From contemplating the sale of your business to establishing a value for gift and estate taxes, understanding the value of your business is important. This article will review 7 factors that affect the saleability and value of a contracting firm.
1.) Management Quality, Depth and Duration
Performance is directly tied to the quality, depth and duration of management. Investors want to know who will run the business in the owner’s absence. Addressing management succession issues and providing adequate depth of management and training is a definite value enhancer.
2.) Revenue Streams
Investors will be interested in all areas affecting operating performance, including project-based and non-project-based revenue streams. Firms with a predictable, consistent non-project-based revenue stream will be more appealing than project-based businesses which tend to be more unstable
Investors are often hesitant when contractors are working in markets that require bonding, a risk management tool used to guarantee completion of the intended project. Bonds are notoriously difficult to obtain which is why the buyer pool can be limited to financial buyers who understand and accept the risk associated with bonds.
4.) Job Bidding
Investors will also take into consideration if the firm is in a highly competitive market where job losses are likely. Seasoned investors looking for an adequate return on their investment would prefer companies operating in a negotiated capacity.
5.) Prime versus Subcontractor
Specific circumstances can positively or negatively impact cash flow. For instance, operating in a subcontractor capacity is not ideal. Investors are hesitant because subcontractors are dependent on the general contractor’s payment terms and cycle.
Construction companies capable of completing a job without the need to outsource are less risky compared to those that depend on subcontractors to get the job done.
7.) Size and Diversity
Diversification is also something investors consider. Generally, more is better. Diversification can involve product, geography or customer base. Another measure of risk is the level and quality of competition.
If you have questions about valuing your business or benchmarking yourself against others, please contact one of our professionals today.