Construction Industry Valuation

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Construction Industry Valuation

• Presented by Rob Hancock
• CPA/ABV CVA

____________ Mann
Frankfort Stein
Lipp Advisors, Inc.
AICPA National Business Valuation Conference
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Presentation Overview

• Industry Primer
• Sources of Industry and Market Data
• Industry Specific Analyses
• Value Drivers
• Special Risk Considerations

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INDUSTRY PRIMER
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Construction Industry Overview

• Among Largest Segments of US Economy
• Residential, Commercial-Private,
  Commercial-Public
• Over 200,000 Businesses
• Generates 577 Billion in Annual Revenue
• Low Margins, High Failure Rate
• Mature and Highly Fragmented
• Trend Developing Specialty Niches

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Current Industry Environment

• Usually Focus on Regional Condition
• National Residential Construction Trends
• Potential residential real estate BUBLE
• Low interest rates
• Alternative to stock market
• Low prices
• Faster paced new home formations

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Current Industry Environment (contd)

• National Commercial Construction Trends
• Weak Demand
• Slow economy (decreased capital spending)
• Bankruptcies
• Unemployment
• National Public Construction Trends
• Strong Government Spending
• Normally, when private sector is slow, public
  sector will pick up.

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Construction Segments

• List SIC codes with of comps in each.

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SOURCES OF INDUSTRY AND MARKET DATA
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Market Data SourcesPublic Company Data

• Pratts Public Company Database (bvresources.com)
• Market Guide (marketguide.com)
• Hoovers (Hoovers.com)
• XLS (xls.com)
• Free Edgar (freeedgar.com)
• Multex Investor (multex.net)
• Mergerstat (bvresources.com)

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Market Data Sources Private Company Transaction
Data

• Pratts Stats (bvmarketdata.com)
• Done Deals (donedeals.com)
• Bizcomps (bvmarketdata.com)
• IBA (must be a member, and email them)
• 2002 Valuation Survey of Construction Companies
  (published by Zweig White)
• Merger and Acquisition Source Book (Quality
  Services Company)

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Market Data Sources Private Company Transaction
Data (contd)

• The Merger Yearbook (Securities Data Co.)
• Merger and Acquisition Magazine (Investment
  Dealers Digest)
• Mergers and Corporate Policy (Securities Data
  Publishing)
• Dialog Information Services (multiple databases
  800-334-2564)

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Industry Data Resources

• Trade Associations
• Construction Industry Publications
• Construction Industry Web Sites
• Government Sources
• General Research and Data Resources

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Industry Data ResourcesTrade Associations

• National Association of Homebuilders
  (www.nahb.com/)
• National Association of Realtors
  (nar.realtor.com/)
• American Institute of Architects (aia.org)
• American Subcontractors Association (most local
  branches have a web site, ie. www.asageorgia.com)

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Industry Data ResourcesTrade Associations
(contd)

• Associated General Contractors of America
  (www.agc.org)
• Building Owners and Managers Association
  (bomasd.org)
• Society of Industrial and Office Realtors
  (sior.com)
• Construction Financial Management Association
  (cfma.org)

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Industry Data ResourcesTrade Associations
(contd)

• American Institute of Constructors (aicnet.org)
• Associated Builders and Contractors (ABC)
  (www.abcpoint.com)
• Construction Management Association of America
  (CMMA) (www.cmaanet.org)

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Industry Data Resources Construction Industry
Publications

• Journal of Construction Accounting and Taxation
• National Real Estate Investor
• Construction Industry Annual Financial Survey
  performed by CFMA
• F.W. Dodge Report (www.fwdodge.com)
• The Construction Management Magazine
  (www.agc.org)

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Industry Data Resources Construction Industry
Publications (contd)

• AIC Newsletter
• American Professional Constructor (AIC)
• Subcontractor Newspaper (American Subcontractors
  Association)
• Constructor Magazine (AGC)
• National Newsletter (AGC)
• Cutting Edge (Associated General Contractors
  Association)

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Industry Data Resources Construction Industry
Web Sites

• Engineering News Record (enr.com)
• Construction.com
• Home Sales and Prices (nahb.com/main_features/fact
  s.htm)
• Most Recent Cost Indexes (enr.com/cost/cost2.asp)

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Industry Data Resources Construction Industry
Web Sites (contd)

• Builder Online Magazine (www.builder.hw.net/)
• Buildingteam.com
• Salary Information (wagesandsalary.com/cgi/wages3.
  pl)

