A construction company can generate millions of dollars in annual revenue. It can own expensive machinery and equipment. It can even have numerous projects underway. However, none of these characteristics automatically determine the construction company’s value.
Some businesses generate relatively predictable revenue because of recurring customer relationships. Construction companies often don’t. Rather, they depend on obtaining new contracts, successfully completing projects, and accurately estimating the costs of labor, materials, and equipment. A contractor may report substantial revenue but actually earn relatively little profit, especially when projects have cost overruns, delays, and unexpected expenses.
Construction companies also operate unlike other businesses. A commercial general contractor, residential homebuilder, and specialty trade contractor may all work in the construction industry, but their operating expenses, sources of revenue, and assets can be quite different.
Business Valuation Resources discusses several considerations that are unique to construction-company valuations; these considerations include seasonality, construction accounting methods, work in progress, bonding requirements, competitive bidding, and backlog. What It’s Worth: Valuing Residential and Commercial Construction Companies 15-30 (2020). These factors can significantly influence the company’s current financial position and its ability to generate future earnings.
For example, two construction companies may each report $7 million in annual revenue. One may have experienced management, a large backlog of profitable contracts, and enough working capital to finish its projects. The other may face significant cost overruns, depend on a small number of customers, and lack the financial ability to obtain more work. Although they have identical revenue, the companies still have substantially different values.
Additionally, Illinois law imposes a particular valuation requirement. Under Section 503(k) of the Illinois Marriage and Dissolution of Marriage Act, when determining the value of property in a divorce, “the court shall employ a fair market value standard.” 750 ILCS 5/503(k). The valuation date is the date of trial unless the parties agree to another date or the court selects another date within its discretion. Id.
Determining the fair market value of a construction company requires more than examining its annual revenue, reported profits, or equipment. The valuation must evaluate the company’s existing contracts, anticipated earnings, assets and liabilities, financial risks, and capacity to continue operating successfully. The ultimate question is not just how much work the construction company performs, but how much economic value the business truly possesses.
What Does The Construction Company Owner Truly Own?
The first step in determining the value of a construction company is for an appraiser to identify what the spouse truly owns.
The spouse may own an entire business or the spouse may hold an ownership interest with other investors. A construction business may operate as a sole proprietorship, corporation, partnership, or limited liability company. The company may also own assets through several related entities. Thus, the value of a spouse’s ownership interest is not necessarily equal to the combined value of every asset associated with the construction company.
Construction companies can own a large amount of tangible assets, such as tools, machinery, vehicles, and real estate. The extent of these assets, however, varies by business type. Heavy construction contractors usually invest significantly in specialized equipment, whereas general contractors sometimes rely more on rented machinery. Id. at 21-22.
A construction company’s value may come from non-physical assets, too, such as contractual rights, customer relationships, reputation, an experienced workforce, accounts receivable, retainage, and rights to payment under existing contracts.
To be clear, not every source of future revenue has transferable value. For instance, a longstanding developer relationship can generate consistent work, but that does not guarantee that those projects will continue after a change in ownership.
Goodwill varies considerably as well. As BVR explains, “many construction contractors have little, if any, goodwill value” because of intense price competition. Id. at 22. By contrast, contractors with negotiated contracts, established reputations, and strong customer relationships may possess greater goodwill. Id.
The appraisal must also account for liabilities, such as lines of credit, lease obligations, equipment loans, and unpaid subcontractors. Separately owned assets need particular attention.
Overall, an appraiser should review ownership documents, financial statements, equipment schedules, contracts, and related-party arrangements to best understand what assets, liabilities, and economic benefits truly belong to the business and could transfer to a purchaser.
Not Every Construction Company Has The Same Business Model
As mentioned above, construction companies differ greatly in the work they perform, the customers they serve, and how they generate revenue. Some specialize in residential construction. Others perform infrastructure projects, commercial construction, or specialized trades. These distinctions impact operating expenses and profitability, as well as financial risk.
