A construction company can generate millions of dollars in annual revenue. It can own expensive machinery and equipment. It can even have numerous projects underway. However, none of these characteristics automatically determine the construction company’s value. Some businesses generate relatively predictable revenue because of recurring customer relationships. Construction companies often don’t. Rather, they depend on obtaining new contracts, successfully completing projects, and accurately estimating the costs of labor, materials, and equipment. A contractor may report substantial revenue but actually earn relatively little profit, especially when projects have cost overruns, delays, and unexpected expenses. Construction companies also operate unlike other businesses. A commercial general contractor, residential homebuilder, and specialty trade contractor may all work in the construction industry, but their operating expenses, sources of revenue, and assets can be quite different. Business Valuation Resources discusses several considerations that are unique to construction-company valuations; these considerations include seasonality, construction accounting methods, work in progress, bonding requirements, competitive bidding, and backlog. What It’s Worth: Valuing Residential and Commercial Construction Companies 15-30 (2020). These factors can significantly influence the company’s current financial position and its ability to generate future earnings. For example, two construction companies may each report $7 million in annual revenue. One may have experienced management, a large backlog of profitable contracts, and enough working capital to finish its projects. The other may face significant cost overruns, depend on a small number of customers, and lack the financial ability to obtain more work. Although they have identical revenue, the companies still have substantially different values. Additionally, Illinois law imposes a particular valuation requirement. Under Section 503(k) of the Illinois Marriage and Dissolution of Marriage Act, when determining the value of property in a divorce, “the court shall employ a fair market value standard.” 750 ILCS 5/503(k). The valuation date is the date of trial unless the parties agree to another date or the court selects another date within its discretion. Id. Determining the fair market value of a construction company requires more than examining its annual revenue, reported profits, or equipment. The valuation must evaluate the company’s existing contracts, anticipated earnings, assets and liabilities, financial risks, and capacity to continue operating successfully. The ultimate question is not just how much work the construction company performs, but how much economic value the business truly possesses. What Does The Construction Company Owner Truly Own? The first step in determining the value of a construction […]
