As a paving business owner, you’re highly focused on material costs, crew schedules and day-to-day operations. You’re intimately acquainted with the challenges your business faces. Buyers, however, will view your company through a different set of eyes. They may see a turnkey business with steady cash flow, strong local market position, and growth upside.
This disconnect can create risk or opportunity, depending on which side is savvier. Unprepared sellers often settle for less than their business is worth, because they are too focused on their perceived shortcomings, while placing too little emphasis on their strengths.
Here’s the truth: As a contractor, your exit is your final and most important project. Ace the test, and you can command a premium that can positively impact your retirement goals or your next venture.
From Asphalt to Assets: How to Prepare for Your Exit
As a paving business owner, you’re already in a strong position. The industry was largely off-the-radar of private equity buyers until not long ago. Now, with buyers seeking to find value in less saturated markets, the paving space is consolidating. Buyers are aggressively seeking to scoop up value-creating businesses.
With infrastructure spending also on the rise (the U.S. government spent a record $625B on infrastructure projects in 2023) and federal, state and local governments allocating vast amounts of capital to road projects in particular, the positive market outlook is likely to continue.
To capitalize on this, sellers must have a comprehensive understanding of the true value of their business.
Why Your Business Value Extends Far Beyond Equipment
It’s natural for a paving business owner to think about equipment when pondering the value of their operation. It’s an important part of the equation. However, your true business value is much more complex and sophisticated.
Some of the variables involved here include your client contracts and relationships (especially recurring maintenance agreements with large commercial properties, municipalities or HOAs); your operational efficiency; the expertise of your crew; your relative market dominance; any specialized services that your company is able to perform, such as highway work or specialized surface treatments.
What To Know Before Listing Your Business
Preparation is crucial to a successful sale and should begin at least a year (preferably longer in many cases) before you list.
Start by auditing and cleaning up your financial statements. You’ll want several years of financial statements. Ensure your numbers are clear and well-documented, with no commingling of funds. Buyers will examine these documents closely, so anticipate that and make a strong case for having a well-run operation with good prospects for ongoing profitability.
Next you should ensure all key processes are thoroughly documented. Losing an owner creates risk for buyers, as lots of institutional knowledge evaporates. Documenting your processes by creating manuals to describe how you maintain equipment, schedule, handle customer service and more. This codifies your knowledge and prevents it from being lost.
Your best workers also have lots of knowledge about what makes your business successful. Buyers will pay a premium if they can retain these workers on reasonable terms. In that same vein, firm up your client relationships by formalizing verbal agreements into contracts and seeking multi-year agreements when possible.
Maintenance logs for equipment also helps you justify your valuation while reassuring buyers they won’t be on the hook for a massive repair or replacement right after signing the contract. Getting in front of overlapping liability concerns by resolving any warranty claims, client disputes or pending litigation also helps avoid the kinds of red flags that lead to broken deals and reduced offers.
What Specifically Affects Valuations in the Paving Business?
Let’s take a look at some of the factors that can help your business return a higher valuation:
First, buyers like diversification, both in terms of your revenue and client mix and your services. You don’t want too much of your business coming from a single client, and if you can offer a range of services (coating, striping, concrete etc.) it also attracts interest.
Next, long-term contracts are appealing to buyers. Government contracts, in particular, are sought after because they offer revenue stability. Buyers also like businesses that have broader geographical coverage and well-maintained equipment that is in good condition.
Other factors that can bump a valuation include documented compliance to environmental regulations around asphalt and other issues and scalability (can you handle large or very large projects if they should arise?)
Looking for the Perfect Buyer
Paving businesses tend to attract two primary categories of buyer, each with different variables to consider.
A strategic buyer will often pay a premium. These buyers include competitors or a larger paving company in a different market. They may be willing to pay more because integrating your firm unlocks immediate value for them when it comes to adding new territory or eliminating redundancies.
A financial buyer may not receive the same benefits unless they want to effect a merger with another firm in their portfolio. However, they are known for creative deal structures that may include attractive earnouts.