Residential contractors often depend more on housing demand and mortgage interest rates, but commercial contractors often rely on business investment, institutional clients, and larger projects. In fact, BVR explains that “residential construction requires different skills” and may involve greater risks but higher margins than commercial work. Id. at 12.
The difference between general and specialty contractors is important, too. General contractors usually oversee entire projects and coordinate subcontractors, whereas specialty contractors perform particular work, such as plumbing or roofing. That requires different kinds of labor, equipment, and subcontracting expenses, which can produce substantially different profit margins, even with identical revenue.
How contractors get work is just as important. Some rely on competitive bidding. Others negotiate contracts through established customer relationships. BVR notes that bids must be “low enough to be attractive to the project owner but high enough to complete a project in a profitable fashion.” Id. at 29. Substantial revenue from competitively bid projects therefore does not necessarily indicate substantial profits.
Government contractors may also face additional bidding, bonding, and eligibility requirements. Id. at 5.
Thus, an appraiser must assess the company’s customer base, construction activities, contract opportunities, and profit margins instead of relying solely on revenue.
Why Is A Construction Company’s Backlog So Important?
One of the most vital considerations in valuing a construction company is its backlog of work. Backlog refers to construction work that a company has contracted to perform but has not yet completed. It helps show how much work the contractor is expected to perform in the future.
Backlog is a particularly important indicator of future earnings for construction businesses. Although some companies have relatively consistent customer demand, construction contractors must continuously obtain new projects to keep up operations. So, backlog, or “work not yet completed,” can provide a better indication of anticipated future earnings than just historical revenue. Id. at 29-30.
Additionally, an appraiser must determine whether any existing projects are expected to be profitable. A contractor can have millions of dollars in contracted work but nonetheless face significant cost overruns, labor shortages, increasing materials prices, or delays that reduce the profits ultimately earned.
Imagine a contractor who has a $5 million project in its backlog with an anticipated profit of $700,000. If unexpected labor and materials costs substantially increase, the project’s anticipated profit could decline or even completely disappear.
This is why it is important to gather accurate construction cost estimates, as underestimated project expenses can result in financial losses. Id. at 27. Accordingly, the amount of remaining contracted work should not be evaluated independently of the costs necessary to complete it.
An appraiser should examine the company’s work-in-progress schedules, estimated costs to complete outstanding projects, anticipated gross profit margins, and history of completing projects within budget.
The reliability of the backlog matters as well. A signed construction contract can provide more reliable evidence of future work than an informal promise from a developer for which the company has only submitted a bid. Even signed contracts can contain terms such as termination provisions or contingencies that impact whether the contractor will perform the anticipated work.
An appraiser should also determine when the backlog is expected to be completed. This is because a contractor with multiple years of profitable work already secured may possess different financial risks than one whose remaining projects will be over within a few months.
Backlog must be evaluated in light of the company’s financial and operational capacity. A contractor may have substantial work available but may not have a sufficient number of employees, equipment, working capital, or bonding capacity necessary to finish every project successfully.
In an Illinois divorce, these considerations are essential because the court must determine the company’s fair market value rather than simply assign a value based on gross revenue. 750 ILCS 5/503(k).
A backlog is evidence of anticipated future operations, not necessarily an additional asset worth its entire contract amount. An appraisal that separately adds the full backlog to a valuation already based on the earnings expected from those contracts risks counting the same economic benefits twice.
Thus, the relevant question is not merely how much work the construction company has secured, but how much profit that work is reasonably expected to generate and whether the company can successfully complete it.
Bonding Capacity Can Determine Which Projects A Contractor Can Obtain
A construction company’s value may depend on its ability to qualify for surety bonds, particularly when it performs public projects or large commercial contracts.
Surety bonds provide financial protection to project owners and others if a contractor fails to meet certain obligations. BVR identifies three common types: bid bonds, which support a contractor’s commitment to its bid; performance bonds, which protect against failure to perform the contract; and payment bonds, which guarantee payment for qualifying labor and materials. What It’s Worth: Valuing Residential and Commercial Construction Companies 28 (2020).
