McKinsey states that construction is the largest industry in the world. This leads to limitless growth potential. For established construction companies, the unlimited potential leads to many excellent valuations and offers equal to or greater than fair market value (FMV). This review discusses how you can value and sell your construction company, along with providing insights into the role of the business broker. We also highlight the various sub sectors of the construction industry as well.
About Construction Companies in The United States (With Rule of Thumb Data)
There is a range of construction company types in the United States. This most notably includes general construction, building, excavation, masonry, municipal, special trade, and steel fabrication companies. Below is more information on each unique business type within the construction industry. We also include information on industry trends and rule of thumb data (acquisition multiples) for each industry.
General Construction Companies
A general construction company may offer a range of services and subsequently does not fall under any of the sub sectors listed below. This industry is relatively stable and there will always be opportunities for general construction companies to make an excellent profit, although the profitability may be more cyclable and dependent upon the state of the economy.
- General construction companies usually sell for 2 to 3.5 times their EBIT, 2 to 4 times their EBITDA, 30% to 50% of their annual sales plus inventory, and 3 to 4 times their SDE plus inventory.
Building Companies
The building subsector of the construction industry primarily deals with new work, additions, alterations, repairs, and maintenance (source: Business Reference Guide). In a strong economy, building companies perform incredibly well, and owners experience excellent profit margins.
- Building companies usually sell for 20% to 30% of their annual sales plus inventory, 1 to 2 times their SDE plus inventory, and 1.5 to 3 times their EBITDA.
Excavation Companies
The excavation industry is incredibly large with more than 52,000 companies across the United States. The industry has grown at an annualized rate of 2.4% since 2018, and it is expected to grow by 1.1% over the next five years. Specifically, this industry is primarily engaged in site preparation activities, such as excavating and grading, demolition of buildings and other structures, septic system installation, and house moving (source: Business Reference Guide)
- Excavation companies usually sell for approximately 25% of their annual sales plus inventory, 2.2 times their SDE plus inventory, and 2 times their EBITDA.
Masonry Companies
There are 95,000+ masonry companies in the United States, making it one of the largest subsectors of the construction industry. This industry experienced a 1.2% growth over the past five years and many experts predict similar growth moving forward.
- Masonry companies usually sell for approximately 27% of their annual sales plus inventory and 1 to 2 times their SDE plus inventory.
Municipal Companies
Municipal construction companies are primarily engaged in construction services for industrial and commercial sites. There was a slight downturn for the industry in the past five years (-0.3%), although slight growth is predicted for the next five years. There are approximately 38,000 municipal construction companies in the United States.
- Municipal companies usually sell for approximately 0.51 times their net sales, 2 to 3 times their SDE, and 2.5 to 3.5 times their EBITDA.
Specialty Trade Companies
Specialty trades are hard to replicate, creating a high barrier to entry that benefits established companies within this subsector. Consequently, valuations are solid due to high demand among investors who are interested in entering the construction industry.
- Specialty trade companies sell for 2 to 3.5 times their EBITDA, 2 to 2.5 times their SDE plus inventory, and 45% to 55% of their annual gross sales plus inventory.
Steel Fabrication Companies
There are more than 15,000 professional steel fabricators in the United States, and the industry produces more than $20 billion in revenue each year. There was a 1.0% annualized growth rate in the past five years with similar projections for the next five years.
- Steel fabrication companies sell for 3 times their SDE, 4 times their EBIDTA, and 15% of their annual sales plus inventory.
How The Sales Process Works for Construction Companies
Your broker can help you navigate the numerous complexities that are involved with the sell of a construction company. However, it also helps to prepare and learn more. To best explain the sales process, we have broken this review into three stages.
Keep in mind, every sales experience is unique and requires a personalized sales strategy. You should always speak with a professional broker before you begin your sales journey.
Stage 1: The Planning and Preparation Stages
The first step in selling your construction company is to prepare for the sale. In fact, a significant amount of work happens prior to listing your company on the private market. This will make the sales process easier and increase the likelihood of a fast and stress-free sale for a fair market value. Specifically, the pre-marketing stages include, but are not limited to:
- Obtaining a professional business valuation
- Establishing the goals for your exit strategy
- Determining the marketing channels you use for the sale
- Gathering your legal and financial documents
Specifically, you should gather your federal tax returns, profit and loss (P&L) statements, cash flow statements, balance sheets, employee lists, client lists, and inventory information. You may have already collected many (if not all) of these documents prior to obtaining your professional valuation. Once a detailed review of your company’s information is completed, and your purpose and goals for selling are identified, you and your team (e.g., broker, attorney, and CPA) can create a personalized sales approach that maximizes your chances of success.
Stage 2: The Marketing and Negotiations Stages
The next step to selling your construction company is to market your company in a confidential manner. Of course, you will need a broker to accomplish this task as they have access to private databases and industry connections that help ensure a sale is accomplished without disclosing news of the sale to the public.
Throughout the process of finding a buyer, your broker will also screen offers as they arrive, negotiate on your behalf with qualified prospective buyers, and ultimately secure a letter of intent (LOI) that establishes the purchase terms with the buyer of your choice.
Stage 3: The Due Diligence and Closing Stages
After a letter of intent, you can begin the due diligence stage, which involves the seller conducting a detailed review of your construction company. In doing so, they may request the documents you prepared in stage 1, ask a series of questions, and conduct a walk-through to gain more information about daily operations. This stage may also involve meetings with you (the seller), your business partners, and key employees.
After due diligence, the sale’s closing is scheduled. During closing, you will review the purchase agreement, attain final signatures of the purchase agreement, and confirm the payment has been sent. Of course, you will also need to transfer ownership officially to the buyer, which usually takes place at the closing table as well.
Contact The Trusted Brokers at Sigma Mergers and Acquisitions
Are you considering selling your construction company? If so, then contact the business brokerage and consultancy at Sigma Mergers and Acquisitions today. We are glad to answer your questions and get the sales process started for you by providing a free, no-obligation valuation.
Scot Cockroft is the Owner & President of the #1 ranked Business Brokerage, Business sales and M&A firm in Texas. Scot has been named Named Deal Maker of the Year by Dallas Business Journal.
He is committed to a “different” type of business brokerage firm, one that is NOT about a sales pitch but, rather, results! In short, a business brokerage firm that is committed to performance-based compensation. Scot believes in these principles as well as a candid honesty with clients. His candid style often takes buyers and sellers by surprise, but is often what assures successful connections between the two.
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