Construction company owners may need a business valuation for a variety of reasons, a possible transaction being the most common. Determining the appropriate value of a construction business is not an exact science and can be difficult, especially for the actual owners. Owners who started their businesses from scratch may value the company beyond its monetary worth. Accordingly, owners commonly benefit from the services of an independent appraiser in determining the true value of their businesses. Additionally, a valuation can be difficult due to the various approaches and factors that need to be considered before coming to a realistic conclusion. Some of the different approaches to valuation include: liquidation value (the value if sold for the quick liquidation of assets to exit a business), fair market value (the value compared to a similar transaction in the market with a willing buyer and seller), and investment value (the value assigned by a particular investor, which is not necessarily what others would pay).
In addition, there are three primary approaches that appraisers take when valuing a business, which include: income-based (assess value based on expected cash flows), market-based (comparing company value based on similar companies within the industry), and asset-based (the company’s estimated equity equals the assessed value of assets minus liabilities). Appraisers should be mindful of the industry and any changes that may affect operations. For
example, the construction industry is greatly affected by fluctuations in lending rates, labor rates, and material prices.
The industry was also affected by the introduction of the Tax Cuts and Jobs Act (TCJA) that was passed at the end of 2017. The law’s primary changes include: reduced corporate tax rates, limitations on deductibility of interest expense, limitations on net operating losses, and accelerated depreciation. Each of these can greatly impact valuation, so a business owner’s best response would be to consult with their tax advisor on how the TJCA could affect the valuation of their business.
To find out more about the various valuation methods for companies, click here. For additional information and answers to your questions, please contact a member of your client service team Greg Elpers, CPA 800.880.7800.