Even in a challenging real estate market quite a few specialized construction companies continue to thrive. The secret of success? Here are a few points to ponder:
- Construction firms in a specialized, well-protected niche, tend to weather the storm better.
- Established companies with strong reputation in their market place stay busy even as competitors exit.
- Word of mouth referrals are even more critical to bringing new business when times are tough.
For example, while new construction volume may be down, construction defect restoration work is still needed. Specialist firms that excel at this often find that their services are in high demand. While no one business is truly recession proof, these types of construction companies are recession resistant.
Interestingly, these successful businesses are sought after acquisition targets – both by larger, well-funded competitors and financial buyers who look for a stable income stream. So even if valuations of many other companies in the market may trend lower, such specialist construction firms hold their value well.
Business valuation methods for specialized construction businesses
Market activity is a very good indicator of a company’s fair market value. Selling prices of similar companies that changed ownership recently offer you a way to estimate what your own firm is worth. Consider using a number of valuation multiples that help you calculate your business value based on its financial performance, such as revenues, profits, cash flow or business asset base.
Example – valuing a construction defect restoration company using valuation multiples
To demonstrate the method, let’s take a typical construction firm with the following recent financial performance:
- Annual gross revenue: $2,000,000.
- Net sales (less returns and discounts): $1,950,000.
- Gross profit: $950,000.
- Net income: $210,000.
- EBIT: $225,000.
- EBITDA: $230,000.
- Seller’s discretionary cash flow (SDCF): $350,000.
- Furniture, fixtures and equipment (FF&E) assets: $195,000.
- Inventory: $100,000.
- Total business assets: $465,000.
- Owners’ equity: $155,000.
We pick a set of reasonable valuation multiples and calculate the fair market value of this company as follows:
|Multiple||Multiple value||Business value|
|Business value based on gross revenue||0.75||$1,600,000|
|Value based on net sales||0.8||$1,560,000|
|Value based on gross profit||1.7||$1,615,000|
|Business value based on net income||8||$1,680,000|
|Value based on EBIT||8.5||$1,912,500|
|Value based on EBITDA||8.4||$1,932,000|
|Value based on SDCF||3.5||$1,325,000|
|Value based on FF&E assets||9||$1,855,000|
|Business value based on total assets||3.75||$1,743,750|
|Value based on owners equity||12||$1,860,000|
|Average Business Value||$1,708,325|
Note that, by convention, the business value above includes all business tangible assets and goodwill. It does not include the cash, accounts receivable, and the business owned real property, if any.
Additional business valuation methods to cross-check your results
To demonstrate the unique value-creating attributes of your construction company, consider using income-based valuation methods. For smaller, owner-operator managed businesses, the Multiple of Discretionary Earnings is a good choice. For larger firms, the Discounted Cash Flow method is typical.
If the company has established itself as a leader in its market, the value of business goodwill can be a large part of total business value. You can measure business goodwill by using the well-known Capitalized Excess Earnings method, also known as the Treasury Method.