Business valuation of commercial building contractors

Are you considering valuation of a commercial building contractor firm? Check out these industry statistics:

There are some 38,000 commercial and institutional construction companies, classified under the SIC code 1541 and NAICS 236220. These construction firms generate a combined $372.5B in annual revenues. The industry sector employs an impressive 654,178 of professional and administrative staff, down 6% from 2002. During the construction boom of 2002 – 2007 the value of construction work done per employee in the sector grew 61%.

The average commercial building construction firm does $9.791M in annual sales with a staff of just over 17. The average revenue per employee in this construction industry sector is $56,201.

Building contractor business valuation

Commercial construction companies with a solid track record of profits and strong customer following are highly desirable acquisition targets. This is good news if you need to value an established contractor business.

You can use the recent business selling prices in relation to the sold companies financial performance numbers. This gives you valuation multiples to use in calculating your company’s value.

For privately owned commercial building contractors, the most typical valuation multiples are these:

• Business enterprise value (EV) divided by revenues (net sales)
• EV to seller’s discretionary cash flow (SDCF)
• EV to fixed business assets

Example: Business valuation of commercial building construction firms

Let’s illustrate the concept by valuing a typical contractor company with these financial figures:

• Revenue: $9,791,000
• SDCF: $1,700,000
• Furniture, fixtures and equipment (FF&E) assets: $300,000

Next, we pick the valuation multiples calculated from recent sales of businesses in the sector and apply them to the financials above to calculate the business value:

Another way to report your business valuation result is to indicate a range of values, from low to high. In this case the company value will likely fall somewhere between $3,165,555 and $3,456,461.

Commercial construction contractor valuation by capitalization methods

Building contractor companies also can be valued by direct capitalization methods under the income approach. Instead of comparing your business to other firms, your valuation focuses directly on your company’s earnings capacity and risk.

A common method of valuing privately owned building contractors is the multiple of discretionary earnings technique. This valuation method lets you determine business value by capitalizing its earnings. The capitalization rate is built up based on your assessment of a number of key financial and operational performance factors.

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