Issue 5 of 9: Cash Generation

Construction Ownership Transition Issue 5 of 9: Does the Business Generate Enough Free Cash Flow to Make the Transition Equitable for All Parties?

D. Brown Management Profile Picture
D. Brown Management
December 6, 2018 2 minute read
Share
Succession: Ownership Transition Issues - Number 5 Cash Generation.
  • Building construction projects -- just by themselves -- is very cash intensive. 
  • For that reason, a contractor must have enough working capital along with financing provided by their operating Line-of-Credit (LOC). Depending on the type of contracting business (GC, Specialty, Civil) and work types, this might range between 5-15% of the revenue.  
  • Growth requires building additional working capital to run the business safely. Your financial partners will ensure that you work within those constraints.
  • Working capital is only built through earning profits and retaining them after taxes are paid.  

For a simple example: If a contractor requires 10% of their revenue in working capital and is projecting $50M in revenue the following year, they will will need $5M in working capital. 

If they earn a 5% pre-tax net profit and pay 40% in taxes, they will retain $1.5M in earnings.  

If they plan to grow by 15% the following year to $57M, they will need another $700K (10%) in working capital.  

That means they will have $800K in free cash flow to pay for the business or provide a return on capital invested by the new ownership group.

This Series (20 of 45)
Issue 3 of 9: Relationships Issue 4 of 9: Financial Partners Issue 5 of 9: Cash Generation Issue 6 of 9: Past Liabilities Issue 7 of 9: Growth Strategy
This Series (20 of 45)
Issue 3 of 9: Relationships Issue 4 of 9: Financial Partners Issue 5 of 9: Cash Generation Issue 6 of 9: Past Liabilities Issue 7 of 9: Growth Strategy
More from D. Brown Management
Learning, Doing and Teaching
Growth in life, career, and business is about a continual cycle of learning, doing, and teaching.
Related Article
Ownership Transition - Key Buyer Risks
While different, buyers of a construction business have just as many risks as sellers. Deeply understanding the risks for both parties is a great start to creating the foundation of a deal.
Related Article
Delivering Advanced Preconstruction Services
Delivering Advanced Preconstruction Services is the rigorous process of ensuring budgets are met along with maintaining features critical to the project owner / users.
Related Article