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What’s Your Company Worth? Is It Valuable?

George Hedley

Every construction business owner will exit their company at some point. They’ll sell, transfer to their children or employees, close, or leave it to their heirs. Most owners don’t like to think about ending, closing or selling their company until they begin to see the end of their working life approaching. And by then, it’s generally too late to make the necessary changes to create a highly valuable company strong enough to attract buyers.

Most Construction Companies are Not Sellable!

A viable construction company that makes a profit, has been in business for many years, and is run by a strong owner does not make a valuable business. A company only has value when buyers or investors are willing to pay money to purchase it. Buyers don’t want a company that they’ll have to continually run and operate. Buyers want a business that runs itself and spits out a large positive net profit without their everyday involvement.

Your Company is Worthless if the Company is the Owner!

Working harder or making more money is not the only answer to maximize the value of your company. To increase the value, your business has to thrive, manage and operate without the owner’s hands-on involvement. Only this characteristic will attract buyers or investors. After they’re interested, then they’ll look under the hood to see if your company is scalable, organized, systemized, led by strong managers, has great customers, and has the potential to grow and create additional profit.

Value is Based on a Buyer Multiple

Even if you’re not ready to sell your company, you want to make it more valuable, right? The fair market value of your company is what it’s worth based on what someone will pay for it in the open market. If it doesn’t have much added value, you wouldn’t be able to sell it for more than the cash left if you closed and sold all of your assets. Companies which are more valuable than just their net cash value or equity, sell for a buyer multiple of one to 10 times the company average annual net profit.

Factors that reduce the buyer multiple for construction companies include roller coaster profit swings, or margin shrinkage from year to year; up-and down revenues; companies without steady annual growth; no standard systems; contractors who rely on unsteady sources of contracts or onetime customers; continual problems like lawsuits, employee turnover or cash flow issues; and companies too dependent on the owner.

Construction companies sell for an average buyer multiple of two to four times the annual pre-tax net profit depending on many factors. An important factor is size. The bigger the company, the higher the buyer multiple. Construction companies with $1 to $3 million in annual revenue generate a below-average buyer multiple. Companies with $3 to $10 million generate an average buyer multiple, and companies with over $20 million in revenue generate as much as double the average buyer multiple.

6 Steps to Make Your BIZ More Valuable!

Step 1: Stop Depending on the Owner!
The owner must stop running the company, managing alone, making all the decisions and continually reminding people what to do. The owner must make it a priority to develop an accountable management team. To make this happen, the owner must commit to delegate, let go and hire professionals to run the company. Let the team get things done and take responsibility for the future.

Step 2: Stop Making Low Profit Margins!
To make your company more valuable, you have to make bigger net profit margins. Industry average low margins are easy to make without written business plans, financial targets, tracking systems, accurate job costs, or running your company without a strategy. What are you doing to go after better people, customers and projects that will generate higher profits?

Step 3: Stop Stunting Your Growth!
Growing your company takes guts, strength, positive innovation and improvement. It takes hiring better players, continually upgrading, better strategies and trying new things. When you don’t grow, you’re continuing to do business the same way. If your company isn’t growing, the value is going down.

Step 4: Stop Winging It!
A key to building a valuable company is having proven operational systems and standards to manage people and projects. Your company isn’t valuable if all of your processes are buried in your head and not written out, followed, practiced, preached and perfected. It’s hard to sell a company without people following implemented systems, and a structure where everyone knows and tracks the results on an ongoing basis.

Step 5: Stop Selling the Same!
When you win work based on providing the minimum required per the plans and specifications, you don’t have a competitive advantage over your competition except low price. More valuable companies offer a unique service to differentiate them from the competition. They also have a written sales and marketing plan that generates ongoing revenue opportunities, loyal customers or competitive advantages. Plus, they have customer targets and action plans to improve their profitability and steady income flow.

Step 6: Stop Spending Money!
If most of your net profit is plowed back into the company every year to buy new equipment, there won’t be much leftover for the owners. If you continually work for companies that don’t pay fast enough to allow you to have enough cash available for payroll or to pay your bills, your company can’t operate comfortably. When cash flow is tight, your company won’t be a valuable entity. Decide how you want to do business based on decisions that will enhance your cash flow.

Take the Test!

Valuable companies have traits that make them more valuable. Oftentimes owners start their companies without thinking about the best way to enhance the value over the long run. Years later they are stuck with what they have become and are then unwilling to do what they need to do to set themselves up for a maximum value exit. By starting now to do what you need to do to increase your company value, you will set ownership up for a strong finish.


George Hedley, CSP, CPBC, helps contractors grow and profit as a professional business coach, popular speaker and peer group leader. He is the author of “Get Your Construction Business to Always Make a Profit!” and “Hardhat BIZSCHOOL Online University” available on his website. Visit www.hardhatbizschool.com for more information.