What is my construction company worth?

What is a construction company worth?

A construction company is worth what a buyer will pay for the earnings it can prove, adjusted for how likely those earnings are to keep arriving after you leave. That gives you three things to work out: what the business earns for someone other than you, how safe those earnings are, and how much of the price you would keep once debts, fees and tax are paid.

Worth to a buyer and worth to you in the bank are two different numbers, and most owners only calculate the first. This page covers both. How a valuation is built, with seller's discretionary earnings, EBITDA and the multiple, is set out in how to value a construction company, which also has a calculator. Here the aim is to get you a figure you can defend and a net figure you can plan around.

Plan around what you keep, not around the price on the contract.

Seven numbers to pull first

Gather these before you speak to a broker, a valuator or a buyer. Each one can be found in your own accounts, and each one is something a buyer will ask for early in the first conversation.

1. Earnings, year by year

   Take your profit before tax from each of the last several financial years, as your accountant filed them, and set them side by side. A buyer reads the run of years, so the direction matters as much as the level: a business that has grown steadily is read very differently from one with a single strong year.
   Your number: profit before tax for each year, in one row.

2. What you pay yourself, and what it costs to replace you

   Add up everything the business pays you or pays for you, such as salary, dividends, bonuses, a personal vehicle, a phone and insurance. Then ask the harder question, which is what you would have to pay a capable person to do your job in full. A buyer who plans to run the business personally may count the earnings before any owner pay, which is the seller's discretionary earnings measure explained in how to value a construction company. A buyer who has to hire someone to do your job will count the earnings after that wage, and if it is higher than what you take, the business earns less than it looks.
   Your number: your total owner pay, and next to it the full cost of hiring your replacement.

3. Costs you can document that a buyer would not carry

   A one-off legal bill, a family member on the payroll who does little work, a personal expense that runs through the company. These are called add-backs. They raise the earnings a buyer sees, but only if you can prove each one, and you should expect to be asked for the invoice.
   Your number: each add-back with the document that supports it, and a total. Leave out any you cannot support.

4. How much of your revenue comes from your largest clients

   Divide your largest client's revenue by your total revenue, then do the same for your five largest together. A buyer prices the chance of losing a client that big, and the risk rises further when the relationship sits with you personally. The Exit Readiness Scorecard uses 15% of revenue as its test for a single client, which makes it a reasonable line to hold yourself to.
   Your number: your largest client's share, and your five largest combined.

5. Repeat work against one-off projects

   Service work, maintenance contracts and clients who come back are priced above projects that have to be won again each time, because a buyer can forecast them. Split your revenue for each year into repeat and one-off.
   Your number: repeat revenue as a share of the total, year by year.

6. Signed work still to come

   A backlog shows that the earnings are not just one good year, but only when it is signed, scheduled and priced with a known margin. Ask your bookkeeper for the schedule of work in progress and the list of signed jobs not yet started.
   Your number: signed work not yet delivered, with the expected margin on each job, as at the date you would go to market.

7. What you owe

   List every debt and commitment that has to be paid or settled when the business is sold: bank loans and lines of credit, equipment and vehicle finance, loans from shareholders, tax owing and any personal guarantees you have given. These come out of the price before it reaches you.
   Your number: the total owed at the date of sale, and which items you have guaranteed personally.

If you cannot find one of these in your accounts, that is worth knowing too. A buyer will not be able to find it either, and the figure that cannot be found is the one they price against you. The full list of what a buyer checks is in what buyers look for in a construction business.

Three kinds of figure and what each is for

When someone gives you a number, the first question is what kind of number it is. The three below are easily mistaken for each other, and they answer different questions.

Why offers come in lower than you expect

The number most owners carry in their head is made of what the business cost them to build. A buyer's number is made of what the business will earn for them. Four things usually sit between the two.

