Construction Contractors: 10 Ways to Increase Your Company’s Valuation Before Selling

Despite the economic headwinds of higher interest rates and inflation, the construction sector continues to see steady merger & acquisition activity. According to Pitchbook, from August thru November 2022, the sector saw just over 200 deals close in the lower middle market, where revenues range from $5MM to $150MM. About half of these companies were purchased by “strategic buyers”, typically larger companies seeking to acquire smaller competitors, expand geographically, or add related services to their existing businesses. The other half of the deals were acquisitions by private equity investors who are building out their sector-focused platforms.

Construction companies tend to sell for 3.5x to 7x EBITDA depending on the company’s size and other qualitative factors which can often be improved prior to selling. Refer to BMI Insight Article: Construction Industry Valuations and EBITDA Multiples, 9/22/2022, for specific data on industry valuations and EBITDA multiples. 

When an owner decides it’s time to sell, some parts of the business may not be ready for presentation to the market and could stand to be improved. In fact, if operations aren’t tightened up before going to market, buyers may be inclined to lower their offer price or walk away from a potential deal entirely. 

The following are ten actions an owner can take to prepare the company for presentation to the market and increase the potential buyer’s offer price:

1. Avoid customer concentration

If most of your revenue comes from just a few sources, buyers will see this as a point of concern. Taking steps to diversify your customer base and avoid concentration is one of the greatest drivers of value in the construction industry.

2. Collect Retainage and manage Accounts Receivable  

Outstanding retainage payments and old A/R undermine your cash flow and may cause buyers to question if there are outstanding defects, delays, or unresolved claims preventing your customers from releasing Retainage and paying your invoices.

3. Maintain a solid management team

Especially those responsible for acquiring and executing projects (Estimators, Project Managers, Superintendents). Owners do not have to exit the business, but if they do, buyers want to know that the company can continue operations and grow without the current owner in place. Do you have key people who will soon be retiring? Are there current vacancies to fill? The best companies continuously recruit and maintain a list of strong candidates if a role were to open on the management team. 

4. Demonstrate your project history

Maintain a 5-year history of completed projects, including final contract value, profit margin, customer contact information, and warranty start & end dates.

5. Maintain a list of contracts

Maintain a list of contracts in progress, their contract values with expected profit margin, pending change orders, expected completion dates, and current billing status (percent complete, invoices billed and paid, etc.).

6. Maintain a list of bids

Maintain a list of bids (proposals) delineated by those still under review by the customer and those submitted but not awarded to you. Note the bid prices, expected margins, date submitted, award date, and customer contact information. Know your 3-year bidding “hit rate” for number of projects bid versus awarded. For those projects, you were not awarded, and as best you can determine, note what factor(s) kept you from winning the job. Was it price, margin, production rates, qualifications, and/or schedule performance?

7. Save project estimate data

Save project estimate data including production rates. Buyers will continue bidding the same work as was part of the company’s history and will need a sound baseline of historical data on which to bid. This information can also be helpful to a buyer who is looking for opportunities to improve operations once they take ownership. Ideally, you use bidding system software or a spreadsheet program and can easily transfer estimate files as part of the sale.

8. Be in good standing with your surety

Request an updated letter from your surety agency noting your current bonding capacity, which carrier underwrites your bonds, and that carrier’s rating.

9. Utilize software technology to manage your projects and track documentation

While you may have started the business using manila folders to hold project documents, today’s buyers will be more at ease if your projects’ historical documentation is stored electronically (i.e. in the cloud or using a subscription project management system). Buyers want to know they can easily find project files, especially if they will be assuming control of contracts currently in progress or in the event of warranty claim on one of your previous projects.

10. Sell off unused equipment

If your company no longer uses certain equipment for its work, it’s best to sell it before placing the business for sale. You’ll keep the cash and won’t burden the buyer with having to decide whether they will need this equipment going forward.  

Conclusion

While many factors influence the final sale price of a construction business, ensuring that operations are tightened up, your key project and bid information is well documented and you have the team in place to continue running the business will yield a sense of lower risk for the buyer and the confidence to offer a strong sale price.


Jeff Shannon

Jeff has over 25 years of experience in the construction industry, working on projects up to $200 million in roles from the job site to the executive level. He excels in building relationships and has a strong background in operations and business development, specifically in infrastructure construction such as highways, ports, utilities, mass transit, military and commercial projects. Additionally, Jeff holds the Certified Merger & Acquisition Advisor designation (CM&AA) from the Association of Merger & Acquisition Advisors. He holds a Bachelor of Science in Operations Management and Marketing from Drexel University and currently resides in the Philadelphia area with his family.

To learn more about Jeff or get in touch with him, click here. If you’re interested in learning more about Construction Industry M&A, click here.