How to Value a Construction Business That Doesn’t Have Assets
The value of any business is often expressed in terms of its tangible assets and liabilities. Known as “book value,” this valuation method can be at best, a guesstimate when selling your business. For one thing, it requires the owner to have kept up to date with their bookkeeping and even more, it doesn’t take profitability into consideration. A better starting place for finding a true value for your business would be to use a business valuation tool. Starting with a more realistic number and then reaching out to a business broker to discuss assets or lack of assets is how you can create a strategy for having a successful sale.
What if your construction company doesn’t have any assets? Believe it or not, having little to no assets doesn’t necessarily lower your company’s value.
At Sunbelt, cash flow is what they’re looking at when evaluating a business. Two business examples to illustrate the point:
Company A is a Grading Company that does $30,000,000 in revenue and has net profit (EBITDA) of $1,000,000 and has physical assets like trucks, plows, etc. worth $2,000,000.
Company B is a Business Services Company that does $4,000,000 in revenue and has $2,000,000 in net profit and has $0 in asset value.
Which is worth more? Company B. Why? Cash flow is king. So, if a business has a lot of cash flow and a ton of assets, the assets MAY add some incremental value, but an efficient business that produces more profit per employee is always worth more and typically gets a higher multiple, especially if it is growing.
Below are additional considerations when doing a business valuation.
Earnings-Based Valuation/Market Comparison
What have other construction businesses sold for? The value of any business starts with its adjusted cash flow. When selling your business, Sunbelt will do an upward adjustment in discretionary earnings with adding back one-time costs along with perks and personal expenses. Combined with a market comparison using the correct multiplier, a broker will land on a probable selling price.
Discounted Cash Flow (DCF)
Discounted Cash Flow (DCF) is an income-based valuation method that determines the value of your projected worth. But what makes DCF unique is that the value is partly discounted to reflect the buyer’s risk.
The method itself is based on a series of mathematical calculations. The basic premise is to multiply a company’s present value by a multiplier, which will actually work to lower your overall value.
Again, the reason you want to lower this value is to account for a buyer’s potential risk, but naturally, you don’t want to reduce your company’s value too much. An experienced broker can work with you to account for any advantages you bring to the table.
For example, where do you get your tools? If you’re paying a discounted rate for your tools and services, then your broker may lower the multiplier used to value your business. As a result, the DCF can account for this added value and improve the selling potential of your company.
Additional Asset Considerations
Debt from assets can actually be considered an asset. Since assets aren’t added on top of the valuation, a buyer may consider picking up the debt instead of paying full price. This selling strategy is better used in a “stock deal” vs. the typical asset deal.
As far as intangible assets, an experienced broker will take those into account when determining the ideal multiplier. Things like customer lists, partnerships and brand recognition may possibly add value to your business.
Bonus Option: Use a Valuation Calculator When Selling Your Business
Sunbelt offers a valuation calculator that you can use to get a free business valuation in just five minutes. For more on how to sell your business, contact Sunbelt Business Brokers of Florida, today.