Business valuations help you understand your construction company’s strengths, weaknesses, vulnerabilities, and market share in the event of its sale. In any valuation, it is important to assess financial risk—income potential vs. vulnerability to disaster. To better measure such risk, consider the following factors:
Quality of Earnings
- How profitable is the company?
- How steady have sales and profits been over the past seven years?
- Is the company too young (less than five years old) to determine if its earnings will be consistent?
- Are sales flat or growing only at the rate of inflation?
- Have sales exceeded the rate of inflation, or are they not keeping pace with it?
Type of Construction Business
- Is the cost of entry into your trade of specialty very high?
- Does the need for expensive fixed assets limit competition, for example, a heavy/highway contractor?
- Is it a service business with few securable fixed assets?
- Are inventory and equipment a large part of the company’s total value?
- Does the business depend on the health of commercial, industrial, residential owners, or public sector owners over which it has no control?
Prospects for the Future
- What is the outlook for new construction, residential and commercial, government budgets, and more as a whole?
- Does the company provide ordinary servicer in a field with little growth?
- Does the company provide services to those in growth areas, such as technology, solar, and more?
- Is it likely the company’s products and processes will soon be outmoded?
- Does the company possess up-to-date technology to install or service construction activities?
- Is there new competition emerging?
- Does the company’s health depend primarily on the economy’s health?
- How competitive is the market for your trade?
- What is the company’s standing verse the competition in your particular market?
- Do the company’s products or services require special skills, education, or licensing?
- Is the work desirable? Does it take place in a pleasant environment?
- Is the company a union or nonunion company?
Quality of Fixed Assets
- Real estate. Assess the location and desirability of facilities, the degree of obsolescence, adaptability to other uses, deferred maintenance, and environmental cleanup liabilities, and the underlying land value and quality of title.
- Construction equipment. Assess the degree of obsolescence and cost of deferred purchases. Is there a bound replacement cycle?
Structure of the Purchase Transaction
- Will any purchase of the company be highly leveraged (lots of debt)?
- Would a buyer need to sink lots of cash equity into the deal?
- Is the company adequately and safely capitalized?
- How do the financial ratios compare to those of other contractors in the industry?
- Does the purchase involve a transfer of stock? What are the potential liabilities?
Other Factors in Assessing Risk
- Is a labor union present and virtually required for the particular market?
- How strong is the staff that would remain after a sale?
- What is the risk of competition from former staff?
- How is the health of key personnel?
- Is there heavy government regulation?
- How dependable are the lending sources?
- How healthy is the region’s economy?
- Are owner and general contractors accounts diversified?
- Are products and services diverse?
- How susceptible is your trade and geographic region to weather, international events, or other uncontrollable market conditions?
For help or questions regarding the risks that can impact your construction company, please contact Tim Cummins or one of our construction specialists at 301.231.6200. For further on this topic, please read our other blogs, “What’s it Worth to You? Why You Want to Know Your Construction Company’s Value,” “Two Methods for Valuing Your Construction Company,” and “What’s Your Company Worth?”