How To Sell a Construction Business – The Complete Guide

The construction industry has been a hub of innovation and unwavering commitment to enhancing infrastructure. As the times have changed, the construction landscape has undergone a transformation driven by technological advancements and global development. In this new era of construction, the emphasis on cutting-edge technology and sustainable practices has never been more realized.

If you’re considering selling your construction business, Raincatcher is your trusted partner. Regarded as a leader in construction M&A, we’ve gained acclaim as the #1 business broker, as recognized by Inc. magazine. Like any significant endeavor, selling a construction business requires time and dedication to attract the right buyers. While there isn’t a one-size-fits-all strategy for the selling process within the construction industry, our approach is tailored to ensure the optimal outcome for your business. This article outlines the journey of selling your business, from assembling the crucial documents to the ultimate closing.

Process of Selling a Construction Business (at a glance)

If you have decided to sell all (or part) of your construction company, here is a glimpse at what the process will entail over the coming year:

  • Build a strong deal team: Align yourself with a business brokerage firm (for deals under $10m) or M&A firm (for deals over $10m) that has proven success representing construction companies. Find a proven M&A attorney (we can introduce you to several groups we’ve succeeded with) and a tax attorney.
  • Compile your materials: Your M&A advisor (Raincatcher) will request a litany of documents from you. This includes financial statements, organization charts, supplier and customer contracts, employment agreements, etc.
  • Market the deal: We create an expansive document and financial forecast for your company and then bring it to market. Most of this work falls on our shoulders as we have an expansive database of investors for companies of all industries.
  • Receive IOIs: Depending on the size of your deal, your advisor may suggest that you market the deal and push for LOIs. Or, if your business is large enough, we look to secure IOIs ahead of time so that we can shortlist the most capable buyers and present them with more information and meetings before receiving an LOI.
  • Management Meetings: Should it fit your business, your broker will join you in hosting investors for a week to share additional information about your manufacturing company.
  • Receive LOIs: ‘best and final’ bids will be received after hosting the most capable buyers for meetings.
  • Sign an Exclusive LOI: After some negotiation, we help you select the most capable buyer based on their price, terms, likelihood of closing and plans for the company.
  • Due Diligence: The buyer and their advisors kick off another 60-90 days of thorough investigation, leaving no stone unturned in examining every aspect of your company.
  • Close: Closing time. The deal is done, and you’ll typically get 80% – 90% of the payment for your business now.
  • Transition: After closing, the buyer will typically require the sellers to stay behind and assist in transitioning the business to them for an agreed-upon period of time.

Hear From Previous Clients Who Sold Construction Businesses With Us

What Determines the Valuation of a Construction Business?

Lower middle market construction businesses (sub $15m EBITDA) trade across a fairly large range, depending on how desirable they are. A construction company that trades for a high multiple (~10x) has many of these traits:

  1. Financial Performance: revenue growth, profit margins, and cash flow history will influence the valuation.
  2. Project Backlog: the volume and quality of contracted projects indicate future revenue potential.
  3. Asset Base: the value of equipment, property, and other tangible assets contribute to valuation.
  4. Market Demand: strong demand for construction services can enhance the business’s value.
  5. Reputation and Client Relationships: a solid reputation and long-standing client relationships can positively impact valuation.
  6. Management Team: the experience and expertise of the management team play a crucial role.
  7. Geographic Reach: the business’s presence in multiple regions can diversify risk and boost valuation.
  8. Industry Trends: staying aligned with current construction trends can enhance value.
  9. Risk Profile: the level of risk associated with projects, contracts, and market conditions affects valuation.
  10. Competition Landscape: market positioning relative to competitors influences the business’s valuation.

 

Remember that the valuation process can be complex and subjective, often involving a combination of these and other factors. The fewer criteria your construction company meets, the lower the multiple will slide. Although rare, some construction companies don’t sell at all. However, these are typically small companies (less than $500k profit).

As noted above and illustrated in this chart, the business valuation of a healthcare company can range greatly. Below, we’ll dig into some of the more critical factors determining manufacturing company valuations.

More Construction Resources

One of the most common questions we get from business owners is about valuation. We put together a construction valuation multiples guide that we think you’ll find helpful.

Financial Performance

Your construction business’s historical and projected financial performance is a critical determinant of its valuation. Prospective investors will require access to updated accounting records, financial statements, and documents such as tax returns. These records will be scrutinized to assess elements like revenue, profitability, cash flow, and growth patterns, all of which contribute to evaluating the financial strength and potential returns on investment of the business in the construction sector.

In construction, the business’s size often correlates with its valuation. For instance, a construction business generating $500k in annual profit might command a valuation multiple lower than a similar business generating $3m in annual revenue.

Investment groups place great importance on maintaining a margin surpassing 30%. Construction companies with healthy profit margins signify that the business possesses a competitive advantage and stands apart from its peers within the industry. This differentiation indicates a strong position and unique qualities that set the construction business apart from competitors.

Industry Segment and Market Conditions

The industry and market conditions in which the construction business operates play a crucial role in its valuation. Factors such as market demand, competitive landscape, barriers to entry, and industry growth potential impact the business’s perceived value.

Generally speaking, the more niche a construction sector is, its total addressable market is smaller. However, they likely have few competitors in that niche and can therefore have more repeat business and more durable earnings. Investors will have different views on niche markets, with most buyers liking them and others disliking them for their limited growth prospects.

Growth Prospects

Buyers evaluate the growth potential of a construction business to ascertain its worth. Aspects such as project portfolio diversification, avenues for expansion, market reach improvement, innovation capacities, and client base all play a pivotal role in gauging the business’s future growth possibilities and subsequent influence on its valuation.

