Do you want to sell your construction business and need a valuation? here are 7 smart tips for valuing a construction business and selling profitably.
Many construction business owners choose to sell their business when the market is at its peak. But it takes a long time to decide whether the market has really peaked. Another reason why you need to be flexible about when to sell your business. This is very necessary to maximize the profit you receive for your work.
You don’t have to wait until the decision to retire to prepare your business for sale. Some preparations can be made immediately, but others must have been made years before. When your business is ready, there are many factors that determine the right time, including the economy, your industry, your business, and your personal issues.
4 factors to consider before deciding to sell a construction business
You should also consider the sales and profit trends of your business. If the trend is down, you need to understand why. Is it because of circumstances beyond your control? Or is it under your control, for example, due to a bad management team?
If this is the result of manual oversight, this might not be the best time to sell. You need to spend enough time building a strong leadership team that can increase sales, increase profitability, and run your business well in your absence.
But before you start improving or restructuring your leadership team, think about its lifespan and whether it will be considering retiring around the same time as your own retirement. If they retire, you can cancel the retirement date as you grow your management team.
But if you have a specific management team and they don’t plan to retire anytime soon, you might consider moving. your retirement and sale date as long as you have that leadership team in place.
Meanwhile, if a negative trend is something you cannot control and can easily reverse, this might be the best advice for selling quickly before it starts to affect sales. If you are nearing retirement and it will take a lot of time and money to turn the business around, you need to carefully consider your situation to decide whether you need to make such a large investment.
According to experts, economic conditions affect how much you get for your construction business and how quickly it sells. When the economy is in decline, buyers may worry more about survival than growth and acquisitions.
Additionally, during a downturn, credit can be limited, making it difficult for buyers to obtain adequate financing. And higher interest rates reduce the profitability of buyers, which means they can offer to pay less to offset higher interest rates.
Keep in mind that the economy works in cycles. If you skip one cycle, it can take years for the next to happen. More importantly, it is impossible to predict cycles with precision. We cannot be sure that we are in a recession until we have been in a recession for some time.
And we know the recession didn’t end until it ended. It is advisable to consider selling only when the economy is strong, interest rates are favorable and credit is available.
- Industry
If you are planning to sell in the next few years, knowing the future of the construction industry is very important. Talk to customers. Ask your suppliers how they are doing. Participate in exhibitions and industry meetings. You can learn a lot about the business acquisition market by asking questions and listening.
- Personal issues
Accepting personal reasons can be the most important factor in determining when to sell your business. It is imperative that you answer a few questions. Do you still like to work? Do you have other interests that will delight you if you don’t visit your business every day?
Have you really tried doing this business to make sure the reality is the same as your dream ? If you have a business partner, you should also consider their plans. If your partners’ retirement plans don’t match yours, you should discuss this before retirement.
Another factor to consider is your health and that of your spouses. This is because health issues can force you to make a sale at the wrong time and possibly hurt the value of your business. Selling your business at the absolute peak time requires a little luck in addition to a lot of preparation. However, with planning, you can be sure that you’re selling your business at the right time and getting the retirement you’ve always dreamed of.
3 ways to determine the value of your construction business
It can be very difficult to measure the value of your business because traditional valuation methods do not take into account the value derived from human knowledge and skills, as well as the reputation of the business. While appraisals, which are essential for a business, should always be backed by a professional, the following tools are useful for getting the big picture of a business’s value.
Note that the three traditional valuation methods involve an asset-based market valuation. income-based. Whichever method you use, it is very important that you have sufficient financial statements, including income tax returns, for at least the past five years.
- Asset-based valuation
This estimate is based on an estimate of the costs required to rebuild, reassemble, refit and / or reallocate all of the company’s assets using prices on a specific date. The assessed value of the capital stock of a construction company is the total assessed value of assets less its liabilities.
