Construction companies are frequent business acquisition targets. The volume of business sales is largely due to the industry size – there are over 346,000 firms in the single-family housing construction alone, classified under SIC 1521 and NAICS 235510.
While this construction industry segment generates over $196 billion in annual sales, the average construction company is small – employing just 3 people and generating around $600,000 in annual revenues.
There is a sizable pool of business buyers looking for construction companies, especially in the mid-market segment – with the profitable firms topping $5,000,000 in gross revenues.
If you own a business in this industry or plan to buy one, knowing the value of your construction company is essential. While standard business valuation methods under the income, market and asset approaches work well for construction business valuation, there are 5 key factors you need to keep in mind:
Construction company worth: 5 key factors
- Longevity, name and reputation of the business make a big difference to what the company is worth.
- Value of a construction company is affected by the expected level of repeat business. Established sales and marketing function that does not depend on the current ownership translates to higher business value.
- Current contract pipeline and billing practices.
- Accounts receivable collection. Slow collection calls for higher working capital which increases business risk and leads to lower valuation multiples.
- Availability and retention of key skilled employees.
Often, higher business selling prices are achieved when a company sells to a competitor or a larger firm looking to enter the market.
Construction business valuation methods
Since construction firms sell often, there is plenty of market comps to determine the construction company worth. Market-derived Valuation Multiples for construction companies under the SIC 15, 16 and 17 are generally based on the business discretionary cash flow or EBITDA.
For owner-operator managed businesses, the Multiple of Discretionary Earnings business valuation method is an outstanding choice. In addition to the business earnings, this method lets you account for the 5 factors above when valuing a construction company.
Well-established construction businesses may have considerable goodwill. Consider using the time-tested Capitalized Excess Earnings method to measure the worth of your construction company, as a sum of its tangible assets and business goodwill.