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Industry Data Resources Government Sources

• United States Census Bureau Construction
  Statistics (USCBCS) (www.census.gov/ftp/pub/const
  /www/cci/frames.html)
• Value of Construction Put in Place (USCBCS)
  (www.census.gov/ftp/pub/const/30_curr.html)

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Industry Data ResourcesGeneral Research and
Data Resources

• Almanac of Business and Industrial Financial
  Ratios by Leo Troy
• Local Chambers of Commerce
• Local Real Estate Appraisers
• Regional Economic Bureaus
• Robert Morris and Associates
• Integra Information
• Standard and Poors Industry Surveys

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Industry Data ResourcesGeneral Research and
Data Resources (contd)

• First Research
• ABC Today
• BV Review
• Journal of Accountancy
• BV Update
• Valuing Small Businesses and Professional
  Practices by Shannon Pratt
• Valuing a Business by Shannon Pratt

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Industry Data ResourcesGeneral Research and
Data Resources (contd)

• Advanced Business Valuation
• Business Valuation by Industry (Volumes 1-5)
• MA Handbook
• Guide to Purchase and Sale
• How to Value 100 Businesses
• Valuing Professional Practices and Licenses

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Industry Data ResourcesGeneral Research and
Data Resources (contd)

• Valuation Examiner
• Valuation Strategies
• BV Body of Knowledge
• PPC Guide to Business Valuation
• Pratts Web Site (bvresources.com)
• Dow Jones Interactive
• Findarticles.com

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INDUSTRY SPECIFIC ANALYSES
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Industry Specific Analyses

• Receivables, Retainage
• Form of Accounting for Income (percentage
  completion, completed contract, lump sum, etc.)
• Location (smaller communities may be more
  valuable due to lack of competition)
• Plants (portable plants worth more than fixed)

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Industry Specific Analyses (contd)

• Union vs. Non-Union Labor
• Expertise and Reputation (examples repeat
  business, no bonding, negotiated contracts, etc.)
• Customer Base (large, small, recurring)
• Identities and Relationships with Subcontractors
  (bond requirements, failure to perform)
• Permanent Labor Force (size and composition,
  field and office staff)

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Industry Specific Analyses (contd)

• Backlog Analysis
• Hidden Liabilities (off balance sheet, claims,
  contingencies, litigation, environmental, etc.)
• Actual or Threatened Litigation

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VALUE DRIVERS
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Value Drivers

• Trained and Assembled Workforce (bidders,
  superintendent, sales, technical, etc.)
• Depth of Qualified Management
• Relationships with Insurance and Bonding
  Companies
• Contracts in Progress
• Trade Secrets
• Joint Venture Relationships

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Value Drivers (contd)

• Accounting and Cost Control Systems
• Quality Contracts
• Warranty Programs
• Relationships with Suppliers
• Customer List
• Market Niches

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SPECIAL RISK CONSIDERATIONS
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Special Risk Considerations

• Bonding and Insurance (costs 1-3, required in
  about half of all contracts)
• Materials Cost Volatility
• Environmental Regulations

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Special Risk Considerations (contd)

• Contract Type (fixed price contracts mean
  additional financial risk, cost contracts are
  least risky)
• Interest Rates (construction industry is very
  interest rate-sensitive)

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Special Risk Considerations (contd)

• Contract Disputes and Litigation
• Outstanding Construction Warranties
• Employment Liability (occupational safety and
  health regulations)

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Special Risk Considerations (contd)

• Political Risk (with government funded work)
• Limited Skilled Labor Pool
• Retainage
• Weather
• Marketability

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CONCLUSION
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Use All 3 Approaches

• Asset Approach
• Pros
• Asset heavy industry
• Conservative approach
• Cons
• Intangible Asset Valuation
• workforce, key person discount, trade secrets,
  warranty claims
• Does not consider cash flow to investors
• Owners compensation effect on retained earnings

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Use All 3 Approaches (contd)

• Market Approach (the preferred approach)
• Pros
• Recent multiples are higher than previous years
• Considers actual market multiples
• Cons
• Synergies built in to multiples
• Comparability of guideline companies
• Diversified businesses are difficult to find
  comps
• Geographic considerations

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Use All 3 Approaches (contd)

• Income Approach
• Pros
• Looks at cash flow to the investor (the bottom
  line)
• Includes intangible assets
• Cons
• Volatile Earnings
• Backlog
• Subjective income adjustments (bad debts,
  contingencies, etc.)