You have built a construction business, and you are ready to exit. We prepared this guide as a roadmap to help you understand how to successfully value and price your business and strike a deal with the right buyer.
The first step in selling any business is to get a good understanding of how buyers will value it. The challenge for you is to approach valuation from the lens of an outsider. What your construction business is worth to a buyer will hinge on its financials.
There are several methods for valuing a business. Traditional income-based methods include discounted cash flow and capitalization of earnings. For businesses with no profit potential, it may be as simple as tallying up the assets and liquidating at “book value.”
In practice, though, most buyers and business owners rely on a market-based approach to business valuation.
Construction business owners, brokers, and buyers generally look to the business for sale market to get a benchmark when valuing a business. Looking at past sales of construction businesses - and specifically the sale prices compared to their financials - we can derive price multiples that are useful for benchmarking new businesses that enter the business for sale market.
For example, if we know that an HVAC company earning its owner $200,000 annually recently sold for $500,000, we can apply an earnings multiple of 2.5 (500,000 / 200,000) to another HVAC company in the same market earning $300,000 and get a benchmark value of $750,000.
By aggregating sales data in this way, we can derive average pricing multiples useful for benchmarking businesses that enter the business-for-sale market. This gives business owners a starting point for determining an asking price.
In the building and construction industry, potential buyers will focus their valuations on the earnings (or cash flow, often used interchangeably) the business produces for its owner. The specific metrics used in business valuation analyses are Seller's Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
Businesses with earnings under around $1MM will typically use SDE, and that's the metric used in our data set. For more on the difference, see our article on SDE vs. EBITDA in Business Valuations.
|
Construction Businesses Sold (2017-2022) |
Average Earnings Multiple |
Average Revenue Multiple |
|
All Building & Construction |
2.54 |
0.55 |
|
Building Material and Hardware |
2.69 |
0.53 |
|
Concrete Businesses |
2.47 |
0.49 |
|
Electrical and Mechanical |
2.62 |
0.61 |
|
Heavy Construction |
2.41 |
0.51 |
|
HVAC Businesses |
2.81 |
0.60 |
|
Plumbing Businesses |
2.53 |
0.62 |
|
All Other Building & Construction |
2.44 |
0.51 |
The average cash flow / earnings multiple for all construction businesses is just over 2.5, and unlike other industries, the range is tight between different construction specialties. Earnings multiples for building and construction businesses in different geographical markets can vary substantially, so finding local comps will be necessary to help dial in an appropriate valuation for your business. See BizBuySell's valuation report when you're ready to start your analysis.
Most buyers and brokers will focus on earnings when evaluating your business but comparing revenue (annual construction volume or sales) multiples can help shore up your valuation and give insight into your margins compared to industry norms.
Industry-wide, the average revenue multiple hovers just above 0.5. Plumbing businesses are highest at 0.62 due to having the highest reported profit margins.
As you begin gathering your financial documents to prepare your business valuation, know that buyers and brokers will look at the latest three years of financial statements (income statement, balance sheet, and SDE) as well as corresponding tax documents.
The valuation doesn't stop at financials, though. The specifics of your business operation will determine how your construction company compares to the competition and affect the pricing multiple you should use (more on that in exit planning below).
Every construction project needs a variety of experts, from engineers and architects, to plumbers, electricians, and carpenters. Selling a business will require a variety of skills as well. As the business owner, you know your business best, but having the right experts can help you sell confidently and prevent leaving money on the table. There are three experts you will want to consider adding to your team:
The process of selling and transitioning ownership of your business will involve a lot of legal documents. From non-disclosure agreements, letters of intent, buy-sell agreements, and financial agreements, to due diligence and business entity transfer documents. Through all of it, you want someone that understands the liabilities you may open yourself up to, and protect your interests.
A lawyer will generally charge by the hour, or you may be able to negotiate a flat fee for the whole transaction.
From the valuation section above, it's clear you will need accurate, professional financial documents that will stand up to the scrutiny of the due diligence process. If you already have an accountant, you're in good shape. If you've been keeping your own books, it is a good idea to engage a qualified CPA to help prepare your financials and be available to field questions from interested buyers.
Like an attorney, a CPA may charge an hourly rate, or agree to provide the service for a flat fee.
Selling a business is a specialized transaction that requires some unique skills, experience, and knowledge. Most business owners will find an experienced business broker to be a valuable addition to their team. These experts are closest to the business-sale market and are best positioned to help you understand what your business is worth, get it in front of the right buyers, and negotiate terms that meet your needs and get the deal done.
Some construction business owners elect to use our platform to sell their business "FSBO". For certain businesses doing annual construction volume under $200,000-300,000, this may be the best approach. If you're thinking about going the FSBO route, see Selling Your Business "By Owner".
Business brokers almost always work on a contingency fee. The typical commission, or “success fee”, ranges from 10-15% of the final sale price.
Once you have a good understanding of what factors will drive your construction business's value, you can start thinking about planning your exit strategy and getting your operation in shape for sale.
