How To Value A Construction Company?

April 19, 2022 by

Andrew Rogerson in Business valuations, Selling your business

When it comes time to value a construction company, there are various factors that will come into play. One of the most important aspects of this process is understanding how these construction businesses are valued in California.

There are several different valuation methods that can be used, but each one has its own set of pros and cons. In this blog post, we will take a closer look at three of the most common valuation methods for construction companies.

EBITDA Multiples

The first method is the EBITDA multiples. This valuation method is often used because it is relatively simple to calculate.

All you need to do is take the company’s EBITDA and multiply it by a certain number. The number that you multiply it by will depend on various factors, such as the company’s size, growth potential, and profitability.

For example, let’s say that you are valuing a construction company with an EBITDA of $20 million. If you apply a multiple of 12, then the company would be valued at $240 million.

However, it is important to note that EBITDA multiples can vary significantly from one company to another. For example, a small construction company with a lot of debt may have a multiple of just six, while a large construction company with little debt may have a multiple of 20.

EBITDA Calculation Formula

The EBITDA multiple is calculated by dividing the market value of equity by the last twelve months’ EBITDA.

EBITDA = earnings before interest, taxes, depreciation, and amortization

You can find a company’s market value of equity by looking at its balance sheet. The market value of equity is also sometimes referred to as market capitalization.

For example, let’s say that you are valuing a construction company with a market value of equity of $240 million and an EBITDA of $20 million. The company’s EBITDA multiple would be 12 ($240 million/$20 million).

Drawbacks Using EBITDA Multiples Method

As you can see, the EBITDA multiple is a relatively simple valuation method. However, there are some drawbacks to using this method.

First of all, EBITDA does not take into account a company’s capital structure. This means that it does not reflect the fact that some companies may have more debt than others.

Another drawback of using the EBITDA multiple is that it does not take into account a company’s growth potential.

For example, a construction company with a lot of debt and a low EBITDA may have a higher multiple than a construction company with no debt and a high EBITDA. This is because the market may believe that a construction company with no debt and a high EBITDA has more room to grow.

The last drawback of using the EBITDA multiple is that it does not take into account a company’s profitability.

For example, a construction company with an EBITDA of $20 million and a net income of $15 million would have a lower multiple than a construction company with an EBITDA of $20 million and a net income of $25 million. This is because the market may believe that a construction company with a higher net income is more profitable.

Overall, the EBITDA multiple is a simple and popular valuation method. However, it has some drawbacks that you should be aware of.

If you’d like to value your construction company by hiring an expert appraisal, give Andrew Rogerson, a certified business broker based in Sacramento, California, a Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com who services the whole state of California.

What do you think? Do you use the EBITDA multiple to value construction companies? Let us know in the comments below.

Net Asset Value Method

The second method is the net asset value method. This valuation method takes into account the company’s assets and liabilities. The goal is to calculate the net worth of the company by subtracting its liabilities from its assets. This number can then be multiplied by a certain number to arrive at the company’s value.

For example, let’s say that a construction company has assets of $100,000 and liabilities of $50,000. The company’s net worth would be $50,000. If we multiply that by two, we get a value of $100,000 for the company.

Another example of calculating the asset value approach when determining your construction company value is by using the times’ interest earned ratio (TIE). This valuation metric is commonly used by banks and other lenders to determine a company’s creditworthiness.

To calculate TIE, simply divide a company’s earnings before interest and taxes (EBIT) by its interest expenses. A construction company with an EBIT of $200,000 and interest expenses of $50,000 would have a TIE ratio of four. This means that the company can easily cover its interest expenses four times over.

Net Asset Valuation Formula

The net asset value formula is as follows:

Value of company = (Total assets – Total liabilities) x Multiplier

As you can see, the formula is relatively simple. However, there are a few things to keep in mind when using this method. First of all, you need to be sure to use the correct values for the company’s assets and liabilities. Secondly, you need to choose an appropriate multiplier.

One way to choose a multiplier is to look at comparable companies. For example, if you are valuing a construction company, you could look at other construction companies and see what multiple they are trading at. You could then use that same multiple to value the company you are interested in.

Another way to choose a multiplier is to use the industry average.

For example, if you are valuing a construction company, you could look at the average multiple for construction companies and use that as your multiplier.

If you are finding this valuation method difficult, you can give Andrew Rogerson, a certified business broker based in Sacramento, California, a Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com who services the whole state of California for a free consultation.

