Working your way to the top of the construction industry is no easy feat. It takes years to earn respect, clientele, and expertise that sets you apart from the rest. Starting out your career with your own company might have been risky at the time, but you prevailed through hard work and dedication. As you take a step back, it’s possible that you’ve considered retirement or moving on to new ventures, concluding it’s the right time to sell your construction business.
Whether you work in the field of renovations, as a general contractor, engineer or design architecture, or even real estate development, business sales likely haven’t been something you were closely involved with. At Sunbelt Canada, we’ve worked with numerous professionals who have asked us, “How do I sell my construction business?” The long and short of it is it’s easier with a broker. In this post, we’ll explore the steps and answer some of your most pressing questions.
Table of Contents
- 7 Steps to Selling Your Construction Company
- Most Significant Factors Affecting the Value of a Construction
- What Does a Typical Buyer Look Like?
- What Multiple Does a Construction Company Sell For?
- Mistakes to Avoid When Selling a Construction Business
- Get More Value with a Broker
7 Steps to Selling Your Construction Company
With the right approach, selling your construction business can be a smooth and rewarding process. This is all done through careful planning and execution, which we have outlined in the steps below.
1. Consider Your Exit Timeline
The first step in selling your construction business is to consider your exit timeline. Determine when you want to sell and why. Are you dreaming of retirement, interested in moving to a different role, or contemplating starting a new company? Maybe you’re looking to sell so that you can take care of personal or financial obligations. Whatever the reason, clearly understanding your motivation will help you establish a realistic timeline and expectations for the sale.
2. Get a Business Appraisal
Before selling your construction company, you need to know its worth. A business appraisal can provide you with an accurate estimate of your company’s value. It takes into account your financials, assets, and liabilities to provide a comprehensive valuation. This information is critical for setting a fair asking price and negotiating with potential buyers.
3. Establish Your Company’s Differentiator
To stand out in any market, having a clear differentiator is essential. Identify what sets your construction business apart from the competition. It could be your specialization, quality of work, customer service, or any other factor. Your broker can clearly communicate your differentiator to potential buyers when marketing your construction company, ultimately increasing its value.
4. Gather a List of All Assets
Assets are all-encompassing beyond just equipment. For example, you can consider contracts, employees, and intangible resources, like licenses, as assets. Having this information organized and readily available will make the due diligence process smoother and more efficient for any buyer considering purchasing your construction business.
5. Identify Weaknesses and Increase Your Value
Every business has weaknesses, but you might be keen to gloss over them or ignore them as the owner. When you’re in the thick of a project, you probably aren’t thinking about what you could do to increase the value of your business, let alone selling in general. Contact your broker if you aren’t sure about your construction company’s weaknesses, and they can conduct a thorough assessment. From there, your broker can recommend improvements and implementations that will make a difference when it comes time to sell.
6. Plan Company Growth
Having a clear growth plan might involve addressing weaknesses, gaining more assets, or another area that increases the attractiveness of your business when it’s put up for sale. Although these details don’t need to be cemented in place, outlining potential plans for the future, including expansion, new services, or entering new markets, can give buyers confidence in the long-term potential of your construction company.
7. Find Buyers
As invested as you are in the process of selling, finding a buyer is one of the interim stages that really solidifies your decision. It can take time to find the right buyer with the experience and financing needed to continue to run your construction business. Your broker can use their network to find qualified buyers, advertise in the right way, and ensure the whole process remains confidential. They can act on your behalf throughout negotiations and keep everything moving forward to your benefit.
Most Significant Factors Affecting the Value of a Construction
It can be difficult to take a “big picture” look at your construction business, especially if everything has been working efficiently and effectively. Keeping things status quo works for you as the owner, but it might not be what works for a potential buyer. In this context, let us explore some of the most significant factors that can drive up the value of your construction company, ultimately setting a fair asking price and putting you in a better position to negotiate with potential buyers.
Your company’s financial records provide a foundational starting point for its value. These include revenue, profits, and cash flow. Having clean paperwork and a clear paper trail is also a benefit to buyers who may want to look into the finite details closely. If you have been struggling with getting an account to pay or have issues with your current accountant, it’s best to resolve those concerns immediately when considering selling.
Construction is an industry highly focused on equipment, whether it’s specialized machines, new technology, or updated tools that enhance efficiency. Overall, the company’s age, condition, and type of equipment can affect its value. If you’ve been putting off purchasing new materials or tools, it might be worth investing in them before looking for a buyer.
This can sometimes be a sticking point because great contracts are seen as both objective and subjective. The value of the contract certainly matters, but so does the client it is with and the duration. Some buyers may be more interested in longer-term contracts with medium-sized businesses, while others prefer regular short-term contracts with executive companies that have the potential to re-up. Your broker can help determine the objective value of your contracts and how they impact the overall sale of your company.