Many business owners only start thinking about selling once they're ready to retire, but planning a few years out can help improve the ultimate selling price.
Once it's listed for sale, it can take anywhere from six to twelve months to complete the sale of a business. With that in mind, you need to establish a target exit date. Ideally, you would give yourself a couple years to prepare, so you have time to make improvements and to take yourself out of day-to-day operations.
If you're anything like most small business owners, much of your operating procedures and maybe even financials are not well-documented. To promote the value of your construction business, it's important that all financials and pertinent information regarding how your business operates is documented and well-organized, so that an outsider can quickly evaluate it and compare it to other construction businesses.
This means having three years' worth of income statements and balance sheets that line up with the same years' tax returns. You will also want to document important high level operating information like your current contracts, upcoming projects, material supplier information, employee list, and information on your primary sales channels.
Once you're ready to start marketing your business sale, you will be glad you invested time up front to be able to clearly present the full picture of your construction operation.
It's not likely you will be able to suddenly double your earnings to improve the price of your business, but you may be able to make changes to the operation of your business to get a better multiple on your earnings. Try to consider how a buyer might evaluate your construction business and find opportunities to improve its appeal. Here are some factors that may help you view your business like an outsider would:
|
Improves Price Multiple |
Reduces Price Multiple |
|
Reliable and well-documented operation: organized financials, detailed operating procedures, enforceable contracts, and tight project controls |
Opaque or ad hoc operation: Messy or non-existent bookkeeping, undocumented "handshake" agreements, disorganized project management, etc. |
|
Modern, well-maintained equipment |
Unreliable, old equipment |
|
Low customer concentration: Having a larger pool of customers reduces the risk of any one customer affecting overall financials |
High customer concentration: Businesses reliant on one or two large customers for the majority of construction volume may appear more risky |
|
Recurring revenue: Ongoing relationships that generate regular sales greatly improve business value. |
Little to no repeat business |
|
Specialization – Construction companies that have carved out a specialized niche tend to have a competitive advantage and will command a higher value. |
Broad scope of construction service – Companies that offer overly broad scope of construction services tend to be inefficient and struggle to compete. |
|
Experienced, tenured employees. |
High employee churn, or employees not likely to stay under new ownership. |
|
Operations management in place. Ideally owner focuses on high-level strategy, not daily operations. |
Owner manages daily operations – remember you want to sell a business, not a job. |
|
Seller financing: Owners willing to finance a portion of the sale and keep some "skin in the game" fetch higher prices. |
Cash only: Sellers who insist on all cash will usually have to accept a lower offer and will receive fewer offers in general. |
Obviously, you can't change the way your construction business operates overnight. Focus on the qualities you can affect, and make your business as appealing as possible to outside parties.
You have a variety of options to consider when thinking about potential buyers of your construction business. The right buyer could be a complementary or competing construction business, a private equity firm, employees, or an individual entrepreneur. The hard part is getting your business in front of enough interested buyers to generate multiple offers.
Most owners prefer to keep the sale of their business private until the transaction has been completed to prevent spooking clients, suppliers, or employees.
If you've engaged a business broker, you will rely on them to market your sale while maintaining confidentiality. Your broker will create a “blind listing” on sites like BizBuySell and BizQuest, and have an NDA at the ready for anyone interested in looking into the details of your business.
Most businesses are sold confidentially, so don't worry about missing opportunities by keeping the sale of your business close to the vest. If, however, yours is a notable construction company with a unique history or special community status, you may gain exposure by making your plan to sell public. If you are able to maintain your current and planned construction projects while entertaining acquisition offers in public, marketing your sale in the open can help open more doors for a possible deal.
A middle ground that can help expedite the process is informing trusted business associates of your intention to exit. You may even want to inform competitors or complementary construction business owners with whom you regularly conduct business. The more interest you generate, the greater the chance of finding a good buyer that values your business as much as you.
Once you've received a reasonable offer, it's time to go through due diligence and start working out the details. The potential buyer will spend a few months going over your documents to confirm the financial, operational, and legal positions are as advertised.
If everything is in order, you will need to work through and ink down the details of the acquisition. Price is always going to be the main point of contention, but you will also need to set boundaries on seller financing terms (if any), training for the new owner, duration of your stay, assets to include, working capital, and a lot more.
It's important to remain as dispassionate as possible during negotiations. Like any business owner, you are deeply invested in your construction business – but emotions need to be kept in check. Accept that the buyer and brokers involved are going to look for every advantage and attempt to get the best terms possible for themselves. Pick your battles and refrain from sinking the deal at this stage over otherwise small details.
Give a little where you can and hold where you've established your limits. Every point, however small, is an opportunity to show good faith, so look for ways to assure the buyer that you're willing to meet their needs as well as yours.
Keep in mind that these acquisitions do not come together very often, and you don't want to sink a deal over terms that are inconsequential in the long run.
Download our free Guide to Selling your Small Business and get information and advice to sell your construction business successfully and with confidence.
