How to Buy or Sell a Construction Business with Finance

Whether you’re planning on exiting your established building company, or looking to acquire a construction business, getting the finances right has a major effect on your chances of success. Let’s take a deep dive into valuing a construction company, doing your due diligence and accessing the funding needed to buy an existing business.

How to value a construction business before buying or selling

Knowing the market value of a construction business is a crucial part of both your exit strategy or your acquisition plan. 

As the owner and seller, you want to know you’re getting the best return from your sale. And as the buyer, you’ll want to pay a competitive sale price and be comfortable that you’re not paying over the odds for this acquisition.

So, how do you put a value on the company?

Common business valuation methods 

• Asset-Based Valuation calculates the business's value by summing the current market value of its tangible and intangible assets, then subtracting all liabilities to determine a net worth.
  
  • Pros: It provides a clear minimum value for asset-heavy businesses, like construction, and is useful when earnings are inconsistent.
  • Cons: This method often fails to capture the true value of future earning potential, or intangible aspects like goodwill and client relationships.
• Earnings Multiple Valuation estimates the company’s value by multiplying a key financial metric (like net profit or EBITDA) by an industry-specific multiplier, derived from recent sales of comparable construction businesses.
  
  • Pros: It’s relatively simple to calculate and understand, offering a quick market-based estimate for profitability.
  • Cons: Its accuracy depends heavily on finding truly comparable businesses and the subjective choice of a multiplier. It can also overlook unique elements of the business, or future growth potential.
• Discounted Cash Flow - DCF) (aka Cash Flow-Based Valuation) forecasts the business's future cash flows over several years and discounts them back to a present-day value, using a rate that accounts for time and risk.
  
  • Pros: It's considered robust as it focuses on the business's intrinsic ability to generate future cash, which is key for investment and growth.
  • Cons: This method is highly sensitive to the accuracy of future cash-flow projections and the chosen discount rate. This makes it a complex methodology and the value can be somewhat speculative.

What impacts valuation 

In any business, there are a multitude of factors that can affect the sale value of the company. For example, current and future cash flow, your market position and company profit forecasts can all impact the potential asking price.

In construction, there are other more specific variables to account for. 

These can include:

• Your workbook and current pipeline of projects 
• The quality of your in-house team 
• The strength of your network of contractors and sub-contractors 
• How up-to-date your equipment and machinery is.

When to get a professional valuation 

Working with a professional mergers and acquisitions (M&A) adviser or business broker is a great way to gain confidence in the accuracy of your valuation.

As the seller, getting professional valuation advice is sensible as soon as you start thinking about an exit from the company. An early valuation helps you understand your business's current worth. It also helps identify the areas where you can start to get proactive with adding value, and setting realistic expectations for the sale price. 

As the buyer, it’s advisable to get a third-party valuation carried out before you make a serious offer for the business. An experienced construction-industry adviser will be able to help you benchmark the sale price against other businesses in the market. They can also help you negotiate a more competitive price with the seller. 

How do I value a construction business for sale?

You can choose to value your construction business based on three key factors: the assets held in the business, the earnings of the company, or future forecasts of your cashflow position. Each method has its own pros and cons (see above)

In most scenarios, it’s best to consult with a professional business broker or M&A adviser. They will help you come up with a realistic sale price, that’s benchmarked against other business sales in the construction sector. 

What buyers need to check for before closing the deal

When acquiring a construction business, it’s vital to do your due-diligence before making an offer and getting too deep into the sale process.

As with any purchase, you need to check the details of the company you’re about to buy, its financial health, its market profile and any ongoing issues to be aware of.

Key areas to focus on include:

• Due diligence checklist: Get forensic with checking the company’s financial health, customer and supplier contracts, and licences with third parties. Also make sure to research the company’s (and the owner’s) reputation in the construction market, and awareness of the brand among customers.
• Red flags: Certain factors can be warning signs of a badly managed business. Look out for late payments, lawsuits, a high turnover of staff, and incomplete statutory accounts, tax filings and Companies House filings. 
• Retention of the top team: Check if key staff in the current management team will stay on, post-sale. Running your newly acquired business will be much easier with an experienced team in place that knows the company inside out. 
• Overview of the customer base: Get a handle on current projects that are underway, and the long-term client relationships that exist in the business. A strong customer pipeline is crucial to success in construction, so do your best to scope out the potential for future projects and long-term partnerships.

How to finance the purchase of a construction business

Having completed your due diligence, you’re ready to make an offer to the seller. To fund this potential deal you’re likely to need access to additional finance. 

But what kinds of funding are available? And what are the financial implications of taking out a large-scale loan to buy your construction business of choice?

Let’s start by looking at the different loan types you can consider.

Types of loan for acquiring a business

There are plenty of construction loans available from banks and lenders. But many of these loan products, such as asset finance or invoice finance are aimed at providing short-term cash injections, not large-scale funding for a business acquisition. 

So what funding products are available?

• Acquisition loans: This type of acquisition loan provides long-term capital specifically to finance the purchase of an existing business. There are various types of finance available, with the loan tailored to your transaction and repayments based on the acquired entity's future profitability.
  
  
• Bridging loans: Bridging loans are short-term, flexible loans, designed to ‘bridge’ a temporary cash flow gap – for example, to provide the funds for your acquisition before long-term funding is received. These loans are used when immediate funds are needed, with a clear exit strategy for repayment, often secured against your business assets.
  
