Understand the Real Value of Your Construction Business
Before you consider how to sell a construction business, it’s crucial to grasp the actual value of your enterprise. Many construction business owners, possibly including yourself, have historically minimized reported earnings to lessen tax burdens. While this strategy may provide short-term financial relief, it presents significant challenges during the business valuation process when you decide to transition.
As a construction business owner, you may have managed your financial statements to show minimal profit. This is often in alignment with strategic tax planning advised by professional accountants.
This practice, while common and legal, typically results in a lower net operating income being reported on your tax returns. While this strategy may serve you well during operational years, it can complicate the valuation of your business when you’re ready to transition.
The Role of Normalization in Valuation
When you engage a business broker, Legacy Business Transition Advisor, or M&A advisor, one of the first steps they will introduce is the process of ‘normalization.’ This crucial step adjusts your financials to reflect the true profitability of your business, critical for an accurate valuation.
Normalization involves adding back discretionary expenses such as an owner’s salary, perks provided to non-working family members. Additionally, it adds back non-cash expenses like depreciation, amortization and interest. This adjustment provides a clearer picture of the financial health of your business, making it more attractive and understandable to potential buyers.
However, it’s not uncommon for some business owners to demonstrate much improved financial attractiveness just they prepare to sell a construction business. A sudden improvement might involve a sudden spike in profitability. While improved bottom line may indicate increased free cash flow, sudden increased can raise red flags for prospective buyers and financiers wary of potential manipulation of figures.
Dealing with Accounts Receivable and Work in Progress
When you sell a construction business, managing Accounts Receivable (AR) and calculating the impact of Work in Progress (WIP) on sale can be very complicated. Accounts Receivable must be carefully evaluated to determine their collectability, as this impacts the liquidity and overall financial health of the business being sold. Work in Progress (WIP) also presents challenges, as it requires precise valuation to reflect ongoing projects’ current and future value.
For companies with one million or more in EBITDA, many Business Buyers Will want the business owner to include working capital. That topic in itself is beyond the scope of this blog. However, it is absolutely essential that you understand the likelihood of a buyer needing this, get a good idea of what a Working Capital (WC) amount would be, and take all of that into consideration, when putting a price on the business. Sit with your accountant, this is Valuation Specialist (NACAV.com) , or even Business Broker (BBFMLS.com) to discuss the impact of Working Capital (WC) and the amount, if any, that should be included in the transition of the business.
Licensing
This ensures that the buyer understands the status and potential profitability of ongoing contracts, which is critical for the continuity and success of the business post-sale. Licensing and Regulatory Considerations Selling a construction business often involves navigating the complexities of business licensing.
Here are some of the licenses required for construction related companies in Florida. Check out the website for details on these and more: https://www.myfloridalicense.com.
| Certified Licenses | Registered Licenses | ||||||||||||||
| Certified licenses are statewide and allow you to work as a contractor anywhere in Florida. | Registered licenses are limited to certain local jurisdictions and only allow you to work in the cities or counties where you hold a certificate of competency. | ||||||||||||||
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Many construction projects require specific licenses. Therefore, finding a buyer who holds or can obtain the necessary licenses is crucial. In some cases, a Seller might hold the license for the buyer temporarily, creating a transitional phase that allows the new owner to obtain the necessary credentials.
Several years back, we wit a corporate refugee, looking to buy a business. Although he initially looked at possibly acquiring a restaurant for sale or auto repair business for sale, he had really been interested in a few different construction related businesses. But it was challenging because he did not have a license. He was a good businessman. He was even an electrical engineer. We reviewed electrical, contracting companies, plumbing, companies, roofing, companies, and heating and air-conditioning or HVAC company. We were eventually able to find him a plumbing company, who is an owner, who is willing to qualify the business license for a period of time. That owner went on later to expand from Tampa Bay into Orlando and added HVAC services.
Who Will Buy My Business?
This aspect requires careful legal and regulatory consideration to ensure compliance with industry standards and laws. Identifying Potential Buyers Identifying the right buyer is key when you plan to sell a construction business.
Potential Buyers might include individuals or companies wanting to establish or expand their footprint in a particular metropolitan area.
For example, an electrical contracting company primarily working in the residential market might consider acquiring a plumbing company that also deals with residential customers. This strategic acquisition allows the buyer to diversify services and consolidate market presence in a cost-effective manner.
For our business Seller clients that have EBITDA exceeding $1 million, we often go to the private equity market to see if there’s some companies that would look to acquire it. Private equity groups (PEGs), and other investment groups, like family offices, or sometimes even have the financing in place to acquire your business.
They’re often more likely to ask you to stick around for a period of time though. Quite often the PEGs want to utilize the skills for a period of years in some cases. There’s an advantage though. Sometimes they give you some of the money upfront then invest in growing your company.