Your staff are an invaluable asset to your construction business. Maybe they’ve come up with you since the start, or their expertise has added services and enhanced projects in ways you didn’t know possible. The experience, skills, and certifications of employees all play a role in how your construction business is valued.
Track record is one of the most pivotal factors that impact reputation. Are you known for completing jobs on time and within budget? Is your team easy to work with? Do they show up when they are supposed to and deliver great work? Reputation is something that can take decades to build, which is why it affects the value of construction companies.
How to Sell a Business
What Does a Typical Buyer Look Like?
As your broker weeds through potential buyers for your construction company, they might come to you with a few different offers. The benefits of working with a broker mean that by the time a deal comes across your desk, it’s already been vetted, meaning the buyer has the financial means and skill to purchase and continue your business.
From there, you’ll need to consider the type of buyer you want to sell to. There are a few typical individuals in the market for a construction business, and they include:
- Strategic buyers: These buyers are typically competitors or companies looking to enter the construction industry.
- Financial buyers: These buyers are typically private equity firms or individual investors looking for a profitable investment opportunity.
- Management buyout: In some cases, the current management team of a construction company may be interested in buying the business.
Does Selling to a Competitor Make Sense?
If you’ve spent years building up your company to set it apart from competitors, it can feel easy to say no if one approaches you to buy your business. But selling your construction business to a competitor can sometimes make sense. Consider that competitors may be willing to pay a higher price for your business due to the potential synergies and cost savings they can achieve through the acquisition. This can help afford you an easier transition as well, knowing that the buyer will require less training and guidance on how to run the company.
However, selling to a competitor also comes with risks, including the potential loss of employees or customers and a decrease in competition in the marketplace. Speak with trusted advisors, like your accountant, lawyer, and business broker, for their perspective on the matter. They can have insights that you may not have thought of, which can help you make a more informed decision.
What Multiple Does a Construction Company Sell For?
The factors that affect the value of your construction business also play an important role in the multiple your company will sell for. It’s vital to consider the following:
The multiple will also depend on the longevity of your company and the specific type of construction you’re in. For example, real estate development tends to be valued more than renovation construction. However, if the renovation company has been in the market for more than 20 years and has commercial and residential clients throughout the community, their multiple could be considered higher.
In general, construction companies can sell for anywhere from 20 to 30% their annual revenue plus inventory or two to four times their annual earnings before interest, taxes, depreciation, and amortization (EBITDA).1 To determine an exact number, it’s best to work with a broker who has a vast knowledge of the industry and takes the time to get to know your business before putting an exact value amount on it.
Mistakes to Avoid When Selling a Construction Business
Just as you carefully plan out your jobs and scope your job sites, you must also dedicate that attention to detail when selling your construction business. The more you invest in ensuring all boxes are ticked, and things are in the right place, the easier and smoother the process will be. With that said, here are several common mistakes to avoid:
- Not properly preparing for the sale. This might be failing to put together your financial records, going back and forth on whether you want to sell, or not planning your handover strategy. All of these factors can lead to lower offers and longer sale timelines.
- Overvaluing your business. Business appraisals take various details into account beyond financials on paper. These are important to show buyers a realistic view of the business and what they can expect. However, overvaluing your business can lead to unrealistic expectations and deter potential buyers.
- Neglecting to address weaknesses. When you’re in the thick of running your construction business, you’re likely splitting your time between planning and projects, which doesn’t give you a lot of time to identify weaknesses. But, neglecting issues in your business can decrease its value and make it less attractive to potential buyers.
- Failing to plan for the future. Similar to the previous point, your focus as an owner is running your business efficiently. When you reach the sale stage, you must also consider the future and what that looks like without you at the helm. If you don’t, the long-term value of your business can decrease, causing buyers to shy away because they feel financials are uncertain.
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Get More Value with a Broker
Selling your construction business is not a transaction that can happen overnight. Not only does it involve plenty of paperwork, but it can also be stressful to ensure everything is done by the book and that you are emotionally ready to walk away. At Sunbelt Canada, we always recommend working with a broker, especially if you want to get the most value for your construction business.
Our team can help you properly prepare for the sale, identify potential buyers, and negotiate on your behalf. This can save you valuable time and effort as you approach your exit from your company. Providing expertise on the sale process, helping you address weaknesses in your business and ensuring that the sale is conducted professionally and efficiently are also part of what we do. If you’re considering selling your construction business or just wondering how to value it, reach out to us.
1“Valuing Residential and Commercial Construction Companies.” n.d. Accessed March 21, 2023. https://www.bvresources.com/docs/default-source/default-document-library/wiw_residential-commercial-construction_interactive.pdf?sfvrsn=1d8dc3b2_0.