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COMMON CENTS CONSTRUCTION

Construction Company Valuation

By Bo Mocherniak

You’ve worked hard to get your business to where it is today, but do you know what it’s worth?
Most privately held construction businesses—whether a family enterprise, entrepreneur-owned businesses or a complicated series of joint ventures under a parent company—will require an independent business valuation at some point.
One of the most common instances where a valuation is helpful is when the owner is looking to sell, take some capital out of the business or pass the company to the next generation. Other owners might be considering an estate freeze; that is, locking in the value of the company today to save on estate tax down the road. Perhaps a large part of your retirement fund is tied up in the company, and fluctuating or uncertain valuation can be a real concern since this is, after all, your nest egg.
A valuation might also be needed because of a change in personal circumstances—an unplanned event such as  divorce or a serious medical issue. And for construction firms that have engaged in joint ventures, business valuation is even more important, especially when projects are ongoing, or are coming to an end and partners leave, or when you want to bring a new partner on.
Determining the fair market value of a business is as much an art as a science, and it takes both reason and instinct to get it right.

Assessing Valuation
Fundamentally, the value of a business lies in its ability to generate future cash flow, so one of the most common places to start is an income-based approach. Historical results are not always an indication of what the business will be worth in the future and it is the future cash flow that a potential buyer is interested in. Seems straightforward enough, but construction company valuation often carries its own challenges. Not only is construction work cyclical and at times uncertain, construction companies are often complex entities made up of various sub-companies and joint ventures, with money moving between the various parts. This can make valuation that much more challenging, and often requires the application of what we call a “normalization concept” to the consolidated group of companies. These normalization adjustments occur between various entities within the commercial group. For example, there might be management fees and cross-company charges to minimize or defer taxes, or there may be family on the payroll. It’s only when you bring all these various elements together and eliminate the “adjustments” that you can get a true picture of profitability.
Another common valuation approach involves looking at the underlying assets and liabilities of the business. As we all know, construction is capital intensive so you want to ensure you are making the right infrastructure and capital expenditure investments. In the case of construction companies, we would want to look at the value of heavy equipment, for example. Valuation can also be enhanced with assets such as  “banked land inventory,” which are recorded at historical costs and may not represent the fair market value of the land.
It’s important to add that knowing what your business is worth isn’t the only reason to go through the process. There are also a number of ancillary benefits from undergoing a formal valuation process. These could include things like:
The identification of areas of risk: For example, many owner-managed businesses can have a significant amount of “personal” goodwill stemming from a long-standing reputation in the market or key relationships held by the owner. This intangible asset, however, only has value with the current owner and is often not easily transferred upon a sale. Understanding the quantum and taking measures to mitigate this risk by transferring it to “commercial” goodwill is a crucial step towards increasing value. 
The identification of value drivers: A valuation process will often highlight the areas of your business (contracts, management, assets, customers, suppliers, etc.) that drive the most value and so can help you focus your attention on areas of your business that will ultimately drive long-term growth and value.
Understanding the pulse of the market:  As a business owner, you are busy with the day-to-day operations and don’t necessarily have time to understand how other construction businesses are being bought and sold. A valuation professional will bring insight into market multiples and transactions of similar businesses.
Don’t wait for a year of super profits or weak performance to think about valuation, and don’t wait until you’re ready to sell or retire. Given current economic realities, privately held businesses in all sectors are looking for ways to strengthen their performance, and a valuation might just be the best starting point for growth.

With over 30 years experience with audit, acquisitions, divestitures and valuations, Bo Mocherniak, CA, CBV, provides services to both public and private companies in Canada and the United States. Bo is National Sector Leader for the Real Estate and Construction Group of Grant Thornton Canada, a member of the Grant Thornton International Real Estate Sector Group and past Chair of Grant Thornton LLP.  He can be reached at bo.mocherniak@ca.gt.com.

 


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