Lumpy earnings valuation

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May 18, 2022

by a searcher from University of Connecticut in Grand Rapids, MI, USA

How have people thought about the valuation of construction-related services businesses with lumpy earnings?

Multiple on average of three years? Contingent purchase price based on future revenue? Have them carry a larger seller note? Stop, do not pass go?

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Reply by a searcher
from University of Pennsylvania in Minneapolis, MN, USA
Valuing lumpy businesses is a challenge. We valued a custom engineered solutions business that supplies to municipal construction contractors. The previous ownership's best year (by far) was the year before they put the business up for sale (of course). Using a three or five year trailing average of EBITDA is definitely helpful, as is a seller earnout contingent on the next###-###-#### months' performance. Finally, most lumpy, construction-based businesses have large backlogs that turn into revenue in the coming months. I'd suggest planning to get deep into that information during diligence - you may be able to tell if the next###-###-#### months are anything like your assumed EBITDA average and renegotiate when you discover that the business is going to have a bad year.
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Reply by a searcher
from Northwestern University in Scottsdale, AZ, USA
I would be careful about basing it on TTM and recommend using avg EBITDA. I would say 3-5 on EBITDA is the right value, whether that gets deal done is obviously another sotry. Also look hard on amount of backlog.
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