News & Resources

Years of robust construction activity in Boston as well as in other Massachusetts’ economies has brought us numerous valuation and modeling projects focused in this space. Shareholder disputes, consulting projects and divorces alike have reinforced the relevance of key issues worth considering in valuation of various construction and contracting firms. These considerations are each briefly highlighted below.

• State of backlog
  How many projects are in the door? What is their stage of completion? Are these contracts fixed price, time and materials, etc.? Are they profitable? Are their any outliers in the backlog data?
• State of relevant market
  Your appraiser should know whether the surrounding market is in a state of expansion, decline, flattening, and general degrees of uncertainty. What are the effects of trends in interest rates, inflationary forces, and the labor market? As a branch of this consideration, the right expert is wrapping into this topic how subject business itself is experiencing issues such as bidding, financing, sourcing of labor, materials, equipment, and so forth.
• Diversity of work
  The degree to which projects come from a diversity of sources and different types of projects may have a profound impact on the valuation of the firm. For example, a contractor reliant on 5 to 10 projects ever year may experience far more volatility in its financials and day-to-day operation than a company working on 30 projects.
• Union / non-union status
  This will factor into ease of attracting qualified labor. It can also have a geographical impact on where you are likely to be doing business. Further, there are back-end financial concerns (e.g., via retirement /pension issues) and legal issues to consider.
• Bonding capacity and status
  Knowing whether the contractor has adequate bonding capacity, knowledge of limits, and generally that there is no imminent threat to bonding should be considered.
• Borrowing capacity and/or approach to financing
  It is not uncommon to see credit facilities in place. Contracting businesses are constantly putting money out to pay their labor force, costs of materials and other resources, but then suffer relatively slow inbound payment cycles to get money in the door. Having facilities in place or alternative means of financing in this fact pattern is an important area to highlight.
  • Separate issues that could be highlighted with respect to topics such as bonding and borrowing include cash conversion, financial health, organizational structure, and the contractor’s track record.
• Related parties
  Frequent or at least periodic valuation issues for contractors revolving around related parties include real estate holdings (e.g., of the office and yard, garages, etc.), equipment/leasing companies, and legal entity separation of a union arm and non-union arm of the same organization. The impact of related parties on the economics and substance of private businesses is a classic valuation issue that is also commonly encountered in a construction or contracting context.
• Reliance on key individual(s), transition / succession plans
  Believe it or not there are organizations doing tens of millions of dollars in business where the key individual or controlling group of individuals will contend that without them, company valuation is highly questionable. It is important to separate fact from fiction and provide careful analysis in this area.
• Evidence of an M&A market
  This can serve as a nice sanity check at times. Whether checking against a complicated fundamental analysis of value, or countering the common allegation that “nobody will buy this business” when there are in fact businesses being bought and sold that are like it, the analyst should typically be checking for indications of value in the M&A market.

The Wider Evaluation

The issue of private business valuation is complex, requiring far more analysis than the mere issues highlighted in this article. Careful analysis broadly tackles the nature, background, history, operations, customers, suppliers, employees, risks, opportunities, earning capacity, and capitalization metrics for these businesses. This requires significant document review, research, interviews, and competent and thoughtful modeling techniques.

Starting the conversation of what your construction business is worth includes understanding the intended scope of the analysis, purpose, and users of the work. It then quickly moves into a document collection phase. Here, the business owner/manager should expect at a minimum to be asked for the last three to five years of business tax filings and financial statements (e.g., Audit/review, basic management prepared financials, etc.). Next contract schedules including completed and uncompleted projects over the same timeframe will be important, as well as any explicit future budgets or projections (if they exist). Beyond these high-level items, it is somewhat typical to seek breakouts of material balance sheet items and supplemental supporting information for your profit and loss statements (e.g., greater itemization, details of payroll, related parties, fringes/perks, etc.). Going beyond the financial weeds will also include collection of various corporate documents like shareholder agreements, leases, org charts, insurance summaries, past letters of intent/P&S/appraisals, and litigation/contingency details, among other things.

After a desktop review of this private production of information, publicly information, and market research, the appraiser will typically request a forum to interview the relevant owner and/or key managers of the construction firm. This may be in the form of a virtual meeting, teleconference, or even physical in-person meeting.

From laying the scoping, to collecting information, and running a multi-phased diligence process, eventually the appraiser applies methodologies to value your construction or contracting firm. Will we value the firm based on a fundamentally derived income/cash flow capitalization metric, determine appropriate market-derived multipliers, or fall back on an analysis of the net assets of your firm? And upon doing so, one of the final questions is what will be the most appropriate format of any formal documentation of the analysis?