Construction company owners looking to sell their businesses should plan well in advance of the eventual sale. Many owners wait until the year they wish to exit a business to start investigating the process, only to find out that selling involves a great deal more than they anticipated. Selling a construction company is very different from selling many other businesses; owners need to consider many variables when contemplating a sale.
Planning For a Sale
If you are going to sell, you should start planning at least three to five years in advance of a desired sale date. During this time, you can work with a business valuation consultant, identify areas of improvement to address in advance of the transaction date and determine the best market for the sale of the business. Some key questions to be answered:
- Is there a group in upper management who could continue running the business or is an outside investor a better option?
- What improvements can be made to the company’s financial statements that would make your business more attractive to potential buyers?
- What are the standards and premises of value?
If you are contemplating an internal sale to a group of current employees, the future owners should be groomed for ownership, including given an opportunity to manage the company while you are still in the business. As well, consider a tiered approach, selling small portions of ownership over time to foster employees’ personal stake in the success of the company and incentivize them to continue to grow the business. This planning step can be difficult, as owners are often reluctant to relinquish control and are accustomed to managing the business on their own terms without involving others in their decisions.
However, it is imperative to the future success of the company that the future owners have an opportunity to learn their roles as owners.
If a sale to a third party is a better—or an only—option, it can take time to identify the right fit. Most owners want their companies to live on long after they are gone, not be dismantled following the sale. Getting to know the suitors and making sure they are the right cultural fit for your business can take time. In most closely held construction companies the employees have become members of the owner’s extended family, and the outgoing owner wants to ensure their ongoing livelihoods. You might find it necessary to plan for a transition period where you stay on in a consultative role. This can provide comfort to the new owners and help them get off on the right foot.
Selecting the right business valuation consultant is also a key part of the planning process. While the consultant may be a Certified Valuation Analyst, a Certified Exit Planning Advisor or a CPA accredited in Business Valuation, credentials are not the only factors to consider. The consultant should, ideally, have experience selling your type of company. This might be the only company sale in your lifetime, but your broker should have extensive experience in selling your type of company to ensure a successful transition, including getting you the best price for the business you have built.
Valuing a Construction Company
Valuing a construction company comes with unique challenges. Your company’s value could be based on your reputation, which is very difficult to transfer to another owner. Contributions to value include good management, good financial records, a stable and deep management team, a great market area for construction activities, or a specialty service that is not offered by many other companies.
Owners often feel their businesses are worth more than a market can bear. Business owners who set their own price and go to market are often disappointed in the market’s response. One common mistake is estimating their value based on values of public companies in the same industry. Such comparisons are apples to oranges, as public companies are vastly different in terms of depth of management, capital structure, and financial resources. Factors such as a lack of marketability or non-controlling interests can also negatively impact the value of a closely held business and require discounts in the valuation of company stock.
However, value can be added through thoughtful positioning. Identifying suitors who will pay a premium for synergistic value or the intrinsic value of a company is one way to boost a company’s selling price. Working with the right valuation professional will help determine the appropriate market and value of your company.
Construction Contracts and Backlog
Once a potential buyer is identified, a period of due diligence is required for a thorough review of your company. Due diligence includes reviewing historical financial statements; identifying key personnel, markets, niches, services offered, major customers, and capabilities to self-perform work; appraising equipment and buildings; and more.
The company’s performance on current and recently completed contracts will be scrutinized. The prospective buyer will want to review bid spreads, if available. They will also compare initial contract bids to actual results, looking for indications of gross profit fade which could indicate weaknesses in project estimating, management, performance, or some combination of all three.
The analysis may lead to a determination that the value of the backlog is something less than an internally calculated projection of future cash flows. Conversely, if gross profit fade is not detected, either historically or on jobs in progress, the buyer can be confident that the entity is appropriately valued, and as such, an attractive target for acquisition. It is important to remember that the buyer is purchasing much more than the jobs you have under contract; the real value of the acquisition is in the company’s ability to continue as a going concern.
If these types of analyses are not already available when a contractor first engages a business valuation consultant, then using three- to five-year historical data is imperative to maximizing the appeal of your company to potential suitors. Having detailed records that are readily available and showcase your company’s strengths will be an effective marketing tool for you.
Many contractors do not have the luxury of repeat customers. They must consistently win new jobs with new customers to grow their companies and remain profitable. That being said, having a strong pipeline for future contracts will typically translate into a higher valuation of the company than simply having a large backlog. A potential buyer will want to see both a strong, consistent backlog and evidence of existing channels for future work to ensure continued success in the short, as well as long run.
When you are considering a transition in the ownership of your business, you should talk with your trusted advisors well in advance of the desired date of sale. Careful and purposeful planning will ensure you are in the best position to command the highest return on your capital investment and the years you have dedicated to your business.