When looking to appraise or value paving companies, there are many unique factors to consider that set this industry apart from others: the seasonality of the business, specific bidding requirements for federal, state, and local governments, as well as contracted set asides for businesses owned by women, minorities, and veterans. There are even special rules for determining what qualifies for these ownership types.
In a chapter from What It's Worth: Valuing Paving Contractors, the author covers 10 unique factors that drive paving company valuations including how companies bid and compete for work, varying commodity prices, types of work companies do, and more.
A paving company’s profitability is often predicated on the ability of the company to successfully bid for fixed price jobs in a way that enables it to win the bids and get the work. Then, the company must be able to successfully complete the work at a cost at which it earns money on the bid. Because of this, companies need to be able to accurately estimate costs and manage materials and resources.
2. Payment cycle
The payment cycle for paving contractors is a value consideration in terms of government versus nongovernment payments. Government entities tend to pay slower than private markets do. In some departments of transportation, for example, the paver must have a field engineer sign off on the work performed and perhaps the number of units performed, or the paving company may be working with a school board that needs to approve payment.
3. Material and resource costs
Prices and costs vary based on the shifting prices of commodity resources such as petroleum, which impacts the cost of fuel and asphalt, and steel, which is a commodity cost. Paving companies use price escalation clauses and futures contracts to try to protect themselves against shifting costs.
As pavers bid on multiple projects, crews and equipment must also be provisioned in such a way that the paving company has the resources to complete tasks but minimizes idle time of both workers and equipment. Companies may also bring in subcontractors to complete components of jobs, either as specialized expertise or to satisfy bid requirements that a certain amount of funds be allocated to minority-, woman-, or veteran-owned businesses.
4. Generalist vs. specialist
Being a specialist implies that a paving company is bringing something unique to the market—it has a specialized product that can deliver value and demands a premium. So, it is either a premium for that product or a premium for the service delivered. To put this in percentage terms, the gross profits of the companies that perform some sort of specialty service or deliver a specialty product often range above 30%. Relate that to firms that do not specialize—the more cookie-cutter-type contractors or generalists that just facilitate the management of a project. They are probably lucky to see gross profit ranging from 15% to 20%.
5. Quick service
Several firms differentiate themselves by providing timely service. Some contractors do work that is not particularly complex, but they have the logistics down so that they are able to perform a contract within a day of being notified about the work. So they get the contract, they turn around, and they get a premium for that quick service.
6. Environmental concerns
Paving contractors go through a lot of fuel, and, if the paver has its own asphalt mix plant, there may be environmental issues that can result in the need for a marketability discount or a specific risk from a valuation perspective.
Paving contractors may have a lot of fuel on their yard, binding agent for the asphalt, and other components—maybe there was a spill, and it poses environmental risks. To make sure there isn’t a hidden liability for the company, valuers should ask “Have you had any recent spills? Have they been cleaned up? Where is the release?”
For many jobs, both government and nongovernment, the entity must be prequalified to bid for work, which adds some cost. Essentially, the paving company must be able to prove prior to the bid that it has the resources and the ability to complete the job. These prequalifications can be much more stringent when it comes to private-sector bidding.
Depending on where the paving company is located and the areas in which it works, there are limits to the number of working days it can reasonably expect each year.
Paving contractors and heavy highway contractors are lucky to have 240 to 280 possible working days. Weekend days are included in that count of working days. Other issues that come up include how much overtime a company will incur to meet its work periods or the kind of management of labor and crews that will be needed to capitalize on the available working days.
9. Underbillings and overbillings
Let’s say a contractor starts performing work, the job doesn’t go according to the budget plan, and estimates aren’t adjusted. In that case, the costs are accruing in a way that make the job appear to be 70% complete, but it is only 50% complete. The result is that the paving company probably can’t bill for that work, so it is an underbilling on the balance sheet. These types of situations can potentially be risky because it means decreased profitability on a contract. The underbilling is an asset on the balance sheet that needs to be credited and then debited as some sort of loss.
Overbillings can occur when there is an established customer relationship and the customer will finance the project. The paving company doesn’t have to worry or maintain the cash flow to get through the project, but overbillings can also be a sign that a project is going a lot better than was originally planned, so there needs to be an accounting of potential profit beyond what was anticipated at the time of the bid that will be recognized as the contract closes into account when valuing it.
10. Bonding and backlog
A bond is something a customer will require of pavers to ensure that a job gets completed. These generally cost 1% to 2% of a contract. How this impacts the paving company is the determination of the contractor’s overall bonding capacity. Working capital factors into that capacity as well as total net worth and availability of an operating line of credit. Even the personal net worth of an individual can impact how much he or she will be bonded for on a project.
Revenue, contracts, client base, and sales are the kinds of things that drive the value of all businesses. Yet, unique factors drive the value of paving companies and set this industry apart from others. Whether you’re looking to buy, sell, or value a paving contractor business, it’s important to consider valuation from several different angles.
To learn more about valuing paving companies, be sure to check out BVR’s special report, What It's Worth: Valuing Paving Contractors. Preview the table of contents and look inside the report to learn more about special considerations for valuing paving companies, the current market in the industry, an in-depth case study, and much more.