Illinois law makes bonding particularly important for public construction. Under the Public Construction Bond Act, qualifying public works contracts generally require a bond conditioned on contract completion and payment for labor and materials. 30 ILCS 550/1. Through December 31, 2028, the general statutory threshold is public works contracts exceeding $150,000, subject to exceptions, including a higher threshold for certain Illinois Department of Transportation and Toll Highway Authority contracts. Id.
A contractor’s bonding capacity is closely connected to its financial condition. BVR explains that sureties evaluate a contractor’s working capital, net worth, debt, and financial statements when determining how much bonding credit to extend. What It’s Worth: Valuing Residential and Commercial Construction Companies 28-29 (2020).
Importantly, BVR cautions that “[a] reduction in the amount of bonding credit can have a devastating financial effect on a contractor.” Id. at 29. A company may have the opportunity to obtain profitable projects but lack the bonding capacity necessary to undertake them.
This also complicates the treatment of working capital. Construction companies may maintain cash and borrowing capacity beyond what other businesses ordinarily need because those resources help support bonding. Id. at 22. Therefore, an appraiser should not automatically treat apparently excess cash as a nonoperating asset available for distribution.
In sum, an appraiser should evaluate the company’s financial obligations, bonding limits, and ability to maintain sufficient bonding capacity after a change in ownership. These factors directly impact its ability to secure and complete future projects.
Customer Concentration And Competitive Bidding Can Affect Value
A construction company’s value can depend on where its projects come from and whether those sources of work are likely to continue.
Some contractors keep up relationships with many homeowners, developers, and businesses. Others depend on one major general contractor or a small number of customers, which can create substantial risk if losing a relationship would significantly reduce the company’s revenue.
Competitive bidding adds another layer of uncertainty. Many contractors get work through competitive bids; this requires them to offer prices attractive enough to win contracts while also maintaining sufficient margins to remain profitable. Id. at 29.
These concerns are especially relevant to public construction. Under Section 30-22 of the Illinois Procurement Code, contractors who want to qualify as responsible bidders on covered construction contracts must satisfy certain requirements, including compliance with applicable business, prevailing-wage, and employment laws. 30 ILCS 500/30-22. A construction company’s ability to secure government contracts may depend on maintaining qualifications and satisfying requirements beyond just offering a competitive price.
The company’s reliance on particular individuals matters, too. When a contractor depends on a small group to have the necessary expertise and relationships, the dependence generates significant valuation risk. Id. at 26.
So, an appraiser should assess customer concentration, historical bidding success, repeat business, customer relationships, and whether the company can continue securing profitable work without its current owner. A contractor with a diverse customer base and an ability to obtain projects often presents different financial risks than one dependent on a single developer or the owner’s personal relationships.
A Construction Company’s Workforce And Management Can Affect Its Value
A construction company’s ability to generate revenue relies on its employees, managers, and subcontractors.
BVR notes that a contractor’s “profitability and work quality relate directly to such employees.” Id. at 26. A company with experienced personnel and established management systems is often better positioned to maintain its earnings after a change in ownership.
Further, labor costs and compliance requirements impact profitability. For instance, the Illinois Prevailing Wage Act typically requires contractors and subcontractors performing covered public works to pay employees at least the applicable prevailing wage. 820 ILCS 130/3-4. An appraiser should account for these labor obligations when evaluating the profitability of existing and anticipated projects.
The company’s dependence on its owner is vital. Some contractors rely almost completely on the owner to secure projects, supervise employees, estimate costs, and maintain customer relationships. Sometimes, those responsibilities cannot be transferred to another manager, and the company’s historical earnings may therefore overstate its transferable value.
Illinois courts recognize the difference between business value and future personal earnings. In In re Marriage of Frazier, the appellate court rejected an insurance-agency valuation based on anticipated future earnings, as it failed to account for the husband’s continued personal efforts after dissolution, and thus, improperly treated the results of those efforts as marital property. 125 Ill. App. 3d 473, 476-77 (1984).
The same concern may arise with an owner-operated construction company. An appraiser should consider what it would cost to replace the owner’s services and whether the business could maintain its earnings without the owner.
