Valuation Multiples for a Construction Company
The construction industry is highly fragmented. There are over 3.7 million construction companies in the United States. This includes businesses that construct buildings, heavy and civil engineers as well as specialty trade contractors. There are many baby boomers who own construction companies looking to retire, As such, there are hundreds of transactions of construction companies each year. If you are looking to buy or sell a construction company, the first place to start is obtaining a business appraisal.
Valuing a Construction Company
There are many reasons to obtain a business valuation for a construction company. If you are looking to sell a construction business, a business appraisal can help determine a listing price. Most businesses don’t sell for two reasons: overpricing the business and high owner dependence. Within the construction industry, there is often a high level of owner dependence. See our article reducing owner dependence for suggestions on how to reduce this.
If you plan on buying a construction business, a business appraisal can help you feel confident in the purchase price. In both instances, a business valuation identifies opportunities to maximize the value of the company. Get started by scheduling a free consultation with Peak Business Valuation, business appraiser.
In a business valuation, a valuation expert like Peak determines the fair market value of a construction company. They use a variety of methods including valuation multiples. Below is a brief overview of what valuation multiples for a construction company look like. These numbers are only a guide. If you would like specific information about a construction company, schedule a free consultation. You can also learn more by reading Valuing a Construction Company and How to Value a Construction Company. As well as Value Drivers for a Construction Company.
Valuation Multiples for a Construction Company
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
Valuation multiples are common when determining the value of a business. A valuation multiple is like a ratio. It compares two factors to each other. A valuation expert will determine what multiples are most applicable to your construction company. A valuation expert uses multiples of similar construction businesses that recently sold on the open market. They then apply the multiple to your construction company to get a range of value. For example, a common ratio in business valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings with the value of the company.
For instance, a construction company has $132,000 in SDE. The valuation expert uses a 2.22x SDE multiple. In this case, the construction business would have an implied value of $293,040. ($132,000 times 2.22x) On the contrary, a 2.83x multiple would imply the value of the company would be $373,560. ($132,000 times 2.83x)
As a business appraiser, Peak Business Valuation works with dozens of construction companies each year. Below is the average range of multiples that construction companies tend to transact and are valued at. Every construction company is unique and is impacted by a variety of value drivers. As such, the range of value can be significant. Below are average ranges for SDE, EBITDA, and REV multiples for a construction company.
SDE Multiple
Average SDE Multiple range: 2.16x – 2.85x
According to our data, construction companies transact between a 2.16x – 2.85x average SDE multiple. To get an implied value of a construction business, apply the multiple by the most recent 12-month period of revenue. The calculation is as follows:
SDE X Multiple = Value of the Business
For instance, a construction company generates $246,000 in sellers’ discretionary earnings. It transacts at a 2.38x multiple, then the business value is worth approximately $585,480.
$246,000 X 2.38x = $585,480
Seller’s discretionary earnings is a common cash flow multiple a valuation expert uses to value small businesses. SDE is calculated by adding back potential expenses a new owner may not incur to the company’s operating profit. These expenses may include the owner’s compensation, the owner’s personal expenses, and other expenses such as non-recurring or non-related business items.
EBITDA Multiple
Average EBITDA Multiple range: 2.79x – 4.11x
The average EBITDA multiple for a construction company ranges between 2.79x – 4.11x. Applying an applicable multiple to the company’s EBITDA derives an implied value of the business. The calculation is as follows:
EBITDA X Multiple = Value of the Business
For example, a construction company has an EBITDA of $223,000. It transacts at an EBITDA multiple of 3.19x. Using the above metrics, the construction business is worth approximately $711,370.
$223,000 X 3.19x = $711,370
An EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings a buyer can expect from the business.
REV Multiple
Average REV Multiple range: 0.31x – 0.64x
According to our data, construction companies sell for an average of 0.31x – 0.64x revenue multiple. You can calculate the implied value of the business by multiplying the amount of revenue or sales a construction company makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, a specialty contractor makes $879,000 in revenue and transacts at a 0.52x multiple. Then the business is worth approximately $457,080.
$879,000 X 0.52x = $457,080
A valuation expert often weights the applicable valuation multiples to get a range of value for the construction company. Small businesses often transact on cash flows multiples – SDE and EBITDA rather than the REV multiple. This is because a revenue multiple does not consider the operations of the business. Cash flow multiples consider expenses such as COGS, salaries, rent, among others. However, there may be instances where it is applicable.
Summary
When looking at valuation multiples for a construction company, keep in mind many factors impact the value of the business. The valuation expert considers these factors when determining the valuation multiple they use. Peak Business Valuation, business appraiser, discusses these factors in a business valuation report. To learn more about these value drivers, see Value Drivers for a Construction Company.
Peak Business Valuation, business appraiser, works with construction companies and specialty contractors across the country. Whether you plan on buying, growing, or selling a construction company, a business appraisal provides valuable information. This includes the fair market value of the construction company, key value drivers, and growth opportunities. We are always happy to answer any questions you have about valuing a construction company. Get started by scheduling a free consultation below!
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