When considering retiring from or selling their business, it’s common for construction company owners to not fully understand their company’s value. They often discover that the perceived value of the business was not what the market was willing to offer, which could prevent their retirement or the sale of the business altogether.

A business valuation is a key factor in a successful sale. Here is an overview of three common valuation methods:

Income Approach
This approach determines business value by capitalizing its future cash flows, defined as net operating income after tax, plus depreciation, less capital expenditures and working capital needs. In this approach, the price a willing buyer would pay is based on the economic benefits of ownership – namely, the cash flows that the business generates.

Construction companies exhibit greater volatility in operating performance than other sectors, therefore making it harder to predict future performance. In fact, it is very difficult for most contractors to predict financial performance more than one year ahead. As a general rule, contractors that apply an income approach should use an income capitalization method that considers historical results rather than a discounted cash flow approach, which is based on projected cash flows.