Workforce stability, management experience, labor obligations, and owner dependence may all significantly influence a construction company’s fair market value.
Construction Equipment And Real Estate Must Be Properly Valued
Construction companies can own a large amount of equipment, machinery, vehicles, and real estate. Sometimes, the amounts recorded on the company’s balance sheet do not necessarily reflect the fair market value of these assets.
Construction equipment’s fair market value can greatly differ from its book value and can even require an independent appraisal of specialized machinery. What It’s Worth: Valuing Residential and Commercial Construction Companies at 30. Imagine a construction company owns an excavator that has been substantially depreciated for accounting purposes but still possesses considerable resale value.
Additionally, whether equipment is owned or leased matters. Purchased machinery may represent a valuable business asset, yet it may carry outstanding financing obligations. Leased equipment may create continuing expenses but not provide the company with equivalent ownership rights.
Real estate needs similar attention. This is because a construction company may own its office or warehouse, or the owner may hold the property through a separate entity and lease it to the business. The appraisal must make a distinction between business-owned real estate and separately owned property, so double-counting is avoided.
A contractor may also need to make future expenditures to replace or maintain equipment. BVR identifies equipment age, leasing arrangements, and anticipated capital expenditures as common considerations when evaluating construction businesses. Id. at 30-31. Under Illinois law, these distinctions are relevant because the court must determine the fair market value of the ownership interest. 750 ILCS 5/503(k). An appraiser should evaluate financing and lease agreements, real estate ownership, equipment schedules, depreciation records, and anticipated replacement costs.
In all, the value of a construction company’s physical assets depends on their true economic worth, associated liabilities, and importance to the company’s operations.
Seasonality And Economic Conditions Can Affect Construction Company Value
Construction companies are sensitive to seasonal fluctuations and broader economic conditions because their revenue and cash flow can change significantly depending on weather, interest rates, construction demand, and the availability of new projects.
Seasonality is a vital consideration in construction-company valuation, as cash flow can decline substantially during winter months before increasing in the spring and summer. What It’s Worth: Valuing Residential and Commercial Construction Companies at 5. For Illinois contractors, seasonality can be a major factor since operations are often affected by harsh winters and weather-related construction delays.
Construction experiences broader economic cycles, too. The industry is sensitive to changes in the overall economy and interest rates, but residential, commercial, and infrastructure construction may experience different cycles. Id. at 25-26.
Additionally, economic conditions can directly impact future profitability. Higher borrowing costs may discourage new development, whereas increases in materials prices, fuel costs, or labor expenses may reduce margins on existing contracts. BVR cautions that losses on a single project can sometimes make a construction company entirely unprofitable. Id. at 26-27.
Illinois law makes the timing of these changes important. Under Section 503(k), the valuation date is generally the date of trial, unless the parties agree to another date or the court selects a different date within its discretion. 750 ILCS 5/503(k). Consequently, an appraiser should consider historical financial performance, seasonal cash-flow patterns, prevailing economic conditions, and the company’s ability to withstand construction downturns. A valuation based only on one unusually successful year can overstate the company’s sustainable earning capacity, just as a valuation based on one particularly difficult year can understate it.
Construction Company Financial Statements Can Be Misleading
One of the greatest challenges when valuing a construction company is understanding whether its financial statements accurately reflect its profitability. Construction projects sometimes span multiple months or years. Contractors may recognize income differently depending on their accounting methods. Misunderstanding a construction company’s accounting method can “significantly impact its ultimate value.” What It’s Worth: Valuing Residential and Commercial Construction Companies at 15.
Construction companies can use cash-basis accounting, which typically recognizes revenue when payment is received and expenses when paid. Other companies use accrual accounting, which recognizes revenue when earned and expenses when incurred. BVR recommends that appraisers think about converting cash-basis financial statements to an accrual basis when appropriate, as cash-basis figures may not fully reflect the business’s earnings capacity. Id. at 15-16.
