Seven Drivers of Valuation

A significant number of contractors will be going through an ownership transition during the next decade.

D. Brown Management Profile Picture
D. Brown Management
April 26, 2018 2 minute read
Share

These transitions impact many people, especially the owners and the management teams.  

Succession: Key Drivers of Valuation. Book: Mergers Acquisitions From A to Z by Andrew J. Sherman. 1. Strong revenue growth. 2. Significant Market Share or Niche Position (Strategically Focused) 3. High Barriers to Entry by Competitors. 4. Strong Management Team (Post Succession). 5. Strong and stable cash flow. 6. No Significant Concentrations of Customers, Products/Services, Suppliers, or Geographic Markets (Strategically Diversified). 7. Low Risk of Technological Obsolescence or Substitution

Valuation is a very critical factor during these transitions because it has to be a number that fairly represents the value of the business for the outgoing owners while providing a solid return for the buyers.  

Andrew J. Sherman just published the Fourth Edition of Mergers & Acquisitions which should be read by anyone who is or could potentially be on either side of a transaction. He laid out 7 Valuation Drivers:

  1. Strong Revenue Growth 
  2. Significant Market Share or Niche Position
  3. Barriers to Entry by Competitors
  4. Strong Management Team
  5. Strong Stable Cash Flow
  6. No Significant Concentrations in Customers, Products, Suppliers or Geographic Markets
  7. Low Risk of Technological Obsolescence or Product Substitution

For a contractor, numbers 3 and 7 don’t typically apply. 

Number 4 - Building a strong management team is the leverage point that makes the other factors sustainable in the long-run and, therefore, truly valuable.  

Focus on building your most valuable asset; a strong management team. 

Teamwork - The Five Foundational Stages to Results
Construction is the most complex TEAM sport there is and the teams that work best together win. It is that simple. The contractors who know how to develop the best teams are thriving in all market conditions including the shortage of construction talent.
Related Article
Production Tracking - Lessons Learned
Look at productivity as a daily “Jar” where your objective is to pack as much “Earned Value” into it as possible. Look at your costs in three major categories and focus on tracking what matters the most.
Related Article
Cash Flow and the 5Cs of Credit - Overview
Contractors need strong financial partners, including banking, surety, and insurance to grow sustainably. It is important to understand how they evaluate your contracting business.
Related Article