Top Valuation Methods For Construction Industry

The US construction market was valued at $2.3 trillion in 2023. Because of investments in the housing, transport, and energy sectors, the market will grow at an average annual growth rate (AAGR) of more than 4% between 2025 and 2028.

Construction businesses are among the most challenging to value. However, a construction company valuation is frequently necessary before a sale, merger, or ownership transfer.

You must have a firm understanding of your construction company’s value before pursuing a new strategic course. It should also consider market conditions, size and scope, material quality, and assets. You need the right methodologies to arrive at an accurate value. This article will help you understand construction valuation better by presenting the top valuation methods for construction.

How do you determine the net worth of a construction company asset value?

Determining a construction company’s net worth involves calculating its assets’ total value and subtracting its liabilities. Begin by listing all assets, including tangible assets such as equipment, vehicles, inventory, land, and buildings, as well as intangible assets like patents, trademarks, and goodwill. Assign values to these assets based on their book value (purchase price minus depreciation) or current market value. Next, list all liabilities, which include loans, accounts payable, and other debts. Summing up the values of all assets and then subtracting the total liabilities gives the net worth.

For instance, if a construction company has assets including $500,000 in equipment, $150,000 in vehicles, $200,000 in inventory, $1,000,000 in land and buildings, and $50,000 in intangible assets, the total asset value is $1,900,000. If the company’s liabilities are $400,000 in loans and $200,000 in accounts payable, totaling $600,000, the net worth is calculated as $1,900,000 (total assets) minus $600,000 (total liabilities), equaling $1,300,000. Thus, the net worth of the construction company is $1,300,000.

When is the valuation required for the construction Industry?

This is the basic question a stakeholder will have. When will you need a construction valuation? The following are the events when you will require a precise construction company valuation for your business.

Buying or Selling Property

Construction valuation lets you find a property’s fair market value when you buy or sell it. Construction valuation can help you as a seller ensure you have a fair price and as a buyer to prevent overpaying. Normally, while assessing a property – bought or sold – you look at its size, location, condition, and market trends. A qualified valuer can help obtain an accurate construction appraisal considering all these aspects, which will help both parties make well-informed decisions.

Compulsory Acquisition

When the government purchases private rights in land or property for public use, like for infrastructure projects like bridges, railroads, or highways, it might be deemed compulsory acquisition. Construction valuation can, in these situations, guarantee the owners receive fair compensation. It represents, taking into account any possible losses the owner may suffer, the property’s fair market worth at the time of acquisition. Owners can benefit from a construction valuation in understanding their rights to feel fairly compensated for their land or property.

Insurance & taxation

Properly finding your construction company valuation can help avoid under or over-insurance. What happens in both cases? You may need more funds if you are underinsured; overinsurance can be too expensive. So, your construction value must be accurate and thorough for suitable risk management and financial security. It also guarantees you will receive enough compensation in case of damage or loss.

Also, a precise construction valuation helps you determine the right tax obligation you owe. It will tell you how much to pay as part of the tax on the company’s worth to avoid potential conflicts with tax authorities.

Financial Reporting

A company must have accurate financial reporting, including the correct worth of properties. The basic aim is to be transparent and to comply with accounting standards. Accurate construction valuation can help investors and other stakeholders clearly understand the company’s financial worth. This will eventually lead to better investment decisions and the assessment of the company’s performance.

Initial Public Offering (IPO), Mergers and Acquisitions

Are you considering going IPO or approaching for M&A? An accurate construction valuation will keep you in a better decision-making position in both scenarios. During the initial public offering (IPO), construction valuation will provide a clear indication of the worth of your assets to attract investors. The better the asset’s value, the higher the stock price and the company’s ability to raise capital.

During an M&A, your company’s main goal will be to get a fair for which construction company valuation can be very useful. Accurate valuation ensures that both parties agree on a value reflecting the asset’s true worth.

Valuation Methods for Construction Industry

There are, in general, three valuation methods for construction. They are:

Asset-Based Approach

Looking at what a construction company owns, such as equipment or materials, and what it owes (liabilities) is known as an asset-based valuation. An accurate valuation should include the brand’s worth, name, website, and any original concepts it develops. The asset-based approach of a construction company valuation includes its physical and intangible assets. They can include:

• Tangible assets: Land, buildings, equipment, supplies.
• Intangible assets: Patents, trademarks, and client databases.

Example for Asset based Approach of Valuation

Eagle Construction Company has the following assets and liabilities:

Assets:

• Construction equipment valued at $2 million
• Owned office building worth $500,000
• Accounts receivable of $800,000
• Intangible assets like company reputation and client relationships valued at $300,000

Total Assets: $2,000,000 + $500,000 + $800,000 + $300,000 = $3,600,000

Liabilities:

• Mortgage on office building of $300,000
• Accounts payable of $500,000

Total Liabilities: $300,000 + $500,000 = $800,000

To calculate the net worth using the Asset Approach:

Net Worth = Total Assets – Total Liabilities
= $3,600,000 – $800,000
= $2,800,000

So, based on the Asset Approach, ABC Construction Company has a net worth of $2.8 million.

Income approach

Another widely used method of construction valuation is the income approach. This approach assesses a construction company’s expected cash flows and evaluates the risks of purchasing, expanding, or selling it. The present value of all future cash flows that investors reasonably expect a company to generate directly relates to its value. The income approach needs projections of future cash flows together with a suitable discount rate.

