Construction Company Valuation

Are you in need of a construction company valuation? Many owners of construction companies are interested in learning the value of their business for planning purposes. The problem is, how can you determine what your business is worth without actually placing it on the market?

With the construction industry facing opportunity for growth over the next five years, you need to make sure that your company is ready to reap the benefits. Having a construction company valuation will show you areas where your company can be more profitable and help your business maintain a “ready-to-sell” state that can increase the fair market value.

The Basics of Construction Company Valuation

Many business owners think that they know what their business is worth but few are actually correct in their assumptions. A recent study conducted by us found that nine out ten owners were not able to accurately estimate the value of their company within 5%. The median error was 58.9% and one owner was off by over 1,000%.(1)

As a business owner that wants to determine the value of your company, it’s important that you understand how valuation experts arrive at a figure.

There are three basic valuation approaches that can be used for any business valuation.

1. Asset Approach - The most common approach for a construction company valuation, this is used when a substantial amount of your value is derived from assets.
2. Income Approach – Analyzes your past and present income to predict the income that a prospective buyer would generate in future years.
3. Market Approach - Comparing similar companies and how much they sold for to your own, this approach is only useful if there enough data to create an accurate figure.

There is no single valuation method that is more correct than the rest. The construction company valuation methodology used for your business will depend on the specifics of your own business.

Key Success Factors and External Value Drivers

The specifics of your business often carry the most weight when fixing a fair value to your business. Listed below are some of the most critical factors for a successful construction company according to IBISWorld.(2)

Success Factors

1. Highly Skilled Workforce - Having ready access to workers and specialist subcontractors can help increase your value.
2. Relationships with Suppliers – Having established relationships with suppliers is essential in this industry.
3. Negotiation Room - Construction managers who have knowledge of building statutes and regulations and can negotiate with government officials and regulatory authorities are a tremendous benefit.
4. Competing on Tenders - A proven record of success with winning new contracts and maintaining a high-profit margin is a proficiency that would appeal to any buyer.
5. Forward Selling Construction - Pre-leasing and obtaining clients before construction is started can be very valuable.

With these factors present, your business may prove to be significantly more desirable to a prospective buyer than a company without them.

External Value Drivers

Every business is affected by the market cycle and construction companies are no different. Factors outside of your own company can have a dramatic effect on the amount of money that a prospective buyer is willing to pay.

Take a look at the list of key external drivers for construction companies according to IBISWorld.(3)

1. Rental Vacancy Rates – High vacancy rates often signal a lack of demand or overdevelopment. Rates are expected to fall through 2011, offering room for industry growth.
2. National Unemployment Rate - Higher unemployment rate often means companies are decreasing the size of their workforce and do not need any additional space. It also indicates less consumer spending, limiting the growth of commercial retail spaces, amusement parks, and other consumer-oriented buildings.
3. Dow Jones Industrial Average – Demand for new property is closely related to corporate profits and economic conditions. The Dow Jones reflects these and the ability and willingness of investors to purchase and develop real estate.
4. 30 Year Conventional Mortgage Rate – Low interest rates and credit standards can fuel industry demand and the ability of investors, businesses, and individuals abilities to invest.

When using a construction company valuation to determine your business’s future, it’s always important to know what factored into the figure.

A construction company valuation report prepared by a professional should demonstrate how these external value drivers factored into your business’ value and clearly explain the reasoning.

Rules of Thumb

For business owners interested in a rough estimate of what their company is worth, construction company valuation rules of thumb can provide you just that.

Derived from industry multiples, these construction company rules of thumb are designed to give you an idea of what the value of your company is using a single facet, such as your earnings.

Take a look below to see some valuation rules of thumb for construction companies that have been compiled by industry expert Tom West.(3)

General Construction Companies

1. 20 – 25% of annual sales plus inventory
2. 1 – 2 times SDE plus inventory
3. 1.5 times EBIT
4. 2 – 3 times EBITDA

Specialty Construction Companies

1. 1 – 2 times EBITDA

Rules of thumb can be very useful for establishing a basis of what your company is worth. However, if you need a reliable figure that you can use for critical business decisions, then you should have your business valued by a professional.

Looking Forward

Moving past the Great Recession of 2009, there are an increasing number of business opportunities in the construction industry that promise future growth.

Corporate profits are rising and vacancy rates are expected to fall over 2011, providing owners with two drivers that can translate into a higher business value. Additionally, unemployment is expected to decrease over the next year, ramping up the desire for consumer spending related buildings.

With these potential opportunities on the horizon, it’s advisable as a business owner to begin preparing for your future.

Positioning your company in line with future growth means getting ready now and it is crucial to understand the value of your most important asset.

Take control of your future now and ensure that it is you that is dictating the terms when you hand the keys to the business over to somebody else.

Choose A Valuation You Can Trust

You’ve helped build the foundations for a number of businesses. Now, you need a construction company valuation that provides you support for your future.

Here at SPARDATA, we understand how important your business is to you. We work with you to help you realize the maximum potential of your business for business planning purposes and can also ensure that you retain full control when it’s time to hand the keys of your business over to your successor.

So whether you’re interested in developing an exit strategy, estate tax planning, or you’re preparing for the next decade of business, we can help you.

If you have questions and you want to ask a valuation expert, you can call (800) 895-4100 or click here to schedule a free consultation.

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1 Unpublished survey of SPARDATA’s business owner clients in 2010
2 IBISWorld. (2011, March). Commercial Building Construction in the US. Retrieved from IBISWorld Industry Market Research database.
3 Id.
4 West, Thomas L. 2010 Business Reference Guide: the Essential Guide to Pricing Businesses and Franchises. [Worcester, MA]: Business Brokerage, 2010.