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Business Valuation - Erosion Control

 
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Old 11-01-2019, 11:36 AM   #1
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Business Valuation - Erosion Control


Our firm has been approached with an opportunity to purchase an existing erosion control business. The purchase would integrated very well with our current work profile and would allow us to gain exposure to new opportunities and relationships.

I have reviewed the past 3 years P&Ls and it offers a decent bottom line. That being said, I am confident that with better management and the synergies that we have the it could be more profitable.

My question is...what are the typical industry metrics and multipliers that have historically been used in assigning a fair market value to the business?

Anyone here have past experience with a merger or acquisition similar to this?
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Old 11-01-2019, 12:06 PM   #2
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Re: Business Valuation - Erosion Control


Construction companies can be difficult businesses to sell. I've seen Discretionary Earnings multiples between 1.5-3 and EBITDA multiples between 3-5. However, most sales turn out to be asset sales.

These multiples are a useful starting point but dangerous to use without a full business valuation analysis. One of the difficulties in pricing construction companies is defining what is included in the sale on the balance sheet as part of the price. And excavators and other equipment heavy contractors can have pricing swings related to the age and condition of their equipment.

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Old 11-01-2019, 01:22 PM   #3
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Re: Business Valuation - Erosion Control


Probably a lot less than the owners want. If you're buying the company or merging with it, base prices is auction value of assets minus liabilities. Overlooked liabilities can be expensive, like tax liability due to off the books jobs, future EPA type liabilities, laundering money through the business hidden as personal loans,...

From there, it however much more you want to pay. This should be based on your expected payback period. I'd consider going 5 years based on their net profit numbers, and look for much better if it's a good fit.
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Old 11-01-2019, 01:57 PM   #4
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Re: Business Valuation - Erosion Control


Having both bought and sold construction companies, here are my two cents. Past history is no guarantee of future results, so unless all of the current employees are staying on board with the deal (including the owner), it's hard telling if you numbers will look the same.

a. Make a list of all of the tools and equipment come up with a fair market value for that stuff.
b. If any real estate is involved, what is that worth?
c. Will any cash stay in the company accounts?
d. How much work is on the books at closing and what are the anticipated profits for those projects?

Add those up and that's what the business is worth. Buying stuff like past history and good name is all pie in the sky speculation. Truth is, most businesses aren't worth nearly as much as the current owners think they are.
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Old 11-01-2019, 03:41 PM   #5
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Re: Business Valuation - Erosion Control


I've also seen deals done with seller financing, with repayment tied to the company's performance.

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