Every industry has nuances that impact the valuation of companies in their respective sectors. The construction industry is a prime example of that fact. Unfortunately, many prospective buyers incorporate the inherent industry risk when valuing every construction company regardless of the specific attributes of one target. Luckily, there are a few strategies that construction company owners can implement to avoid getting painted with a broad brush of the industry’s shortcomings.

Why Construction Companies Tend to Have Lower Perceived Value

Too 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
To avoid these industry stereotypes, construction company owners need to find a way to carve out a definitive niche to make an immediate impression in the mind of their prospective buyers. Focusing on a narrow market niche can result in less competition, reduced risk and increased financial certainty for the future. All of this leads to an increased valuation.

How to Make an Immediate Impression on Potential Buyers

Let’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.
Which of these companies immediately stands out in your mind? Even though the description for Company B is only slightly different, a prospective buyer may be more excited about investing in that business for the following reasons:

  • 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
In this simple example, painting a clear picture of the future growth potential within your market niche in the mind of buyers builds a higher perceived value.

What Carving Out a Niche Can Do For Value

When 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 Niche

Not 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."

Painting a Vision for the Future

The important thing is to paint a clear vision of the future of your business. You can help buyers believe your company story by using case study documents and specific testimonials that specifically support your claims. Make it a point to target a specific market niche, and you’ll be adding a higher perceived value in the minds of potential buyers when it comes time to sell.