When the PEG has successfully grown the business, the shares of the business that you held onto after the closing tend to grow in value. You then get to be bought of the rest of your business. And sometimes shares of increase significantly. This is often referred to as taking a second bite of the apple.
Preparing for Sale and Transition
Preparing your construction business for sale involves more than just sprucing up financials. It includes understanding the intricacies of the business landscape, such as the competitive environment, market demand, and economic conditions that could influence the sale.
Engaging with a knowledgeable business broker or Business Transition Advisor who understands the construction industry can provide significant advantages. They can offer insights into market trends, help prepare your business for sale, and negotiate effectively with potential buyers.
The Importance of a Professional Valuation
A professional valuation is indispensable as it provides a detailed and objective analysis of your construction business’s worth. This valuation considers various factors, including financial performance, market position, competition, and other operational metrics. Having a clear understanding of your business’s value not only aids in setting a realistic price but also enhances your negotiating position.
If you’re not thinking about selling your business for a long time to come, you might be tempted to put off getting the business valuation closer to the horizon of your intended sale. This is almost always a mistake. Quite often business owners are considering a portion of their business sale to be part of their wealth for retirement.
Too often business owners are told a lot of nonsense about how businesses are valued. And as a result, we’ve seen over the last 20 years , the vast majority of intelligent business owners have been led to believe a line of nonsense.
Get a Valuation Now
A challenge arises when owners are ready to sell their business. They often discover a large gap between the money they need and the amount they thought their business would sell for.
We highly recommend that you get a business valuation immediately. That is, if you haven’t had a business valuation in the last year or maybe two years. But don’t just go for paying someone to give you a specific number or even a range of possible sales prices. Get a company that specializes in understanding the elements and Value Drivers
As an example, you might have an electrical contracting company in a certain cells range where are the multiple of EBITDA could range from 2.1 to 5.7 times that earning. If that valuation included a value driver assessment, you would be able to decide if you’d like to make some changes. Perhaps you’d like to address the direction of sales over the years, or a customer concentration challenge.
Having knowledge early on makes a world of difference. Smart construction owners get the facts early on. Making a change well in advance of the sales horizon is much easier than trying to fix things in a matter of weeks or months. In most cases, it’s very difficult to do.
As a result, you can mean that you don’t get what you need or want for your business. Or it can mean that you don’t sell your business at all. If you look on the Internet, you might find records that show that 70% to 80% of businesses that go to marketplace never sell.
Be Prepared and Take Action
Don’t let that happen to you. Get the facts. Make a plan. Let your legacy grow. Reap the rewards. Take action now. Being able to identify a valued driver that could be easily improved with a little bit of effort can make the world a difference regarding the value of your business. Don’t procrastinate. We’ve been working on and off with a great customer in North Carolina. But for three years now he’s been just a few steps away from putting his business on market. He admits he’s not doing anything to really improve the business, but just disappears for a period time. And then comes back on looking to get more information to sell his business. Being prepared, makes a world of difference.
Remember, it’s not just about you. Having early conversations about your business’s future is empowering. It allows you to plan how your business legacy can continue, benefiting everyone involved.
Not sure what your business is worth? Get a valuation with business assessment today https://buybizusa.com/value-my-business/.
This approach helps maintain jobs and keeps your customers satisfied as they continue to patronize the business you built. It also contributes to the economic stability of your community. Additionally, your family will often be thankful. We’ve seen many businesses face challenges, but because the owners prepared ahead of time, their spouses and family members were able to keep the business thriving.
Conclusion
Selling a construction business requires careful planning and expert guidance. From managing financial intricacies like accounts receivable and work in progress to navigating licensing requirements and identifying potential buyers, each step must be meticulously handled to ensure a successful sale.
Engaging with professionals who specialize in the construction industry can provide the expertise needed to maximize your business’s value and secure a favorable outcome. For construction business owners in Florida, partnering with local experts like those at Legacy Venture Group can offer significant benefits.
These professionals are well-versed in the specific challenges and opportunities within the Florida market, ensuring that your business valuation and sale strategy are tailored to reflect the true potential of your business.
Thank you for considering this critical aspect of your business journey. Whether you’re seeking a business valuation in Florida or aiming to sell a construction business, Legacy Venture Group is here to assist. Reach out for a free consultation at Biz@buybizusa.com or call 833-289-2491 (833-BUY-BIZ1).
We have an office in the Tampa Bay area of Florida. But we work with clients as far south as Marco Island and Naples, Florida. We served clients in Orlando, Lakeland, Sarasota, Fort Lauderdale and Miami. We’re talking with clients in Maryland, Washington DC area, Virginia, North Carolina, South Carolina, Arkansas, and Texas. He can say we get around. We look forward to helping you navigate this complex process and achieve your business transition goals.