Putting a Price Tag on a Construction Business
by Leonard Toenjes

Q: I own a general contracting business and want to retire. I know how to value the business based on the "hard costs," such as inventory, human capital and value of contracts. But I am unsure on how to value it on the "soft cost" of reputation. How important is reputation in valuing a business and how do I calculate the value I have built into the business based on the reputation I have established?

A. Valuation of a construction business is a technical process. Even some of the items you have listed as "hard costs" may, in fact, not be rock solid.

This is an area where it really pays to have a professional consultant that is knowledgeable about construction valuation involved in the analysis. Inventory and equipment certainly are certainly more straightforward for valuation.

Office building and any yard areas can be assessed by a real estate agent.

Also included in this relatively easy portion of the valuation are accounts receivable. After some reasonable deduction for bad accounts based on past history, a realistic accounts receivable number can be calculated.

Valuing Human Capital

Human capital is another story. Unless your employees have signed contracts or noncompeting agreements with the company or you have some other type of "golden handcuff" arrangement, human capital is very fluid.

Depending on the purchaser and its management style, human capital may have little if any value.

To enhance value, consideration should be given to establishing contractual arrangements with key staff, noncompeting agreements that may be structured in a manner to give potential purchasers some level of comfort or "golden handcuff" arrangements that can create financial benefits, such as pensions, for long-term employees that will encourage them to stay.

As harsh as it may sound, reputation is based on human capital. Once you leave, it is difficult to guarantee that key staff or the new ownership will continue to operate the business with the same level of professionalism or integrity of the existing ownership.

While a brand name and trademark may have some short term value, in the long term it is hard to put too much value on reputation during selling of a business. The seller thinks it is of high value, while the purchaser will undervalue it.

Some testimonials from long-term customers may help enhance the value of reputation, with some assurances that they will continue to purchase construction services from your firm. Again, this may be tied to key personnel arrangements that could help enhance the selling price.

Ultimately, putting these systems in place and spending some money to hire a professional construction company valuation firm should help you keep more bait on the hook during your retirement.

Do you have questions on construction human resources or safety?
E-mail them to Leonard Toenjes at ltoenjes@agcstl.org or
craig_barner@mcgraw-hill.com.

(If Len picks your question,
he will answer it in a future issue of Midwest Construction.)