is too low.
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