Valuation Multiples – A Key Element to Selling A Construction Company

Valuation Multiples – A Key Element to Selling A Construction Company

Construction companies can be difficult businesses to sell.  A key element to selling your construction company business is pricing it at proper market multiples.  At a very high level, other major considerations for selling construction contractor businesses are:

  • Be profitable.  You are selling profits.
  • Ensure that your financial statements clearly show the profits.  For many companies this will require Reviewed Accrual-based financials along with clear Work In Process Schedules.  If you intend to sell in the next year or two and you don’t do this now, review your situation with a knowledgeable broker.
  • Create defined systems, and have a reasonable level of schedules.  Your buyer needs to understand your business.  He or she is not in the middle of your business like you are and is not in your head.
  • Identify key people who will remain with the business.  If your key people are your age and retiring with you, who will continue the relationships that drive the business?  Who will know the systems?
  • Do not wait until the next recession is on the horizon to start thinking about selling.  Selling a construction company is a nine to 18 month process in good markets.  During recessions, most contractors will not sell for much above work-out prices if they sell at all.

Finally, price the business fairly.  It is hard to resist asking for the moon under the theory that a buyer will negotiate if they are interested and “… just maybe…..we will get lucky.”  This rarely works out.  Buyer prospects inquire on reasonably priced businesses (your buyer’s theory is “if they are serious, they will price it right”) and without prospects you can not sell.  Price your business at the high end of reasonable, and if it truly deserves that pricing remain firm during negotiations.

Below are valuation multiple ranges we have seen for some typical construction contractors.  Please note that these ranges can vary dramatically based on the nature of your contracts, the size of your business, bonding requirements, actual trade, and more.  In all cases we recommend obtaining a business valuation by a valuation company that also brokers and sells companies.  They will look at all the specific variables and come up with a much more accurate price.

 

Type of Construction Company Discretionary Earnings Multiples EBITDA Multiples
General Contractor 1.5 – 3 3 – 5
Remodeler 1.5 – 2.8 3 – 4.5
Window Wall 2 – 3 3.5 – 5
HVAC/Plumbing/Electrical 1.5 – 3.3 3.5 – 5.5
Painting/Drywall/Insulation 1.5 – 2.5 3 – 4
Excavation (often asset based) Varies Varies

 

What is included in the “price”?  Most sales are asset sales.  One of the difficulties in pricing construction contractors is defining what is included in the sale on the balance sheet as part of the price.  Namely, who gets the accounts receivable and, when applicable, is the inventory included in the base price or added to it.  How the “price” is quoted in relation to these two asset classes can cause big swings.  Obviously excavators and other heavy equipment contractors can have pricing swings related to the age and condition of their equipment.

In conclusion, these multiples are a useful starting point but dangerous to use without a full business valuation analysis if you are really going to sell.

We would be pleased to discuss your situation with you in a confidential no-fee initial consultation.  Click on the How May We Help You tab below.

Want to know more about building value and selling your construction company – Click here to download our e-book “What’s Your Number? A Contractor’s Guide to Contingency and Succession Planning.” 

 

(Note – the Author, Greg Caruso, JD, CPA, CVA, has 15 years experience as a project manager for large general contractors and then as an owner/operator of a home building company that delivered up to 70 homes a year. Greg ha been a business broker and Certified Valuation Analyst for more than 18 years.)

Harvest Business Advisors provides business brokerage, business valuations and succession transaction services. Our team has extensive experience and diverse backgrounds in the financial, legal, medical, information technology and contracting fields. Harvest Business Advisors has offices in Maryland, New Jersey and Virginia.  Connect with us at info@harvestbusiness com or  877-838-4966 to discuss selling your business, ordering a business valuation or buying a business..