Valuers typically use this method to value holding companies or companies whose assets are worth more individually than overall (i.e. the company is constantly trying to generate income). positive cash flow). The assets of construction companies include promissory notes, receivables, real estate, tangible personal property and intangible assets. Financial and tangible assets can be measured by:
- book value, which is the value of an asset shown in the company’s financial and accounting statements;
- Adjusted Book Value, which adjusts the book value to more accurately reflect the actual market value of assets; and
- Liquidated Value, which is the value of the assets if the company is liquidated immediately.
The liquidated value provides the lowest asset value and the adjusted book value generally provides the highest value.
Intangible assets are judged subjectively and generally include contracts in progress, contract offers in progress, brand recognition, skilled labor, customer relations, executive recruitment contracts and contracts. with major suppliers. unfinished legal issues, or unfavorable long-term contracts, can have negative intangible value.
- Market Based Assessment
Market valuation captures the value of a business using data from transactions known to its private or public companies. For example, price / earnings indices are a common measure by which valuers assess the value of a company after comparing its performance to that of its peers. The evaluator often makes additional adjustments to parameters to account for differences between entity and peer group operations.
While comparable companies may differ in important aspects including size, location, and market share, their financial ratios speak directly to the value of other companies in the same industry. These ratios are often compared to price versus revenue, sales, equity, and cash flow. These ratios can be very convincing if information on comparable companies is available.
- Income Based Assessment
This estimate is based on the expected cash flow of the business during the valuation. Please note that this method is often applicable to entrepreneurs with a small capital base but with a good track record or success. These valuation approaches include the discounted cash flow approach and the income capitalization approach.
Remember that the discounted cash flow method uses the projected income statements, working capital, and fixed assets for a separate future period. At this point, the appraiser then refines the forecast so that future cash flows more reasonably reflect what the potential buyer could achieve.
The appraiser then reduces the future cash flows to the current amount using a rate of return commensurate with the perceived risk of the company’s future cash flows. The higher the perceived risk, the lower the current value of the business.
However, earnings capitalization is based on a single standardized estimate of annual cash flow based on the assumption that the business will grow steadily over time. Without a doubt, the income capitalization method is the simpler of the two methods because it only requires one estimate of cash flow.
But this is not always applicable because the expected cash flow of the business can change dramatically. Although only one of these methods is likely to be used to determine the value of a transaction, it may be useful to compare the values obtained in the three methods. Ultimately, value is what the buyer is willing to pay or the lender is willing to finance, but analyzing the business with each method can help homeowners find the best fit for their business.
7 tips for profitably selling a construction business
Indeed, valuing and selling a construction business requires a unique and complex set of considerations. Reasonably reliable forecasting of a company’s cash flow is key to any meaningful income-based assessment.
Developing reliable forecasts is generally difficult, but not impossible, given a wide range of industrial factors (such as credit rates, consumer and producer confidence, labor prices, materials) which can change overnight.
Moreover, the value of a construction company, in addition to the value of its tangible assets – its machinery, equipment and real estate – depends directly on its ability to generate constant and significant cash flows. Keep in mind that this ability is often directly tied to a construction company’s reputation for service, quality finishes, lead times, and employee-friendly policies.
This can mean that all of the company’s efforts need to be focused on a specific niche strategy or market that can lead to above average profits. Obviously, there are many ways for a construction company to maximize its reputation in the market, and whatever method or methods are chosen, good management is the key to achieving this goal. Below are five factors to consider and put together before selling your construction business.
1. Marketing
This is essential to the success of any business, especially in the digital age where internet marketing is becoming a necessity. Almost 85% of consumers would use the internet to find local service providers, and if you don’t have an internet presence, you’re not even on your potential customer’s radar. Please note that the first step is to develop a website and use all social media pages, including pages from sites such as Angie’s List and Yelp.
Due to some businesses having general contractors, some consumers find it difficult to trust the business. in this arena. But by making yourself visible on payment sites and referring happy customers to review pages, you can earn the trust of your community and make your business a trusted one. An effective marketing campaign also includes email newsletters, Google AdWords campaigns, direct mail, and social media updates.
