Selling a construction business is a complex process that requires careful planning and execution. At Unbroker, we’ve seen many construction company owners struggle with this challenging task.
This guide will walk you through the essential steps to sell a construction business successfully, from valuation to finding the right buyer. We’ll provide practical tips and insights to help you navigate this important transition and maximize the value of your hard-earned business.
What’s Your Construction Business Worth?
Key Value Drivers
Several factors influence the worth of a construction business. Your company’s financial performance stands as paramount. Buyers typically examine revenue trends, profit margins, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). A construction company that generates $1.2 million in revenue with $100,000 EBITDA could attract potential buyers.
Your project backlog serves as another crucial element. A healthy pipeline of future work demonstrates stability and growth potential. For instance, $300,000 in booked projects signals ongoing cash flow, which appeals to buyers.
The quality and diversity of your client base also play a significant role. A varied clientele reduces risk and shows adaptability. If your company maintains a mix of residential, commercial, and government contracts, you’ll likely command a higher valuation.
Valuation Methods
The construction industry often uses multiple methods to calculate business value. The most common approach involves multiplying EBITDA. Industry data suggests construction businesses often sell for varying multiples of their annual EBITDA, with higher EBITDA businesses receiving the highest offer multiples. However, companies with strong growth, unique specializations, or advanced technologies can command higher multiples.
Asset-based valuation proves particularly relevant for equipment-heavy construction businesses. This method considers the value of your tangible assets (such as machinery and property), plus any intangible assets like patents or brand recognition.
Financial Records Matter
Accurate and up-to-date financial records become non-negotiable when valuing your business. Prospective buyers will scrutinize your books, so transparency is key. We advise our clients to prepare at least three years of clean, audited financial statements.
Don’t overlook your tax returns. They provide a snapshot of your business’s financial health and compliance history. Buyers want to see complete and accurate financial records, including profit and loss statements, balance sheets, tax returns, and cash flow statements.
Projections and Forecasts
Projections hold equal importance. While historical data tells where your business has been, forecasts show where it’s heading. Try to create realistic projections based on your backlog, market trends, and growth strategies. The CFMA provides benchmarking data that can help you compare financial performance against the rest of the industry.
Valuing a construction business extends beyond number crunching. It’s about telling your company’s story through data. A well-prepared valuation not only helps you set a fair asking price but also positions your business attractively to potential buyers.
As you move forward in the selling process, preparing your construction business for sale becomes the next critical step. This preparation involves organizing documents, streamlining operations, and addressing any potential issues that might affect the sale.
How to Prepare Your Construction Business for Sale
Organize Your Financial Documents
Start with a thorough organization of your financial documents. Your company’s financial statements play a pivotal role in establishing the asking price for your business, buyer due diligence, and lender approval. This includes profit and loss statements, balance sheets, tax returns, and cash flow statements. A survey by FMI and CFMA revealed that 50% of construction executives lack a proper ownership transfer plan. Don’t make this mistake. Highlight your contracts, especially long-term agreements and recurring revenue streams. These demonstrate stability and future earning potential.
Consider hiring a third-party accountant to review (and potentially audit) your financials. This adds credibility to your numbers and can uncover areas for improvement before buyers start their due diligence.
Improve Operational Efficiency
Streamline your operations to make your business more attractive. Find ways to cut costs without sacrificing quality. Implement project management software to improve job tracking and resource allocation. A study by Autodesk and FMI found that bad data causes 14% of all rework performed in 2020, costing an estimated $88.69 billion. Address these inefficiencies to improve your profit margins and make your business more appealing.
Evaluate your equipment and assets. Sell or dispose of outdated or unused equipment. This not only tidies up your balance sheet but also shows potential buyers that you run a lean operation.
Resolve Legal and Regulatory Issues
Tackle any outstanding legal or regulatory issues before putting your business on the market. This includes ensuring all licenses and permits are up to date, addressing any pending litigation, and complying with all relevant industry regulations.
