Selling your construction business is likely one of the biggest financial moves you’ll ever make. And you’ll probably have only one opportunity to get it right. To maximize your return on investment, careful preparation is essential. Here are some best practices to help position your business for a successful sale.

Build a strong management team

Construction companies are often led by strong and charismatic owners who are heavily involved in all aspects of operations, from strategic planning to day-to-day project progress. However, what may have been a boon for the business historically can become a bane when it’s time to sell. Potential buyers may understandably wonder how much of the company’s revenue and key relationships are tied to the owner.

If a sale is on the horizon, start assembling an executive team and delegating some of your responsibilities. Also, document the processes and procedures you’ve been following, cross-train managers and other employees, and involve others in your relationships with project owners, vendors and other stakeholders. These moves can reassure would-be buyers that key institutional and operational knowledge will remain after your departure.

Boost your curb appeal

Establishing a strong management team is one way to increase your business’s value before a sale. There are others; for instance, you could expand your construction services to diversify your client base and work on different types of jobs. Prospective buyers may be wary if your base is too concentrated — particularly if, say, a single project owner provides more than 20% to 25% of your revenue.

You’ll want to build up your backlog, too. A solid roster of upcoming, likely profitable jobs in varied geographic locations demonstrates your company’s resilience. In turn, it raises business value. You might also consider tightening cost controls, streamlining operations, ensuring equipment is properly maintained and verifying technology systems are up to date.

Polish up your financial statements

Without a doubt, potential buyers will closely scrutinize your financial statements. At minimum, you should have three years of reconciled and accurate statements — preferably prepared in accordance with Generally Accepted Accounting Principles and, as feasible, independently reviewed or audited.

Potential buyers are looking for, among other things, evidence of stable and sustainable earnings. That includes consistent revenue (taking into account seasonal effects), sufficient working capital, reasonable debt levels and steady cash flow.

Earnings before interest, taxes, depreciation and amortization (EBITDA) is another focal point, so it’s important that yours is “normalized.” A qualified accounting professional can help make one-time adjustments to remove items that may distort EBITDA, such as personal expenses, owner perks, nonrecurring costs and excessive compensation.

Obtain a QoE report

Independent quality of earnings (QoE) reports provide deep insight into financial performance and earnings sustainability. Although it may evaluate sellers’ discretionary earnings — generally net income plus owners’ salaries, perks and other discretionary expenses — a report can also examine revenue quality, margins, working capital trends and risk factors.

Incurring the time and expense of a QoE report demonstrates transparency and commitment to the sale process. It also helps you identify your company’s strengths and weaknesses, which you can then highlight and mitigate, respectively.

Engage a qualified valuation professional

A reliable valuation of your business is essential for pricing. You don’t want to rely on ballpark estimates, rules of thumb or the sales of what you believe are comparable companies. A qualified valuation pro will evaluate a wide range of factors, including:

• Financial statements,
• Tax returns,
• Inventory, equipment and other assets (tangible and intangible),
• Real estate appraisals (where applicable),
• Liabilities,
• Customer base and market share,
• Management and staff,
• Industry trends,
• Economic conditions,
• Comparable sales, and
• The legal and regulatory climate.

A comprehensive written valuation report provides a strong foundation for pricing and negotiating with prospective buyers.

Assemble your team and start early

Preparing your construction company for a successful sale can take years and requires external guidance. When you’re ready to get started, assemble a qualified and experienced advisory team that includes financial, tax and legal advisors. Ideally, all should have experience with construction companies so they understand the nuances of your business and industry.

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