EBITDA multiples are sometimes used to determine approximate business value in a sale transaction. Multiples can vary widely by industry and within industry segments. In recent years, we have also seen more higher end deals with multiples of 7 to 8 times EBITDA. The data tells us only premium quality businesses are achieving extraordinary valuations in the construction industry. The table below shows data for a sampling of construction industry transactions from companies sold between 2017 and May 2023 with reported EBITDA in a range of $300,000 to $8 million and at least $5 million in revenue:
| Construction Industry | EBITDA Range | EBITDA Multiple Mean | EBITDA Multiple 25th-90th Percentile Range | Median Revenue |
|---|---|---|---|---|
| Electrical Construction | $.3 Mil – $3 Mil. | 4.6x | 2.8-7.4x | $9.6 Mil. |
| Commercial & Heavy Construction | $.4 Mil – $2.8 Mil. | 4.1x | 3.0-10.4x | $9.4 Mil. |
| Misc Construction Trades | $.4 Mil – $8 Mil. | 4.7x | 2.8x-7.8x | $7.7 Mil. |
| Plumbing, HVAC | $.4 Mil – $4.0 Mil. | 4.4x | 3.5x-7.9x | $7.3 Mil. |
| Residential Home Construction | $.3 Mil – $1.3 Mil. | 3.2x | 2.8x-4.1x | $6.6 Mil. |
| All Construction | $.3 Mil – $8.0 Mil. | 4.5x | 2.9x-8.2x | $8.0 Mil. |
Valuation Calculation
EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization. Example value calculation using Mean Multiple: Electrical Contractor with $1,000,000 of EBITDA may have a value of $4.6 million based on the mean multiple calculation ($1,000,000 x 4.6). Actual offers from buyers would be expected to fall within the 25-90 percentile ranges with higher EBITDA businesses receiving the highest offer multiples. Many factors affect ultimate value and higher EBITDA businesses with high qualitative factors would be expected to generate the highest offers.
Larger Business Have Higher Relative Valuations
As noted above, larger businesses generally sell for higher multiples as shown in this multi-year analysis of private equity acquired civil and heavy construction companies for 2012 thru 2022:
| Mean Revenue | Mean EBITDA Multiple |
|---|---|
| $25 Million | 5.7 |
| $40 Million | 5.7 |
| $55 Million | 6.7 |
| $75 Million | 8.7 |
Sub-Sectors Make a Difference
Keep in mind while larger companies have higher relative valuations, the specific construction sub-sector plays a big part. Two recent transactions reflect this well where a home building company that is 42 times larger sold for the same relative valuation as an HVAC business:
| Acquired Company | Revenue | Valuation/EBITDA | Construction Sector | Acquiring Company |
|---|---|---|---|---|
| CalAtlantic Group | $ 6,517,260,000 | 8.42 | Residential Homes | Lennar |
| Ivey Mechanical | $ 155,000,000 | 8.01 | HVAC Mechanical | Comfort Systems |
HVAC has been a very hot sector over the past 5 years and thus has high relative valuations. But even within a sector, qualitative factors can make a big difference. For example, an HVAC business mostly involved in new construction projects might sell at 4x EBITDA while a similar size company with a significant service and replacement component might sell for 6x EBITDA.
With this summary, we have presented an overview of generally how the business sale market works in the construction industry. Like any industry, business sale valuations in the construction industry are affected by many factors including subsectors, size, management team and other qualitative factors. Prospective sellers should consult a knowledgeable advisor with construction industry experience to determine the value of their business in the market.
To learn more about our Construction M&A team or read additional insights, visit our Construction Industry page.