2. Management team
This private factor is generally overlooked by construction contractors, and they always pay dearly for it when the time comes. The reason is that when a business owner is actively involved in all aspects of the business, including customer relationships, sales or operations, it can be very difficult for the new owner to enter. in the business smoothly.
Reports indicate that buyers often view this as risky because of the potential repercussions of the owner’s departure from the business. For example: if the owner manages most of the large accounts, it can be risky for a new buyer because the clients mainly work with the owner.
If you see this problem in your own construction business, the solution is to build your own management team. Once you’ve identified your management team, start delegating your responsibilities to them so that when the new owner takes over, there is virtually no handover responsibility.
3. Regular customers
Keep in mind that the fun of owning a construction business is that it is easy to build customer loyalty. For example, maybe you helped a client rebuild the patio and they were so happy with your job that they remember you when they need to install new lighting. Note that a good job in this industry will create future work for your business and create a word of mouth marketing campaign.
Unfortunately, many people have had negative experiences with contractors or construction companies. and before choosing someone they have never worked with, they can ask for a recommendation from friends or neighbors. Immediately, you create several regular customers, you can offer them your various services and offer special offers to create new jobs.
4. Equipment maintenance
Keep in mind that the value of your inventory is an important part of determining the value of your business. Therefore, to guarantee the maximum sale price, you must ensure that your equipment is at the maximum value before being appraised. Although it is expensive, you will get this money back when the deal is done.
It is advisable to spend a little more now (or over time) to make sure your equipment is still on schedule for routine maintenance, make sure repairs are made and equipment is replaced on time come.
The ideal way to maintain your equipment is to spread the cost of service over the life of the device, not to fill a ton of it. renovation when you are about to sell. The cost of equipment is very important in this industry, and it will not only increase the selling price of your business, but also an impressive inventory will attract more buyers.
5. Environmentally friendly materials
In our modern times, our society and government are starting to put more emphasis on green products and services, but here are some things you may not know. Millennials are the next generation of home buyers, and that demographic is currently the largest group in the United States, and part of their culture cares about the planet. This is another reason why your business will benefit from offering green options to its customers.
Greener options sometimes cost more, but the younger generations are willing to pay for them for the planet. Offering green products will also give you a new marketing ploy and help build your reputation for ethical business conduct. The construction industry in the United States is huge and is constantly adapting to new technologies, demand, and domestic and global market trends.
The industry is also heavily dependent on a number of other sectors, many of which dictate the financial health of the industry and of small businesses in India. Due to these facts, construction business owners are still turning their backs. looking to the future, and in the event of the unexpected, it is important that you have a plan to save your business.
When looking to sell your construction business, it’s important to remember that timing is everything. If you wait until the market starts to struggle and you know the next few years will be tough, you won’t get the same amount for your business; However, if you experience rapid growth, new contractual relationships emerge, and your business begins to enter new markets, you can profit from future unearned income.
When you are starting or starting your business, try to build an organization with the right masters, executives and leaders who can make the tough decisions that will grow your business, even if you can’t always make the same decisions, attract leaders able to make the right decisions and help the business evolve. forward will have a huge impact on the value of your business.
Also, when you’re ready to make a call and sell your business, you may need to consider sticking around for a few years. Some investment firms want you to stay in your business to ensure a smooth transition after the sale.
They probably even structure the buyout with a clause that will be paid based on the performance of the company one or two. years after closing the deal. You will probably want to be there to make sure he pays what you want.
Okay, selling a family owned and built business can be a very emotional transaction, especially when you’ve spent most of your life starting a business. For some people, it is more like marrying your oldest daughter.
If you think you’re not getting what it’s worth, but the market thinks it’s worth it, you might be in trouble. It is recommended or strongly recommended that you speak to one or two consultants in order to have the right expectations, otherwise you may be spending a lot of time and money just to withdraw an offer that you feel is insufficient.
