Construction contractors often ask, "How much is my business worth?" The answer to this question depends on several factors and should be left to a valuation expert. However, there is a way to think about this question that allows us to gain some context on the business's potential value and then better consider next steps.

To begin thinking about business value, we must first consider how the business operates. There are two options to consider.

• Scenario 1 - The business is dependent on the owner to generate income. Under this scenario, the business has been built so that the owner, individually or by managing employees, delivers a product demanded by the market at a profit.

• Scenario 2 - The business can generate income separate from the owner. Under this scenario, the business has been built so that employees are trained to execute their responsibilities in a manner that collectively results in delivering a product demanded by the market at a profit.

Next, we consider the value of the business in two areas.

• The value of the business's assets - This would include items such as property and equipment, customer list, cash, and receivables expected to remain in the company after it is sold. Consider the net value of these assets after any related liabilities are repaid.  

• The value of the business's future income - Most buyers are willing to pay for a business that generates future income. The amount they are willing to pay is often dependent on the risks associated with that future income. A buyer may analyze the value of the business based on the income generated each year and a reasonable number of years to recoup the investment. For instance, if a business generates $100,000 of income each year and a buyer requires repayment for the investment in five years, the value of the future income today may be around $500,000.

Now, we put these pieces together.

Under Scenario 1, the business's future cash flow is not very valuable because the business can only generate income with the owner. The value of the company's assets will determine the value of the business.

Under Scenario 2, there is value in the future income of the business and the value of the assets of the business. Therefore, the business value will be derived from the value of its assets and future income.

Before you can determine the value of the business's future income, you must have a solid accounting system in place. Whether your accounting system is sophisticated, basic, or non-existent, Punch List Accounting specializes in helping construction contractors calculate and understand their business income. Please reach out by selecting the "Get In Touch" button at the top of the page. Then call us, email, schedule an appointment, or submit the form, and we will contact you.