Selling your construction business
Getting the help of an accountant, financial planner, broker or attorney can make a difference between a sale that meets your goals and one that leaves you frustrated.
It took hard work to build your construction business and you earn a good living. But if you can envision a time when you’ll sell and walk away with a cash payout, the sooner you start to plan, the better off you’ll be.
Knowing what determines the value of a construction business can help you maximize your return when you want to sell yours.
Valuations are typically determined in one of three ways: the asset approach, market approach, or income approach. The asset approach subtracts liabilities from assets to decide the value of the business. This approach can work well for a business with a large number of physical assets.
The market approach bases the value on similar businesses. In this case, the fair market value is the price a willing buyer will pay and a willing seller will accept.
The income approach evaluates the ability of the business to generate cash flow. This method uses the cash flow for a specific period of time and then discounts it by the risk of collecting that money to establish a value for the business.
“Most building construction firms are valued using the income approach,” says Gregory Caruso, attorney and CPA with Harvest Business Advisors, a firm which provides business valuations, succession planning and brokerage skills to firms in a variety of industries, including construction.
According to Caruso, many small contractors are incredibly disappointed with the number they get for the value of their businesses. That amount is typically about 2 to 2.5 times what the owner is making, but only if they meet certain criteria that Caruso cites as being essential to having a saleable business.
“To create a business that can be sold, you need key people and systems to remain,” says Caruso. When the owner is a central part of the business, without other key people in place, a potential buyer has difficulty envisioning himself as the owner and managing the staff. An involved owner reduces the value of the business to a potential buyer.
Planning is essential to maximizing the value of a business and yet only 24 percent of business owners have a formal exit strategy in place. Most experts recommend you start exit planning two or three years before you want to sell, longer if you plan to transition the business to a family member or manager.
Many construction company owners transition ownership to employees or family members.
How to increase the value of your construction business
Concentrate on profit when selling your construction business. The most important thing you can to do increase the value of your business is to make it as profitable as possible. Accurate financial records are a necessity, and the bottom line is critical. While most privately held businesses tend to minimize earnings and taxes, to get a better price for your business your records must demonstrate earnings and cash flow. “As a buyer, I want to know how much money an owner is able to take out of the company,” says Caruso.
Focus the work you do. Service or building maintenance work that is likely to continue even in slow times can help increase the value of your company. Similarly, a broader base of clients is more appealing to a buyer than a business that relies on one or two large clients.
Develop a sales process that’s now dependent of you. Potential buyers want to know they’ll be able to generate revenue when the current owner is no longer associated with the business. By documenting a proven process to generate leads, perform estimates and obtain contracts that doesn’t rely on your relationship with the customer, you’ll increase the value of your business.
Get the right people in place. Your employees are a key asset o your construction business, especially given the current and construction industry, reports larger firms are increasingly looking to mergers and acquisitions to address labor concerns. Consider using incentive programs designed to motivate key employees. Deferred compensation plans can give key employees substantial financial incentives for staying with the company for a specified period of time.
Who will buy your construction business?
Construction can be a risky business and success is often dependent on the owner’s relationships. According to Caruso, it can be difficult to interest a buyer in purchasing a construction company unless the company owns a substantial amount of equipment, fills a specific market niche or includes another valuable resource that can be purchased with the company.
All-cash sales, which offer sellers the lowest risk, are less common. Instead, many construction company owners transition ownership to employees or family members.
In its 2014 Merger and Acquisition Trends report, FMI says that earn outs remain common in the general building market as buyers are only willing to pay upfront for earning levels they confidently believe can be supported. In an earn out, sellers must “earn” part of the purchase price through the performance of the business following the acquisition.
“I always encourage construction businesses to find an internal sale,” says Caruso. However, at the same time, family members and managers will most likely need financing to purchase the business. Banks may look down on construction company buyout loans because the additional debt can make bonding difficult, which in turn can impact the future earnings of the company. Owner financing affects the company less, but this option can tie the owner to the company for another five to 15 years.
Getting help
Selling your construction business is complex and time-consuming, but getting advice early will help. According to Caruso, if you’re making $100,000 a year or more and there is some organization to your business (key people and processes in place), you can probably find a broker to work with you. A broker helps find and vet potential buyers, negotiates the sale and prepares paperwork.
“Owners often end up spending months with prospects that don’t have the money,” says Caruso.
Getting the help of an accountant, financial planner, broker or attorney can make a difference between a sale that meets your goals and one that leaves you frustrated. This is especially true in the construction business, where risk is high and future business is difficult to predict. Remember that your business wasn’t built overnight and a successful sale may require a similar amount of fortitude.
5 common mistakes when selling your construction business
- Failure to know the value of the company. Let an independent party provide a business valuation so you can set the right price from the start.
- Poor financial records. Even if you’re not thinking of selling your construction business now, keep track of expenses so your financial records can be recast for the purpose of a sale vs. for tax purposes.
- Demanding an all-cash sale. While an all cash sale is the least risky for the seller, the reality is that most sales in the building construction market require some assistance from the buyer or a bank loan.
- Selling your construction business at the wrong time. The ups and downs of the construction market will affect the number of buyers who are interested in your business and the price. Aim to sell at or near market peak.
- Being too involved in the business. Stepping away from the business and delegating authority to key staff is one of the most important things you can do to increase the value of your business.
–By J. Costin
