Why Construction Companies Tend to Have Lower Perceived ValueToo many construction and trade contracting companies claim to serve a very broad and vague market such as "residential," "commercial" or "industrial." Buyers discount valuations of companies in the construction industry primarily for the following reasons:
- Unpredictable accounts receivable
- Widely fluctuating profit margins from project to project
- Uncertainty about the odds of winning future contracts
How to Make an Immediate Impression on Potential BuyersLet’s examine the following simple scenario of a prospective buyer in the market to acquire a design/build landscape contracting business. This buyer finds two companies worth looking into:
- Company A is a residential/commercial landscaping contractor that designs/builds landscape projects for custom homes and maintain residential and commercial properties throughout the city.
- Company B is a commercial landscape company focused primarily on design/build and renovations for hotels and resorts. It has completed projects at several West Coast locations for the Hilton Hotels & Resorts and Marriott Hotels, among others.
- Potential to expand to the East Coast, and even worldwide
- Opportunity to leverage the global brands leading to contracts with other popular chains
- Potential to open the door to other markets such as the time share industry
- Opportunity to offer other construction products and services to existing accounts
What Carving Out a Niche Can Do For ValueWhen buyers believe there is a positive outlook on the future, it shifts their perception. What buyers like to see evidence of is:
- Less Competition
There will always be competition in every market, but by claiming a specific market niche, construction company owners no longer compete with every other contractor. If the seller can clearly articulate the top two or three competitors, it can make potential buyers feel more comfortable in the company's ability to be a market leader.
- Reduced Risk
An outside buyer's perceived risk is often really fear of the unknown. The clearer sellers can become about their target industry and customers, the easier it will be to overcome the common buyer objections and ultimately reduce the perceived risk.
- Believable Projections
Most buyers find financial projections hard to believe. By focusing on a niche market, a construction company owner can support the company's forecasts with known industry trends, creating a higher level of certainty in the buyer's mind.
- Higher Earnings Multiples
Strategic buyers may pay more to acquire market share. Larger construction companies can justify paying higher-than-average multiples to combine new customer channels with their existing infrastructure.
How to Create Your Own Market NicheNot every construction company has contracts with global brands, but they don’t necessarily need one to carve out a niche within their industry. Consider the following three examples to boost the perceived value of your contracting company.
Residential HVAC Contractor
A residential HVAC contractor could create a niche by focusing on residential tract home projects. By highlighting its proven success and recent growth trend in this area of the residential market, a company like this can create a vision for the new buyer by identifying key tract home builders and submitting bids on large developing neighborhoods.
Commercial Flooring Contractor
Rather than trying to describe a business model with a vague statement such as "80% commercial and 20% residential", a commercial flooring company should try to find a more specific pattern of projects. For example, if the company has successfully completed several doctors’ offices, clinics and dental offices in Arizona, then it might intrigue potential buyers by stating that it focuses primarily on medical offices in the Phoenix metro area.
Industrial Electrical Contractor
Instead of claiming to be an industrial electrical contractor, sellers should try to go deeper to help potential buyers understand what niche industrial market they are buying into. For example, sellers should try making a bolder claim such as, "We win a large percentage of all the new lighting projects in world’s largest steel mills near the Chicago area."