Make sure you’re fully licensed, bonded, and insured. This reduces perceived risk for potential buyers. If you have any environmental concerns related to your projects or properties, address them proactively. Environmental liabilities can be deal-breakers for many buyers.
Build a Strong Management Team
A capable management team can significantly increase your business’s value. Labor shortages in construction can lead to project delays and increased costs for both contractors and clients. In light of this, focus on developing a team that can run the business without you.
Document your processes and procedures. This makes it easier for a new owner to step in and maintain operations. Update or implement employee training programs. A well-trained workforce is a valuable asset.
Enhance Your Digital Presence
In today’s digital age, your online presence matters. Improve your website and social media profiles. Showcase your best projects, client testimonials, and industry awards. A strong online presence can significantly boost your business’s value. (One study found that construction companies with 300,000 monthly web-driven projects indicate high organic traffic, which can be attractive to potential buyers.)
With these preparations complete, your construction business will stand out in the marketplace. The next step involves finding the right buyer who will appreciate the value you’ve built and can take your company to new heights.
Who’s the Ideal Buyer for Your Construction Business?
Strategic Buyers vs. Financial Buyers
Construction businesses attract two main types of buyers: strategic and financial. Strategic buyers often include larger construction companies or related businesses that want to expand their operations. They value a company’s geographic presence, specialized skills, or client relationships. Financial buyers, such as private equity firms, focus more on financial performance and growth potential.
More than half of today’s construction firms will change hands over the next 10 years due to the impending generational shift within the construction market. This trend often results in management buyouts or sales to key employees. However, external buyers can bring fresh perspectives and resources to grow your business.
Effective Marketing Strategies
To attract the right buyers, you must market your construction business effectively. Create a comprehensive information memorandum that showcases your company’s strengths, financial performance, and growth opportunities. Include details about your project backlog, client relationships, and any proprietary technologies or processes you’ve developed.
Use industry-specific platforms and networks to reach potential buyers. The Associated General Contractors of America (AGC) and other trade associations often provide resources for business sales. Online platforms can also prove effective. Maintain confidentiality throughout the process to avoid alarming employees or clients.
The Role of Business Brokers
Some owners choose to work with traditional business brokers. These professionals help value your business, identify potential buyers, and negotiate deals. However, their services often come with hefty commissions (typically 8-12% of the sale price).
If you decide to use a broker, look for one with specific experience in construction business sales. They should understand industry-specific valuation methods and have a network of potential buyers in the sector.
For a more cost-effective solution, consider platforms like Unbroker. They offer transparent, low-cost options for selling your business without the high brokerage fees.
Negotiating the Deal
The negotiation process begins once you’ve attracted potential buyers. Prepare for extensive due diligence. Buyers will scrutinize your financial records, contracts, and operations. Risk impacts on time and cost in construction projects are significant factors to consider. Take the time to address all buyer concerns thoroughly.
Consider different deal structures. While an all-cash offer might seem attractive, seller financing or earn-out agreements can sometimes lead to higher overall valuations. These structures can also help align your interests with the buyer’s, potentially smoothing the transition process.
The highest offer isn’t always the best offer. Consider factors like cultural fit, plans for your employees, and the buyer’s ability to close the deal. Forty-two percent of firms have initiated or increased spending on training and professional development programs to address labor shortages. A buyer who understands these industry challenges and has plans to address them might be a better long-term fit for your business.
Final Thoughts
Selling a construction business requires careful planning and execution. You must accurately value your company, prepare it for sale, and find the right buyer. Each step plays a vital role in achieving a successful sale. Professional guidance can provide invaluable support throughout this complex process.
Traditional business brokers often charge high fees that reduce your sale proceeds. Unbroker offers a modern, transparent, and cost-effective platform to sell a construction business. We provide expert support, premium marketing tools, and access to a vast network of potential buyers without hefty commissions.
The sale of a construction business represents a significant undertaking. With the right approach and support, it can become a rewarding experience. Unbroker can help you navigate the sale process with confidence and maximize the value of your hard-earned business.
