As a company-owner and entrepreneur there is a certain amount of pride you should place in having built a thriving business. However, can that pride translate into a specific dollar amount? Not necessarily. How, then, do you objectively place a value on your construction business and price it right when it comes time to sell?
As Oscar Wilde put it: “Nowadays people know the price of everything and the value of nothing”
True, to an extent. ‘Value’ can be subjective to the masses, but for professionals that work in this field, value is a finely-crafted amount, arrived at by way of a seemingly-endless combination of variables. It’s this amount that is so important, as it not only represents the sale of a company, but really, your legacy that has been created over the years – the decades even – and is a big factor in determining what type of life you can build in your post-ownership reality. When it comes to valuation the intricacies are many and the result is crucial, so what next? Enter the professional business valuators. Valuators can be a tremendous resource when it comes to fairly assessing your business.
Key considerations when approaching valuation
“Price is what you pay; value is what you get.” – Warren Buffet
The Oracle of Omaha said it best, in the simplest of terms. As it is influenced by outside factors, value can fluctuate, so preparation and knowledge on your part can help sway the odds (and perhaps even dollars!) to your benefit.
Many factors can determine value. Value is set at a single point in time, and can change over time. A dampened economy might weaken a company’s valuation, and even when a fair assessment is done to determine the appropriate value, this doesn’t always mean it will be the exact price you receive at sale time. There are many factors that determine the final price, including the negotiating strengths of either side, how strong your desire is to sell (hopefully not just settle), and perhaps the number of buyers at the table.
If you are considering selling your construction company, you want to get the most for it. Business valuators can usually help you find opportunities to increase the value with just a few strategic, proactive decisions. Make these thoughtful choices to help build a better business now, and sell for a better price down the road. It may even help the most penny-pinching of buyers see the value in offering top dollar for your company.
Determining a Valuation
There are three different ways value can be evaluated by the professionals:
1. Asset approach – this approach involves determining the fair market value of your assets and liabilities, (i.e. determining today’s value of equipment/buildings/land that you bought throughout the years as you built your business, to assess what everything is worth overall, today).
2. Income approach – assessing the earnings that can be maintained, or the cash flow, and assessing the risk of achieving those earnings / cash flows.
3. Market approach – comparing your business to comparable public companies or similar industry transactions.
Valuators can determine which approach is best, and often a combination of two out of the three is used.
Maximizing the value, and the selling price, for your construction company
Business valuators can help sort through the complexities in determining how value is reached, but for you as an owner, there are also six key areas you can consider on your own:
1. Personal vs. Commercial Goodwill
When determining value and considering a sale, be aware of what you are really offering and what you think might drive up the price:
- Personal goodwill (personal being the owner/business leader) is not transferable. Personal goodwill arises from an individual’s particular abilities, personal characteristics, good name and/or reputation – characteristics and traits which are not transferable. If a business relies on you as its owner, or other key personnel for its operations, it could lead to trouble during the valuation, as these characteristics cannot be transferred.
- Commercial goodwill is transferable (i.e., a buyer is willing to pay for this). Commercial goodwill grows a business by virtue of its products, services offered, location and other features that are not dependent upon individual employees. Examples of such goodwill include: the brand name, proprietary technology, contracts, customer lists, patents and/or trademarks.
What can you, as an owner, do to transfer personal goodwill into commercial goodwill? It’s important to build brand recognition and the reputation of a quality product and service, rather than your individual reputation. Transferring goodwill can be done in two ways: building a team to develop and maintain relationships internally and externally, that shifts the focus away from you, the owner; and/or building up the expertise in employees, as this decreases dependency on other key personnel to carry the knowledge forward.
2. Reputation and management
As with many situations, the company’s overall reputation, if in good standing, can be a huge benefit. Reputation is spread and carried throughout the company, on all levels. Experienced management with strong “bench strength” (executives, management and team members) and trustworthiness can increase value.
3. Acquisition synergies
The buyer in this situation believes it can acquire certain advantages by combining the for-sale businesses with its own. A strategic buyer or special interest purchaser may be willing to pay a premium for a company if that company can offer certain “synergies” to its own business by:
• reducing cost through better access to financing;
• sharing resources;
• eliminating overlap; or
• reducing its workforce.
4. Reduction of risk
Generally, the more vertically-integrated the revenue streams are, the more protected a company is from swings in the economy. A variety of service offerings can be seen to create cross-selling opportunities amongst a client base, as well.
5. Client work
No-Bid vs. Bid Work
If your company often secures contracts under “no-bid contracts,” it is highly likely that you are able to earn a premium for services, as a result of your unique position in the market (– well done!). Ultimately, this can be a very attractive feature when compared to industry peers or competitors.
6. Client base and backlog
Evaluating your clients can be a determining factor in a sale. A “sticky” client, one that has been around for a long period of time, might be viewed as willing to pay a premium for services, versus those clients that engage in one off, small, or short projects. Another attractive feature that some may not keep in mind is backlog. The higher the backlog, often results in an increase in value. Companies with a low backlog might accept jobs with lower margins in the hopes of just covering overhead, while companies with high backlog can demand a premium in pricing. Backlog provides a greater assurance of future revenue and growth.
This information might be overwhelming, especially when it comes to something as personal as the company you built from the ground up. Selling your business can understandably be emotional, it’s your legacy – your life’s work – and you want to get the most value for it. The Richter team consists of highly-skilled, entrepreneurial-minded experts adept at mitigating risk and valuating your business fairly. When it comes to the intricacies of objective evaluation, let the experts at Richter help you maximize the value so what it’s worth to you, is also valuable to the right buyer.
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About Richter : Founded in Montreal in 1926, Richter is a licensed public accounting firm that provides assurance, tax and wealth management services, as well as financial advisory services in the areas of organizational restructuring and insolvency, business valuation, corporate finance, litigation support, and forensic accounting. Our commitment to excellence, our in-depth understanding of financial issues and our practical problem-solving methods have positioned us as one of the most important independent accounting, organizational advisory and consulting firms in the country. Richter has offices in both Toronto and Montreal. Follow us on LinkedIn, Facebook, and Twitter.