Why the Best Deal Means More Than Price
Valuation may be the most critical factor in a sale, but it’s far from the only consideration. Deal structure is also very important and should not be underestimated or glossed over.
Some commonly seen structures include asset sales vs stock sales, earnout provisions where a portion of the sales price may be tied to post-sale business performance, seller financing (which carries risk but can expand your buyer pool), and post-sale consulting arrangements, where sellers agree to stick around for a bit to ensure things run smoothly.
Non-compete agreements are often required by buyers and should be considered carefully, especially if your future plans are not set in stone.
What Makes a Successful Transition?
Even if a premium price is already paid and no earnout exists, no business owner wants to see their life’s work undone by a bungled transition. Here’s how to prevent that:
First, give your key clients lots of attention and firm up your relationships. A personal introduction to the new owner may be helpful. The same holds true for vendors and any beneficial arrangements you may have.
Clear communication to employees and, potentially, some financial incentives can help prevent an exodus of workers.
You’ll also want the new owner to debrief you, if possible. Share all the knowledge you have accumulated about best practices and the ins and outs of your particular business. Insights about seasonality, cash flow and any other relevant issues can help put the new owner in position to succeed early.
What Else Do I Need to Know?
Now that we have covered the fundamentals, let’s walk through some of the more subtle angles to a sale in this industry. These may not appear in a general business guide, but they can have a real impact on what buyers are willing to pay.
First, the timing of your sale can be a factor. Listing in late winter or early spring is often an advantage because buyers want to close before the busy season. This gives them time to integrate your operations, or get up to speed, and capture as much business as possible when things heat up. Selling during peak season may attract fewer buyers, as they may be swamped tending to their own operations. Remember this is not an ironclad rule; great businesses can be sold at any time.
Your business backlog is also a subtle factor that smart buyers will consider. If you have a 6-12-month backlog of signed contracts, you can earn a nice valuation bump over a seller who lacks similar commitments. Backlog volume and the type of those contracts (long-term and high value is better) can be a differentiator.
If you’re in an area where materials are impacted by supply chain issues, relationships with quarries or other material suppliers can also be a differentiator. Some sellers have priority delivery arrangements, preferred pricing, extended payment terms and other perks accumulated over many years in business. If you can show some of these, buyers will be intrigued, especially if you can show a written agreement that they will continue post-sale.
Paving is obviously a weather-dependent business, and maintenance can sometimes get deferred during very busy periods. If you have significant deferred maintenance, an eagle-eyed buyer may identify it and make it a negotiation point. Get in front of this by servicing everything before starting the sales process.
Your location can also intrigue the right buyer. If you don’t have a major competitor close to your territory (say 50-75 miles), that means expansion is on the menu. It’s close enough to oversee but far enough to be a fresh market. Mapping your business against the locations of potential strategic acquirers can help identify buyers with expansion potential.
Permits and regulations can also provide a moat in some cases. Let’s say you have a specialized equipment permit or an environmental certification that is difficult to acquire. If these things are transferable, that’s a serious asset. The permitting process can take years and is quite onerous for new buyers. Having a turnkey operation with all permits and certifications ready is a major boon for buyers.
Pre-qualification status with municipal public works or procurement departments also provides significant value. It often takes years for companies to prove themselves and gain access to top-level municipal work. Document metrics such as bid success rate, public works relationships, bond capacity etc. to quantify this. It’s another one of those subtle factors that can make a big difference to the right buyer.
The Takeaway
The more informed and methodical you are about selling, the more likely you are to walk away happy. Think of this as your final project, one that can secure your preferred financial outcome while also sealing your legacy.
At Sun Acquisitions, we have been helping paving business owners successfully exit for 25+ years. This guide represents just a small sample of what we’ve learned about this industry.
If you’re thinking of selling – or even if you’re not sure and just want clarification – we are here to help. We offer online resources and no commitment consultations to help you arrive at the optimal decision, and we encourage you to reach out to us for more information.
