Key Takeaways

  • Margins, specialization, equipment, and a great safety record matter a lot in construction (along with the things that matter in almost every business valuation).
  • High-quality backlog and repeat customers can boost the value of a construction business.
  • Buyers tend to care more about profits than revenue.
  • EBITDA is the most common valuation method, and SDE is second.
  • Specialized businesses tend to make more profits on a given project but may see higher customer concentration and owner dependence.
  • Catchfire can help you buy or sell a construction business. 

What Goes Into Valuing A Construction Company

Unless you’re a massive AI company (tech tends to live in a topsy-turvy world in terms of valuation fundamentals), there are some things that are important to consider when valuing most companies - things like revenue, profits, supplier and customer concentration, and how crucial the owner’s knowledge and relationships are to the operation of the business. 

With construction companies, there are some factors that tend to be especially important:

  • Margins: They’re crucial because low margins mean you’re surviving from job to job; you might not be able to replace aging equipment or expand your business. You’re also less likely to survive cost overruns or bad months. 
  • Specialization: Doing general construction work is fine, but specialized work can mean less competition and a more reliable customer base looking for the kind of work only you can do.
  • Equipment: Newer equipment means the buyer is taking on less liability and lower maintenance costs.
  • Safety: When your workers’ comp premiums are through the roof from on-site accidents, buyers will hesitate - both because they don’t want to take on those higher costs, and because you might not have the most sterling reputation.

For M&A Advisors in Winnipeg, contact Catchfire today!

The Financial Metrics Buyers And Appraisers Review

Unless you’re doing an asset-based sale (and we hope you’re not, because that doesn’t bode well for the performance of your business), buyers and appraisers are going to look at a few different financial metrics:

  • Profits: Cost overruns are extremely common in construction, and margins can be quite thin. Massive revenues don’t always translate to profitability, and if your company is unable to regularly turn a profit, buyers may not care how big the contracts you can pull are.
  • Backlog: Most successful construction companies have a backlog of jobs waiting to be completed; buyers may look at these jobs as sources of revenue. When you’ve profitably completed similar projects before, your buyer may say, “Hey, there’s money on the table here!” and be more inclined to buy.
  • Bonding: When a company has historically been bonded for very large projects, it’s a sign that insurers trust them enough to offer bonds for future projects. Without getting bonded, you can’t work on some of the largest projects, so records of recent large bonds are crucial to some buyers.

Construction Company Valuation Methods And Multiples

Most construction companies are valued based on earnings before interest, taxes, depreciation, and amortization (EBITDA), though some smaller companies are valued based on seller’s discretionary earnings (SDE). 

Industry multipliers in construction tend to be somewhat low; margins are thin, you have to secure new projects every year (at least until we get a subscription-based Construction-As-A-Service startup revolutionizing the field), and knowledge and relationships tend to be concentrated at the top of the org chart.

The good news: There are a few ways to boost your multiplier. Maintenance contracts and service agreements can provide the “subscription-based” revenue I was being cheeky about a moment ago. Getting your management team trained up so that the business is less reliant on you is also a good way of getting more for your business. 

Get Expert Help Valuing Your Construction Company

People want to buy your construction company for less than its worth. Don’t let them. Work with my team at Catchfire. We’ll help you make your company more attractive to investors, so that you get more when it’s time to sell. Read our guide to selling a business!

Common Mistakes In Valuing General Vs. Specialized Contractors

Specialized contractors are often, but not always, worth more than general contractors. When valuing your business or a construction business you’re angling to buy, you should look at:

  • Repeat Business: Specialized contractors may see more repeat business from companies in the niche they serve.
  • Customer Concentration: The downside to the last point - the more you niche down, the fewer potential customers you have.
  • Profitability: General contractors might see higher revenues because they can take on more jobs, but specialized contractors tend to be more profitable because they can charge more for every job they do. They’ll also (hopefully) be good at what they’re specialized in, which can mean fewer cost overruns. 

How Catchfire Can Help You!

We help sellers make their businesses more attractive to buyers, and we help buyers find, value, and negotiate business acquisitions. Whether you’re looking to buy a construction company or want to know when to sell your business, Catchfire can help you! 

FAQ

  • What is the most common method used to value a construction company?

EBITDA is the most common valuation method, but SDE is sometimes used. 

  • What multiples are used for a construction company valuation?

Multiples vary; some small contractors might see multipliers of only 2x-4x, while highly specialized contractors with strong profits, a diversified customer base, and decentralized knowledge and relationships might see multipliers of 5x or higher. 

  • How do backlog and contracts affect a construction company's value?

Backlogs and contracts have a positive effect on the value of a construction company; recurring contracts are seen as a reliable source of revenue, and backlogs (especially backlogs that are similar to profitable projects a company has undertaken before) are often seen as money on the table. 

  • Does equipment ownership increase the value of a construction business?

That depends on the equipment; while there can be tax advantages to depreciation, old, unreliable equipment is typically not seen as an advantage. On the other hand, if all of your equipment is brand-new, it could be seen as a major advantage. 

  • How does owner dependence impact valuation?

Negatively, the more dependent a construction company is on its owner, the less a buyer is likely to value it. Good news: If you want to retire when you sell a business, now you have two reasons to train up your management team and do less work over time.