• Your effort is inside your numberYou count the years of work you put in. A buyer counts what they will have to pay someone to do that work, and takes it off the earnings.
• Your best year is inside your numberOwners tend to remember the strong years. Buyers read all of them, and the weaker ones are priced in.
• What you built is not what they pay forBuyers don't pay for what you built. They pay for what runs without you.
• Uncertainty is discountedBuyers pay a premium for certainty and discount everything else. Whatever a buyer cannot check, they price against you, usually more harshly than the gap itself deserves.

The last two are the ones you can do most about. They are what the Exit Readiness Assessment measures: how much of the business transfers to a buyer, and what each gap is costing you in multiple.

From price to what you take home

A price agreed on paper is not the same as money in your account. Work through these in order, with your own figures, before the first conversation, and call the result your net.

1. Start with the price you would accept

   Use a range and not a single figure.
   Your number: a low case, a middle case and a high case.

2. Take off what you owe

   Everything from the seventh number above is paid out of the proceeds at closing.
   Your number: the total debts and commitments at the date of sale.

3. Take off the cost of selling

   Broker fees, legal and accounting fees, and the fees of any other adviser. Ask each one for their fee in writing, including what happens if the sale falls through, and what happens if you later sell to someone they introduced.
   Your number: each fee as an amount in dollars on your price, not as a percentage.

4. Take off the tax

   Tax on a sale depends on your country, on whether shares or assets are sold and on how the price is structured. Your accountant can model this before you list.
   Your number: your accountant's estimate of the tax on each of your three price cases.

5. Allow for what is not paid at closing

   Part of a price can be held back, paid later or made to depend on how the business performs after the sale. That money is not yours until it is received, and a buyer who is slow or unable to pay is a risk you carry. A buyer will usually also expect a normal level of working capital to stay in the business, so ask your lawyer how that will be measured.
   Your number: the share of each price case that is paid in cash at closing.

6. Subtract, and keep the result

   Price, less debts, less fees, less tax, less anything not paid at closing.
   Your number: your net, for each of the three cases.

Work backward from what you need

The most useful figure is the one you need, not the one a broker names. Decide what the money is for, whether that is retirement, the next venture, paying out a partner or clearing personal debt. Write down the net you need, then add back the debts, fees and tax from the sum above to find the gross price that would produce it.

Gross price needed, divided by your yearly earnings, is the multiple you need.

For the earnings, use the figure from the first three numbers: profit before tax, with your documented add-backs included, and with your own pay either added back or replaced by a full wage for your job, depending on the kind of buyer you expect. Then ask two or three brokers what multiples they are seeing for businesses of your size and trade in your market, and which earnings measure each multiple applies to, so that you compare like with like. If the multiple you need is well above theirs, you have learned the size of the gap before anyone else had to tell you. If it is below, you have room.

There are only two ways to close a gap: raise the earnings or raise the multiple. The multiple moves with certainty, and certainty comes from the business being able to run without you. That is the part the Exit Readiness Assessment puts a figure on, gap by gap, and it is the subject of a business that runs without you.

What to do with the answer

• The multiple you need is within reachLook at when to start planning your exit, and at whether to sell to a partner or on the market.
• The multiple you need is above what you are hearingFind out which gaps are holding the number down. The free Exit Readiness Scorecard gives you a first read, and the Exit Readiness Assessment puts a cost on each gap.
• You could not fill in some of the seven numbersStart there. What buyers look for shows how each gap is read, and the mistakes that cost you at sale shows what happens when gaps are found late.

This page is general information for owners of design and construction businesses. It is not legal, tax or financial advice. Rules differ by country and by how a sale is structured, so take advice from your own lawyer and accountant before you act.

Keep reading

• When to start planning your exitWork back from your date, and see what the time you have can and cannot change.
• Selling to a partner or on the marketHow each route is priced, who can pay, and the questions that settle the choice.
• What buyers look for in a construction businessThe eight tests a buyer applies and the documents they ask for.
• Mistakes that cost you when you sellTen mistakes, what each costs, and the check that catches it.
• How to value a construction companyThe method behind a valuation, with a calculator.
• A business that runs without youWhy a company that depends on its owner is hard to sell, and how to change that.

Questions owners ask