CONSTRUCTION Accounting ARTICLE -
Contractor Learns Benefits of a Business Appraisal
Target Audience: Construction Industry Professionals, Contractor Business Appraisal, Job Costing, Schedulers, Cost Variance Interest, Spending Planners, Project Managers, Contractors, Construction Accountants
A contractor with a five-year-old commercial construction business was faced with growing competition in his sector — and only a vague idea of his current competitive standing.
Because he didn’t own any of his own equipment, the contractor’s most important assets were his employees, and the idea of determining a tangible value for his company seemed impossible. After learning a fellow contractor had his business appraised before an ownership transition, he brought his inquiry to his financial advisor.
The contractor’s financial advisor explained that a thorough valuation is advisable for a number of reasons, including the need to prepare or assess a business for a sale or management buyout, and to identify business opportunities.
Appraisals can also identify risks in the marketplace and industry, and weaknesses within the business. From such an assessment, it doesn’t take much to identify what changes may benefit the company. In this case, the appraisal might help the contractor determine what could be done to improve his standing in the marketplace.
Moreover, his advisor reminded him, it’s always better to be prepared for a potential sale during slow periods than it is to scramble around should the need become urgent. The advisor went on to explain that, for a contractor, there are three main components that determine value: 1) company backlog, 2) equipment, financial and profit history, and 3) people. Of course, there are other factors that can affect value as well, including industry trends as well as a company’s location, special services offered and overall performance.
During the appraisal process, an appraiser will typically consider an asset-, income- and market-based approach. An asset-based approach will typically adjust the company’s net assets to fair market value. An income approach will determine value based on the construction company’s anticipated sustainable cash flow and profitability. A market approach will generally use a multiple obtained through a thorough analysis of comparable public companies or through the use of private transactional databases.
Having become more familiar with the valuation process, the contractor and his financial advisor decided to look for a qualified appraiser (one who has earned additional accreditations through continuing education, training, experience and testing). Ultimately, he received a solid analysis of his construction company’s strengths and weaknesses, and he was able to make vital changes to sharpen his competitive edge.
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