Seven Drivers of Valuation

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

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D. Brown Management
April 26, 2018 2 minute read
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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. 

Increased Value by Lowering Variability
A construction business is capable of providing a very high return to the owners who have their capital at risk as well as the team members that work there. Contractors with lower variability in profitability are both more valuable and more sustainable.
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