Valuing a Construction Company
Demands for commercial construction fell when the Covid-19 pandemic hit. However, residential construction has continued to increase. There has been consistent demand and growth in the economy, even in a pandemic. People still need houses! As such, now is a great time to buy or sell a construction business. Below we discuss valuing a construction company.
Whether you plan on selling or buying a construction company, be sure to understand the fair market value of the business. There are several things that impact the value of a construction company. As a business appraiser, Peak Business Valuation loves to work with individuals who are buying or selling construction companies. The first step in either of those processes is acquiring a business valuation. During our free consultation, we discuss key factors a valuation expert uses when determining the worth of a construction company. Be advised that the factors below are only a guide. For exact information on your business, schedule a free consultation below.
Market Multiples for a Construction Company
- SDE Multiple Average: 2.16x – 2.85x
- EBITDA Multiple Average: 2.79x – 4.11x
- REV Multiple Average: 0.31x – 0.64x
** Disclaimer: These multiples are for educational purposes only. Multiples are based on companies with revenues between $1-$5 million. 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. Seek the guidance and advice of a qualified business valuation professional about any matter in this article.
A valuation expert often uses SDE multiples and EBITDA multiples when valuing a construction company. A revenue multiple is not used as often as it does not consider the operations of the business. The valuation expert will determine which multiples are most applicable to your construction company.
By understanding the company’s worth you will gain the tools to start maximizing the value of a construction business. This is helpful when you are expanding, obtaining a new construction company, or want to increase the value of your construction company before selling. Below are a few ideas to help increase the value of a construction business. If you are looking for a more detailed valuation, please reach out. Schedule a free consultation using the link below.
Key Success Factors
Peak Business Valuation values construction companies on a regular basis. As such, listed below are some success factors that can help differentiate your business. The factors will also impact the value of a construction company.
Product and Service Mix
First, a valuation looks at your product and service mix. Construction companies have many products and services they offer. A valuation expert looks at the split of revenue between residential and non-residential projects. The residential market in America is booming, despite the pandemic taking a hit on the commercial side. Construction companies whose primary focus is on residential tend to have higher revenues. This increases the value. Residential construction includes building new homes/developments, completing renovations, and upgrades on existing structures.
Creating Recurring Revenue
Next, significant value comes through creating recurring revenue streams. In regards to construction, contractors can have contracts with builders who are building large housing developments or commercial developments. This means more than one house or building. This type of revenue is preferred, especially if you plan to sell your construction company. Recurring revenue is easily transferable to the new owner. This is because it is predictable and reduces owner dependency. Recurring revenue increases the value of a business.
Embracing Technology Advances
Construction is one of the least digitized industries. Many construction owners find technology difficult to navigate and expensive, not an investment. To operate at optimal efficiency, technology needs to be implemented. Technology may cost more at the beginning but will save the company a lot of money in the long run. Efficiency impacts the bottom line of the construction company.
Last, as the construction industry grows, it becomes increasingly complex. Contractors manage multiple contracts at multiple locations, with countless employees and several subcontractors. Oftentimes, poor management communication creates problems. This can include problems with contracts, mistakes in work done, or delays in timing. This can be very costly for the construction company and the clients. Embracing technology advances improves efficiency. The more efficient your company is the more valuable it becomes.
There are many crucial factors when valuing a construction company. Understanding the value is important whether you are buying, selling, or trying to grow. Receiving a business valuation will help you understand the fair market value. A business appraisal will also find opportunities to maximize the value of a construction company.
Peak Business Valuation, business appraiser, values construction companies across the country. Feel free to reach out with any questions you might have about the value of your construction company. We look forward to working with you!
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