Example for Income approach method of valuation

Green Construction has the following future cash flows

• Project Future Cash Flows:
  • Year 1 – $500,000
  • Year 2 – $550,000
  • Year 3 – $600,000
  • Year 4 – $650,000
  • Year 5 – $700,000
• Determine the Terminal Value (value of cash flows beyond the projection period):
  • Assume a perpetual growth rate of 3% after Year 5
  • Terminal Value at Year 5 = $700,000 * (1 + 0.03) / (Discount Rate – Growth Rate)
  • Discount Rate – 10%
  • Terminal Value = $700,000 * 1.03 / (0.10 – 0.03) = $10,300,000
• Discount Rate: 10%
• Calculate Present Value of Cash Flows:
  • PV of Year 1 = $500,000 / (1 + 0.10)^1 = $454,545
  • PV of Year 2 = $550,000 / (1 + 0.10)^2 = $454,545
  • PV of Year 3 = $600,000 / (1 + 0.10)^3 = $450,789
  • PV of Year 4 = $650,000 / (1 + 0.10)^4 = $443,959
  • PV of Year 5 = $700,000 / (1 + 0.10)^5 = $434,645
• Calculate Present Value of Terminal Value:
  • PV of Terminal Value = $10,300,000 / (1 + 0.10)^5 = $6,395,490
• Enterprise Value: Sum of all Present Values = $12,538,483

Based on the income approach the value of Green Construction is $12,538,483.

Market approach

The market-based valuation approach compares your business’s performance with transaction data from nearby peers. An appraiser could, for instance, generate a fair market value estimate by examining performance indicators from comparable or similar construction companies.

Example for Market Approach method of valuation

Maze Construction specializes in residential projects and wants to know its worth.

• Comparable Companies: We find two publicly traded construction companies (Comp A and Comp B) with similar size, experience, and project types to Maze Construction.
• Financial Ratios: We analyze their financial statements and calculate a key valuation ratio, Price-to-Earnings (P/E) ratio. Let’s say:
  • Comp A: P/E ratio of 8 with a current stock price of $20 per share.
  • Comp B: P/E ratio of 7 with a current stock price of $15 per share.
• Maze Construction Financials: We obtain Maze Construction’s recent earnings (profit) figure, let’s say $1 million.
• Valuation based on Comps: Using the P/E ratios, we can estimate a valuation range for Maze Construction:
  • Based on Comp A (P/E of 8): $1 million (Earnings) * 8 (P/E) = $8 million valuation
  • Based on Comp B (P/E of 7): $1 million (Earnings) * 7 (P/E) = $7 million valuation

Market Approach Estimate: Based on comparable companies, Maze Construction’s potential market value could be somewhere between $7 million and $8 million.

Factors Influencing Valuation for Construction Company

A construction valuation involves assessing various factors, and the following are a few that can impact its value.

Financial Performance

Your construction company’s financial performance is the first and the most important factor influencing its value. What are the aspects it covers? It typically includes your firm’s cash flow, balance sheet, and income statements to determine its profitability and financial stability. If your company’s financial performance is good, you can expect a higher construction valuation, but losses and inadequate cash flows can lower your company’s value.

Also, past financial performance, growth patterns, and industry comparisons must be considered to provide an accurate construction valuation.

Revenue size

Your company’s revenue is the factor that most affects its value after its financial performance. Higher-revenue companies will have a more established market presence and lower risks than lower-revenue companies.

Increased revenue also shows that your business can make profits and remain viable in the market to successfully secure and carry out projects. A catch is that, as consistency is essential to stay viable, you should consider revenue growth and size.

Customer concentration

The degree to which a business’s revenues are dependent on a small number of important clients is known as customer concentration. Because losing a big client could negatively affect the company’s finances, high customer concentration can be a risk factor. Diversified customer bases lower risk and improve stability by lessening reliance on one customer. Valuations usually favor the wide and varied clientele, suggesting more steady and predictable future earnings.

Technology and Innovation

Technology and innovation are becoming increasingly significant within the construction sector. Businesses investing in cutting-edge technology can increase productivity, cut expenses, and improve project results. Additionally, innovation in building materials and techniques can offer a competitive advantage. Companies that adopt the technology first have a higher construction valuation because they are better able to adjust to changes in the industry, increase operational efficiency, and satisfy changing customer needs.

Asset Intensity

Asset intensity is the quantity of assets required to produce a specified sales volume. It frequently relies on how many assets – “Operating Assets” – are added for operational reasons and how much sales they may produce. These operating assets usually require large investments from construction companies, which might affect their valuation. Increased capital linked to the assets is called a high asset intensity, and improper management of these assets may be risky. However, businesses with well-kept and well-utilized assets can increase their returns on investment, which will eventually increase the construction valuation.

How can Eqvista support your construction company’s valuation services?

Determining the construction company’s valuation can help with long-term expansion and well-informed decisions in the construction sector, where project value assessment is very important. Using the various income, market, and asset-based approaches will give you a thorough grasp of the company’s value.

However, the construction sector’s dynamic nature requires real-time data and an understanding of complex valuation techniques for a precise valuation. Eqvista, with its cutting-edge technology, guarantees accurate and on-time valuation.

Through our valuation services, you will be in a better position to handle the complexities, maximize resource allocation, and realize your company’s full potential. Contact us to learn more about how we can help you with your company’s valuation services.