IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities. Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family owned businesses. The following blog article has been provided by Leo Ross.
What Construction Company Owners Should Know When Preparing to Sell
A general contractor I worked with years ago used to say, “We build our reputation one project at a time, but we sell our business all at once.” He was right about the first part. The second part, I later learned, was wishful thinking.
Selling a construction company is not a single event. It is the culmination of years of decisions about how you estimate, track costs, document systems and manage financial performance. Buyers don’t just buy your equipment and backlog. They are buying your ability to consistently and predictably turn estimates into profit. That ability or lack thereof becomes clear during due diligence.
After two decades in construction estimating and having reviewed hundreds of company financials during sale processes, I have seen the same patterns emerge. The companies that get premium valuations and close deals quickly are the ones that prepared their operations years before they ever listed for sale. The ones that struggle often discover too late that their internal numbers don’t tell the story buyers need to hear.
If you own a construction company and plan to exit in the next three to five years, the time to prepare is now. Here is what you need to know.
Buyers Trust Systems More Than Promises
When a buyer evaluates your construction company, they are not just reviewing last year’s revenue or this quarter’s backlog. They are assessing whether your financial performance will continue after you leave. That means they need to see systems that operate independently of your personal relationships and instincts.
Construction estimating is the most scrutinized system during due diligence. Buyers want proof that your bid accuracy is consistent, that quantities are calculated methodically and that historical estimates align with actual job costs. If your estimating process lives in your head or in scattered spreadsheets without documentation, you have introduced doubt into the transaction. Doubt reduces price.
A well documented estimating system on the other hand signals that the company is disciplined and profitability will transfer to new ownership. Buyers pay premiums for predictability. They discount heavily for risk.
Financial Variance Tells the Real Story
One of the first things a sophisticated buyer or their financial advisor will look at is the variance between your estimated costs and your actual job costs. A company that finishes projects within three to five percent of its original estimate shows strong operational control. That consistency translates directly into confidence about future earnings.
Conversely, projects that frequently overrun estimates by ten, fifteen or twenty percent raise immediate red flags. Even if your company has been profitable, wide variances suggest that profits are inconsistent or that margins are the result of luck rather than management. During due diligence, buyers will dig into individual job files, compare estimates to final costs and build their own picture of your true financial predictability.
If your estimates have been inconsistent, you can’t fix two decades of job files in six months. But you can start now. Implement tighter estimating processes, track variances religiously and document improvements over the next few years. Buyers value trajectory as much as history.
Undocumented Assumptions Are Landmines
I have reviewed hundreds of estimates prepared by contractors planning to sell. A common issue is the lack of documentation behind key assumptions. Labor rates, waste factors, crew productivity and material pricing often appear in estimates without any explanation of their origin.
This becomes a problem during due diligence when a buyer’s financial team starts asking questions. Where did that drywall waste factor come from? Why is your concrete crew productivity higher than industry benchmarks? Are these material prices based on current supplier quotes or three-year-old databases?
If you can’t answer these questions with documented sources, buyers assume the estimates are optimistic or unreliable. They will then apply their own, more conservative assumptions to your backlog which reduces the value they are willing to pay. In some cases it can kill the deal entirely.
The solution is simple: document everything. Every line item in your estimates should trace back to a defendable source—a supplier quote, a historical job cost, a productivity study, an industry benchmark. This level of transparency doesn’t just satisfy buyers. It shortens due diligence, reduces disputes and positions your company as professionally managed.
Sloppy Job Costing Undermines Valuation
Accurate estimation service is only half the equation. The other half is rigorous job costing. If your accounting system doesn’t track costs by project or if job cost reports are incomplete or months behind schedule you can’t prove your estimates were accurate. Buyers need to see a trail from estimate to invoice. They want to compare budgeted labor hours against actual hours worked, planned material costs against invoices received and estimated subcontractor fees against payments made. This data proves your financial statements reflect operational reality rather than accounting adjustments.
Many construction companies operate with informal job costing, relying on the owner’s memory or rough approximations. That might work while you’re running the business but it destroys value when you try to sell. Buyers can’t verify profitability on a job-by-job basis so they discount the entire company to account for uncertainty.
