Valuing a Construction Company
Or Honey, I just talked to divorce lawyers…
The other day, I walked into my wife's office and said, "Honey, I just talked to a divorce lawyer."
"Oh?" With raised eyebrows. Way to go, I had her attention!
"An old listing has asked me to provide a value for her construction company in a divorce case and I have agreed to do it." "Oh." The attention was fading.
Agreeing to provide a valuation, a deposition and testimony in court for a small fee and a potential listing did not raise my total worth in her eyes; and when I blurted it out, it didn't sound like a brilliant idea to me either.
Subjecting yourself to the humiliation and aggravation of interrogation by a lawyer set to make you look and sound incompetent should be avoided. So why do we do it? The only real reason: I know what a construction company is worth on the market, how difficult it is to find a buyer and close a transaction and I am offended by the highly paid, sublimely degreed imbeciles who compare the value of a construction company to a window manufacturing and installation business in Tampa.
The truth needs to be told. My wife, however, thought maybe someone else should tell it, and I should devote my efforts to something more productive and profitable. She had a point.
If you approach this from a mathematical viewpoint, develop averages, weighted averages and the like, the results are, in my opinion, flawed and extremely inaccurate. In this case, I thought the opinion of the opposing expert that the value was $750,000 was heinously wrong, but these types of valuations are appealing to the court because they do not require "judgment."
My opinion of value was $250,000 and I told her she would be lucky to get it. Especially since she was unwilling to provide a non-compete.
Here is what I subtracted from the "mathematical" viewpoint:
- The lack of a non-compete. In this very personal business, the cooperation of the Seller is critical, and, in this case absent.
- There was a back charge pending for over $300,000 and retainage exceeded $600,000. My valuation assumed (properly, I think) that only a fraction of these would be collected by a new owner.
- Backlog at the time of valuation was $300,000. Compared to annual revenue of $10 million, this was "full-stop." Based on historical margins, this would not pay overhead for a week.
Instead of a company that would perform along the lines of historical averages, I saw a company with uncertain performance, impaired assets and little evidence of future business.
WHY WOULD YOU BUY A CONSTRUCTION COMPANY?
Short answer: There is no better way to amass significant wealth. Except, of course, the two best ways - marry it or inherit it. Sure, I would like to reap the benefits of one of Warren Buffett’s insurance companies, but I don’t have a spare billion dollars or so. While contracting takes money, it is money that is often within the reach of individuals.
But this road to wealth is littered with the bodies of the vanquished, the ones who reached and failed. It is high reward and high risk.
A fundamental guideline: in my experience, it takes construction experience to be a qualified buyer of a construction business.
When establishing a value/making an offer to purchase:
- Keep the price within about 1.0 to 3.0 times cash flow.
- Recognize the extra value of equipment, but the effect is probably not substantial in most except "heavy" contractors.
- Include a “look back†provision in your purchase contract as a way of settling up on matters that will be decided as jobs complete.
- Insist on a backlog that will provide a good start for the new owners.
- Obtain a meaningful transition process.
- In due diligence, look for general contractor back charges, establish a bonding line prior to closing and be v
About The Author
Bob Peterson is the sole owner, president, top guru and stud duck at National Business Brokers Company. He revels in the pretentious name, thinks of himself as too grumpy and too old to have partners or employees.
From a background of 20 years in banking and corporate M&A, he specializes in small ($100,000 to $2 million) deals and often finds more satisfaction than money from helping people achieve their goals. Most of his clients only do this once or twice a lifetime, so they need more counseling than shrewd financial expertise.
His wife owns a medium-sized, union, mechanical contracting firm (commercial plumbing and HVAC) so he knows people and practices in that industry.
Contact him at 913.238.2298. That number rings to his office during normal hours and to his cell otherwise.
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