Disadvantages of using the net asset business valuation

This method includes the fact that it does not take into account a company’s earnings power or future growth potential. In addition, this method can be difficult to use if a company has a large amount of debt because the value of the company’s assets may be significantly lower than its liabilities.

Another disadvantage of using the net asset valuation method is that it may not be an accurate reflection of a company’s true value. This is because the value of a company’s assets can fluctuate over time, and this method does not take into account these changes.

Overall, the net asset valuation method is a good way to get a general idea of a company’s worth. However, it is important to keep in mind its limitations. When valuing a construction company, it is best to use multiple methods in order to get the most accurate valuation possible.

What are some other methods for valuing a construction company? Let us know in the comments below!

Discounted Cash Flow Method

The third and final method is the discounted cash flow method. This valuation method takes into account the company’s future cash flows. The goal is to estimate how much money the company will generate in the future and then discount that number back to its present value. This number can then be multiplied by a certain number to arrive at the company’s value.

For example, let’s say that a construction company is projected to generate $100 million in cash flow over the next five years. We would then discount that number back to its present value using a discount rate. This rate is typically the company’s weighted average cost of capital.

Once we have the present value, we can multiply it by a certain number to arrive at the company’s value. This number is typically between four and six.

So, if we discount the $100 million cash flow at a rate of 12%, we would arrive at a present value of $59.26 million. Multiplying that by five would give us a value of $296.30 million for the construction company.

Cons of using the discounted cash flow method

Include the fact that it is very sensitive to changes in assumptions and that it can be difficult to forecast a company’s cash flows years into the future.

For example, a small change in the discount rate can have a large impact on the present value.

It can also be difficult to estimate a company’s cash flow years into the future. This is especially true for construction companies, which are often reliant on winning new contracts. As such, their cash flows can be very volatile.

The bottom line is that there are a few different ways to value a construction company. The most important thing is to use a method that makes sense for your particular situation.

Selling a Construction Company

If you’re looking to sell a construction company, one of the first things you’ll need to do is value the business. Valuing a construction company can be tricky, also, running and selling a construction business can be difficult. See how a business broker can help sell a construction company with five steps?

The first step is to understand how construction companies are valued. The most common method used to value a construction company is by using EBITDA multiples. Ebitda, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s profitability. Construction companies usually have high EBITDA margins, so their EBITDA multiples are usually higher than other industries.
The second step is to understand what factors will affect the value of your construction company. The three most important factors are the size of the company, the profitability of the company, and the growth potential of the company.
The third step is to understand what buyers are looking for in a construction company. The most important factors that buyers look for are the size of the company, the profitability of the company, and the growth potential of the company.
The fourth step is to find a buyer who is willing to pay your asking price. The best way to find a buyer is to hire a business broker.
The fifth and final step is to negotiate the sale price of your construction company.

You should always hire a business broker to help you with this process.

If you follow these five steps, you will be able to sell your construction company for the highest possible price. Valuing a construction company is not an exact science, but if you follow these steps, you will be able to get the best possible price for your company.

The most important thing is to use a method that makes sense for your particular situation. You should also keep in mind that valuations can be affected by a number of factors, so it’s important to understand all of the factors that could impact the value of your company.

This is just a quick overview of how to value a construction company. If you’re interested in learning more, there are many resources available on our blog.

References:

Do you have any questions about how to value a construction company? Leave a comment below and we’ll be happy to help!

Final Take: Value a Construction Company in California

As a retiring business owner in California, you don’t need to struggle with appraising a construction company yourself. A trained and qualified business broker in California would be happy to answer all of your questions and find ways to increase your value.

Contact Rogerson Business Services to help you with more information today!

With a construction business broker at your side, we feel confident that you will sell a construction company at the highest price.

If you are considering valuing and selling your construction company within six to twelve months, give Andrew Rogerson, a certified business broker based in Sacramento, California, a Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com who services the whole state of California.

This is part of the tips to sell a construction company in California series ->

2 Comments

Syed-brothers April 29, 2023 at 1:14 am Reply

Excellent article. It was a nice read.
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Renovation Company July 24, 2023 at 4:32 am Reply

The blog post by Rogerson Business Services explores the value of a construction company from a business perspective. It sheds light on the factors that contribute to the overall value of a construction business, making it an insightful read for entrepreneurs in the industry.

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How To Value A Construction Company?