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Article | Construction

Maximize The Value of Your Construction Company For When It’s Time to Sell

Whether you’re considering selling your construction company internally or to an outside buyer, the best strategies involve planning your eventual transition several years in advance. Somewhere between three and seven years in advance is good timing, time enough to identify issues and implement solutions. There are several areas that, if focused on, will help to drive the value of your company higher in the eyes of potential buyers.

Corporate setup

The first and most important item to consider is your corporate setup. Any business where the owner wears all the hats and performs most of the management duties is not going to be valued highly by a prospective buyer. A buyer wants to step into the shoes of the owner with the time to run the business effectively. Construction company owners often act as their firm’s lead estimator, project manager, head of the HR department, and in other roles because they don’t have people on their internal team talented enough to handle those duties. It’s important that, several years ahead of a prospective transaction, the owner spend time and resources putting the right pieces in place so that the business can run without him. If a buyer sees he will have to spend long hours just keeping the business running, your business won’t sell for as much as it would otherwise.

Project backlog and customer mix

Obviously, the more work you have on hand the better. When the prospective owner can see substantial revenue already on the books, he will understand the business as profitable moving forward, whether that is through distributions of profits to the new ownership group or to produce the money necessary to make payments on the loan he will use to finance the purchase of the company. Also important, though often not so easy to make happen, is a broad customer base. Having one or two large customers might be profitable for you, but a new owner will see that as a risk. If the company under new leadership is unable to retain a particular customer, it would significantly, negatively impact earnings. As much as possible, start from five years out to take on new customers and diversify the company for prospective buyers.

Accurate, up-to-date financials

Current and accurate financial statements are going to be critical to selling your business. Your prospective buyer will want to look back several years at your financial performance, and if your financial statements turn out to be inaccurate, that could kill the deal, or at least cause a lot of issues throughout the buying process. Many times the buyer is financing this new venture, and the bank is going to want to see a history of financial statements. They’ll also be looking for a minimum of a rolling 12 months of activity. At every point you want to ensure your monthly statements are accurate and with proper adjustments for jobs in progress. Your financial statements must provide a clear picture of what you’re trying to sell.

Equipment upkeep and maintenance

No prospective buyer wants to see a junkyard of old equipment. Your equipment needs to be replaced when necessary, but otherwise maintained in good order so a buyer won’t be looking at a huge capital investment necessary to upgrade all of the equipment at once. It is vital to keep up with your maintenance schedule, work through equipment issues as they arise, and ensure your equipment works well and looks good. Many times the buyer will be looking at using those assets as collateral for a new loan, so they have to demonstrate value.

Expansion opportunities

You should be able to identify expansion opportunities that are available to a prospective new owner. Any new buyer will want to grow the business, want to see a future of expansion opportunities. Even if you don’t want to go down that path, you need to be able to highlight areas of potential expansion and have a presentation ready for buyers to show them that there are other aspects of the business that can be expanded or new areas of work they can go into to provide new sources of revenues.

Even if you’re not actively planning to sell your business, it’s important to do all you can do to make your company attractive to potential buyers. Before you’re ready to sell, it will improve your valuation, and when you’re ready to sell, you’ll have access to more and more willing buyers.

About the Author(s)

Mike is a Principal in the Youngstown, Ohio office of HBK CPAs & Consultants and has been with the firm since 2001. He is the National Director of HBK Construction Solutions, a team of specialists focused on contractors and their unique business needs.

In 2008, Mike received the designation of Certified Construction Industry Financial Professional (CCIFP) from the Institute of Certified Construction Industry Financial Professionals, Inc. (ICCIFP). ICCIFP is a not-for-profit corporation established to promote the highest standards of construction financial management through the credentialing of construction financial professionals. Mike works closely with hundreds of construction clients helping them achieve their financial goals.

In addition to his CCIFP distinction, Mike is a member of the Mahoning Division of the Builders Association, serves as Treasurer of the Construction Accounting Network, and is a member of the Ohio Contractor’s Association. He was published in the national construction magazine “Breaking Ground” as a subject matter expert on Financial Perspective in an article titled “Give Your Workforce the Financial Tools to Manage a Successful Project” in 2019. He also attends several national construction conferences each year to always stay ahead of industry trends and regulatory changes.

During his career, Mike has gained significant expertise in accounting and management consulting related to the construction industry. Mike’s industry distinctions include:

  • Assisting clients with cash flow projections and financial statement projections. In one case, it helped lead to a contractor client obtaining more than $100M in a single contract bond.
  • Helping a contractor secure a line of credit with a financial institution at seven times the level they had prior.
  • Assisting in the negotiation of a settlement of sales tax liability, which resulted in a reduction of more than $200,000 from the original assessment.
  • Aiding a contractor client in claim negotiations resulting in more than $1M of additional revenue.
  • Providing expert witness testimony on behalf of a contractor, resulting in a successful lost revenue claim.
  • Helping develop a training program for the management team of a contracting firm, to improve internal communication and overall profitability.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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