  
• Secured business loans: Secured loans offer large sums of money, but require the borrowing business to offer assets (like property, machinery, or invoices) as collateral. This reduces the risk for the lender, potentially allowing for larger loan amounts, lower interest rates, or more favourable terms.
• Flexible online loans: If you’re buying a small-scale construction business, with a smaller price tag, an iwoca Flexi-Loan could be an agile way to get the funding you need. You can borrow up to £1 million and have the money in your account in less than 24 hours. And our lending criteria is based around business performance, rather than just your historic business credit score. 
• Seller finance: With seller finance, the current business owner acts as the lender, providing a portion of the purchase price to the buyer as a loan. For the buyer, this reduces your immediate upfront cost and can facilitate a smoother transaction, with repayments made to the seller over an agreed timescale.

What loan options are available to buy a construction business?

Buying a construction business will usually mean taking out some form of acquisition loan. That could be a secured business loan, a bridging loan or possibly some form of seller finance, where you gradually repay the sale price to the original owner. 

With many acquisitions, a mix of different funding products is used to finance the deal. For example, you could opt for seller finance and then use an iwoca Small Business Loan to fund the gradual repayment of the loan to the seller.

What sellers should do to prepare their business for sale

When you’re the owner of the business, and the potential seller, it’s important to prepare for your business sale well in advance. A five-year plan is advisable, with a clear exit strategy and succession plan worked into this document. 

• Get your accounts up to date and clearly presented
• Reduce any inherent reliance on the owner (systemise the business and learn to delegate to your team)
• Resolve any legal or tax issues that could cause concern
• Document all your internal operational processes and your client history
• Position the business to demonstrate your future growth potential.

What’s the best way to prepare my construction business for sale?

Before putting your construction business on the market, it’s important to spend the preceding years adding tangible value to the business. This means getting your financial management in order, growing your customer base, building up a talented management team and making the company an attractive proposition.

The process of adding value doesn’t happen overnight, which is why it’s advisable to start your exit plan several years in advance.

How to plan a smooth transition after the sale

Once the deal is signed and the construction business has been sold, there’s the challenging process of transitioning the company over to a new owner.

As the new boss, it’s sensible to:

• Notify your clients, suppliers and team: Make sure you communicate the change of ownership and management as soon as possible, so you preserve the relationships and good will of your stakeholders. 
• Arrange support from the previous owner: Where possible, it’s a good idea to keep the previous owner on as an adviser and mentor. Sharing their knowledge of the business can be invaluable. It helps you acclimatise to being the new boss and get a feel for your workforce, suppliers and customer base.
• Ask for handover notes: Ensure the seller has passed on important details and notes. For example, software passwords, overviews of ongoing projects, and access to the tools, machinery and subcontractors needed to trade.
• Keep customer service consistent: During the transition, make sure your customers are being informed of the change in ownership, and still have full access to your site managers and customer service team. 

When is the right time to buy or sell a construction business?

The construction industry is a volatile sector, where market conditions can quickly change and fluctuate over time. 

If you’re looking to buy or sell, it’s important to gauge the current health of the market, and the prevailing external conditions – such as supply chain issues, rising costs of raw materials, or a scarcity in skilled labour etc.

Make sure your deal is aligned with your own personal goals as the seller or buyer too, so you exit or buy at the right point in your own business journey.

So, when should you sell up? And what’s the best time to buy?

Ideal times to buy a construction business 

It’s advisable to buy a construction business when you can guarantee a broad choice of available companies, and a competitive price for the business.

Buying during industry downturns is a good tactic, when owners may be eager to sell up and recoup their losses on a struggling business. This can also be a good time to scale the business via acquisition, creating a larger group.

Ideal times to sell a construction business 

When exiting the business, it’s critical for your construction company to be a well-maintained and attractive proposition to a potential buyer.

Making the business a viable enterprise will mean delivering stable revenue, good margins and a well-structured team. You can sweeten the deal (and increase your asking price) by proactively adding value in the years leading up to the sale. 

How to structure finance help your construction business grow post-deal

With the business under new ownership, one of your foundational goals will be to continue the growth of the company. But taking out finance to buy the company does mean you now have relatively high debt levels in the business.

Balancing growth against a reduction in debt is a challenging balancing act, but can be done successfully with a controlled and responsible approach to your finances.

For example:

• Avoid overleveraging the business during transition. Taking on debt that can’t be balanced with your current cash flow is a bad idea. 
• Consider repaying debts early, as your revenue ramps up. Look for finance that offers no penalties for early payment, like an iwoca Flexi-Loan.
• Use top-up options to invest in new staff, tools or marketing. Short-term business loans don’t overstretch your cash flow, but bring much needed capital.
• Keep cash flow breathing room, post-deal. A small injection of capital will extend your cash runway and give you the liquidity that’s so vital in a fast-moving construction business.

iwoca: flexible finance to fund your construction business

iwoca’s small business loan is the perfect route to flexible funding. 

Whether you’re building a finance package to buy a construction company, or need to capitalise on your new purchase to drive growth, we offer straightforward funding. 

• Borrow £1,000 to £1 million
• 24 hours to get a decision
• Repay early with no fees
• From 1 day to 60 months

Apply for a Small Business Loan