Start building a job costing discipline now. Assign costs to specific projects, reconcile estimates to actuals monthly and maintain organized job files. These habits take time to embed in your operations but they are among the highest return activities you can do to prepare for a sale.
Buyers Want to See Your Mistakes, Too
It might seem counterintuitive but buyers respect transparency about problems more than they trust perfect financials. Every construction company has had a project go sideways. What matters is how you handled it, what you learned and whether you adjusted your systems to prevent it from happening again.
If due diligence reveals a failed project that you tried to hide or downplay, trust evaporates. If on the other hand you proactively present a problem job, explain what went wrong and show how your estimating or project management systems were improved as a result, buyers see a company that learns and adapts. That resilience adds value.
Maintain a record of lessons learned from difficult projects. Document the root causes of cost overruns and the changes you implemented in response. This kind of transparency not only builds credibility during due diligence but also demonstrates your systems have been stress tested and refined over time.
Technology Is an Asset Only If It’s Used Correctly
Many construction companies have invested in estimating software, digital takeoff tools or project management platforms. Buyers view technology as a positive but only if it’s been integrated into daily operations and produces reliable data.
A common mistake is to purchase software, use it sporadically and then revert back to manual processes or spreadsheets for actual decision making. During due diligence buyers will see through this. If your estimating software hasn’t been updated in two years or if job cost reports from your project management system don’t reconcile with your financial statements the technology is not adding value. It might even be adding confusion.Before you list your company for sale audit your technology stack. Ensure systems are used consistently, data is accurate and reports are easy to understand. If you’re not using your software effectively either commit to proper implementation or remove it from your pitch. Buyers prefer simple functional systems over expensive underutilized ones.
The Partnership Question Matters More Than You Think
If your company outsources estimating the quality and stability of that relationship will be scrutinized during due diligence. Buyers want to know if your estimating partner will continue to work with the new ownership, if pricing is locked in or subject to renegotiation and if the partnership is documented in a contract.
A long term relationship with a reliable estimating partner can actually be a selling point because it shows your company has access to expertise that will transfer with the business. But if the relationship is informal, based on personal connections or dependent on rates that are no longer market competitive it becomes a risk.
If you rely on external estimating support formalize the arrangement now. Get contracts in place, clarify terms and ensure the relationship can transition smoothly to a new owner. This preparation removes uncertainty and preserves value during negotiations.
Plan Your Timeline Backwards From the Sale
Preparing a construction company for sale is not a 6 month project. It’s a multi year process. If you want to sell in 3 years you need to start improving your estimating accuracy, job costing discipline and financial documentation today. The improvements you make now will show up in your financials during due diligence and will directly impact the price you get.
Many owners wait until they are emotionally ready to sell before they start preparing. By then it’s too late to build the track record buyers demand. The best time to prepare your company for sale is while you still plan to run it for several more years. The systems you build to attract buyers are the same systems that will make your company more profitable and easier to manage in the meantime.
The Takeaway: Your Numbers Are Your Negotiating Power
Construction is one of the most competitive industries and the margin between success and failure is often measured in percentage points. When you sell your company that same precision applies to valuation. A few percentage points of improved estimate accuracy, a few years of documented financial performance and a few smart investments in operational systems can mean hundreds of thousands or even millions of dollars in sale price. Buyers will test every assumption in your financials. They will compare your estimates to actuals, question your cost structures and challenge your projections. The companies that get top dollar are the ones that welcome that scrutiny because their numbers hold up under pressure.
If you want to sell your construction company for full value start treating your internal systems with the same care you bring to client facing projects. Document your processes, track your performance and build a financial record that tells a clear and credible story. Those habits will not just prepare you for a sale. They will make your company stronger, more profitable and more valuable every year until you’re ready to exit.
The best sales are the ones where the company was built to sell long before it ever went to market.
If you have questions relating to the content of this article, Leo Ross would welcome the opportunity to answer them. Mr. Ross can be reached at leoross789@gmail.com.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, and real estate communities on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.