A contractor has several options when it comes to transitioning ownership. Whether the company is selling all or a portion of the company or engaging in a transaction where a valuation is required, it is critical for the CFM to know the company’s worth.

Obtaining a business valuation, or appraisal of the company’s worth, gives the management team a competitive edge. The valuation process helps management not only understand the drivers that positively and negatively impact value, but also make intelligent business decisions.

Key Value Drivers
Most private businesses are typically priced as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). EBITDA serves as a proxy for cash flow, the lifeblood of any contractor. Companies with higher growth potential and greater discretionary cash flow typically command higher multiples of EBITDA.

External and internal factors also affect value. External drivers include market conditions, lending conditions, industry-specific factors, and government regulations. Internal value drivers include the company’s margins, the depth and experience of its management team, customer concentration, business plans, and growth strategies. Generally, companies with experienced management teams and solid growth command higher valuations.