Even within the construction sector, the more specialized business could exhibit promising growth potential by identifying related construction domains and services they can provide.

Assets and Intellectual Property

The tangible and intangible assets of the healthcare business can also impact the company’s valuation. This includes heavy equipment, tools, construction materials, office equipment, land and real estate, site infrastructure, and misc. inventory. Well-maintained assets and valuable intellectual property can enhance the business’s value.

Generally, companies with modern machinery using high-quality equipment will trade at higher multiples than those with more commoditized products.

Additionally, companies with solid teams are seen as more desirable and able to transfer leadership to a new owner. While this asset isn’t on the balance sheet, employees are critical to the business.

Customer Base

The strength and stability of client relationships serve as a testament to the quality of work and form the foundation of the construction company’s reputation and success. A loyal and diverse client base signifies the company’s ability to meet varying construction needs, establish lasting relationships, and foster a sense of trust within the community. This helps ensure consistent and recurring revenue for the business while showcasing its expertise and reliability.

What is the Process of Selling a Construction Business?

While it may not be a fit for all clients, most entrepreneurs we work with who run construction companies will see the most competitive price and terms for their business coming from a well-run auction process.

Auction processes typically take 7-9 months to complete. On certain occasions, we may recommend that our client hire an accounting firm to complete a quality of earnings analysis before we start the auction process. In our experience, this cost and time is justified and can manifest itself in 5% – 15% hire exit values.

We’ll go into each of the steps of an auction process at a high level below:

How we Maximize Exit Proceeds for our Construction Clients with our Auction Process

Sell-side due diligence

Due diligence is traditionally done by business buyers and not business brokers. However, our comprehensive sell-side process includes a diligence process before we bring a business to market. 

Our comprehensive diligence and sale process is designed to drive the highest value for the business owner as buyers know that there won’t be any skeletons in the closet once they submit an offer and start spending money on legal and financial diligence.

 

Specially designed brokerage or M&A auction process

Depending on the size of your business and industry your company operates in, we may recommend a traditional brokerage process with a listing price. Or, a competitive auction process with buyers submitting the price and terms for negotiation. 

Our buyer list is comprehensive and will be tailored to include (or exclude) and participants in your industry who may make great strategic buyers or who you want to avoid knowing the business is on the market for sale.

Short-listing finalists

It isn’t uncommon for strong, sizable companies to get 5+ indications of interest (soft offers). We’ll then validate those buyer groups, attend dinners where they meet out clients, prepare further data on the business and negotiate the deal terms that the prospective buyers will propose in their final offer.

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Negotiate LOI terms and facilitate diligence

Once LOI’s have been received from potential buyers we work with our clients to select the potential buyer with the most attractive offer before executing the exclusive LOI.

It’s common for diligence to take 60-90 days before closing. This requires a significant time commitment from all parties. Additionally, final deal points are negotiated and contested during this period.

Talk to the experts

Care to learn more about Raincatcher’s brokerage and M&A processes and what we can do for your business? Get in touch with us for a complimentary consultation.

What Affects the Market's Appetite for the Construction Industry?

Many factors collectively shape its attractiveness and viability to investors. Economic conditions play a significant role, as a robust economy with steady GDP growth tends to stimulate construction demand. The construction industry benefits when individuals and businesses have the financial capacity for real estate ventures and infrastructure projects. Interest rates also factor in, as lower borrowing costs encourage investments in construction projects, spurring market activity.

Companies that embrace automation, Building Information Modeling (BIM), and other cutting-edge techniques tend to attract more attention as they offer efficiency gains and cost savings. Sustainability considerations, such as green building practices and eco-friendly materials, have gained prominence due to environmental concerns, driving demand for environmentally conscious construction solutions. Additionally, regulatory frameworks and government policies, including zoning regulations, building codes, and incentives for infrastructure development, significantly influence market appetite by shaping the feasibility and profitability of construction projects.

Thinking About Selling?

If you are entertaining selling your company, feel free to request a consultation with one of our construction business brokers or M&A specialists to learn about our unique process and why we believe it is the best in the industry.

What Role Does Technology Play in Investors Analysis of the Construction Industry

Strategic buyers and private equity groups alike are interested in buying companies at a discount to the cash flow they can take out of them over the coming decade. There are a few ways they go about this:

  1. Invest in companies that can grow significantly.
  2. Acquire highly differentiated companies and therefore have a very stable, predictable client base and cash flow.

 

In both cases, Investors assess how construction companies leverage technologies like Building Information Modeling (BIM) and project management software to enhance efficiency, accuracy, and collaboration throughout the construction lifecycle. Companies that integrate these technologies effectively are seen as forward-thinking, more capable of completing projects on time and within budget, and better positioned to adapt to industry trends and changes.

Either this technology will be leveraged to grow the business. Or, it is seen as a differentiating factor to separate from the competition and create a higher margin and more durable revenue stream. Companies with specialized services often trade at 30%-40% premiums to their more commoditized peers.

Request a Consultation

At Raincatcher we represent sellers of exceptional lower middle-market companies. Generally speaking, these companies generate anywhere from $2m – $100m in annual revenue. We were even named the #1 business broker by Inc. magazine.

Our team is comprised of former business owners, public accountants and investment bankers. Included in this group is two of our partners who each spent over a decade working at middle-market investment banks where they represented manufacturing companies. This is one of the reasons we are seen as an expert in the manufacturing space.

request a consultation today to review your market value, discuss what type of exit process would make the most sense and meet our team of advisors who have real-world experience selling manufacturing companies.