Long-term construction contracts present further accounting considerations. BVR identifies two methods historically used to account for construction projects:
Completed-Contract Method. Under this method, contract revenue and related costs are recognized when the project is finished. This may be appropriate in certain circumstances, but it can also distort annual earnings when projects continue on for several years.
Percentage-of-Completion Method. Under this method, revenue is recognized as work progresses, usually based on the proportion of estimated project costs already incurred. This may provide a more accurate picture of performance over time, but it also depends on reliable estimates of the costs necessary to complete each project. Id. at 16-18.
For instance, BVR illustrates how a $5 million construction project spanning three years can generate significantly different annual revenue figures depending on the accounting method. Under the completed-contract method, revenue is deferred until the project is finished, yet recognizing revenue over time distributes it across the construction period. Id. An appraiser examining only one year’s reported earnings might reach a misleading conclusion.
The same problem occurs when contractors underestimate how much a project will cost. Revenue recognized based on an overly optimistic completion estimate may need to be adjusted when additional expenses become apparent. An appraiser needs to evaluate ongoing contracts for anticipated losses, so that the company’s value is not overstated. Id. at 19.
In an Illinois divorce, these issues emphasize how important reliable valuation evidence is. In In re Marriage of Grunsten, the Illinois Appellate Court recognized that valuing a closely held business is “inherently subjective,” and it requires courts to evaluate competing expert methodologies, credibility, and the reasonableness of their valuations. 304 Ill. App. 3d 12, 17 (1999) (quoting In re Marriage of Gunn, 233 Ill. App. 3d 165, 183 (1992)).
Thus, a construction-company appraisal should assess historical financial statements, accounting methods, job-cost records, and estimates of remaining project expenses. The goal is to understand the company’s sustainable earnings rather than just the income appearing on its most recent tax return.
Underbillings, Overbillings, And Retainage Can Affect Construction Company Value
Construction companies do not automatically get paid when they earn revenue, which causes financial reporting issues that may affect their valuation.
Underbillings arise when a contractor recognizes more revenue than it has billed, while overbillings arise when billings exceed recognized revenue. These amounts usually appear as contract assets and liabilities, respectively.
BVR explains that these differences occur because billing schedules and accounting periods do not always align, especially when change orders delay payment. What It’s Worth: Valuing Residential and Commercial Construction Companies at 20.
For example, if a contractor has recognized $900,000 in revenue but billed only $750,000, the $150,000 difference is an underbilling. By contrast, overbillings can improve short-term cash flow yet can leave the contractor obligated to complete extra work. Sureties may view reasonable overbillings favorably, whereas excessive overbilling can signal financial risk. Id. at 29.
Retainage is when payments are withheld until specified contractual conditions are satisfied, often upon project completion. BVR reports that retainage traditionally ranges from 5% to 10% of progress billings. Id. at 20.
Illinois regulates retainage under the Contractor Prompt Payment Act, limiting retainage on covered private construction contracts to 10% before 50% completion and 5% thereafter. 815 ILCS 603/20. Separate statutory requirements apply to public construction contracts.
An appraiser should therefore evaluate work-in-progress schedules, underbillings, overbillings, retainage, and outstanding project obligations. Amounts billed or collected do not automatically demonstrate earned income or cash available for distribution.
Construction Company Earnings May Need To Be Normalized
A construction company’s reported earnings do not always accurately reflect the income a hypothetical purchaser should expect to receive from the business. So, an appraiser may need to normalize, or adjust, its financial statements.
Closely held construction companies might pay personal expenses through the business, compensate family members above or below market rates, or incur unusual expenses that are unlikely to recur. By contrast, the company may have deferred required equipment purchases or maintenance, making its current earnings seem stronger than they are.
These adjustments are important, as construction-company profits can fluctuate from project to project. An unusually profitable contract should not necessarily be viewed as representative of future performance. Similarly, a significant one-time project loss may warrant separate examination.
Owner compensation also requires careful consideration. A construction-company owner may serve as the company’s president, estimator, project manager, and principal salesperson. If the owner receives below-market compensation for these responsibilities, reported profits can overstate the economic benefits available to a purchaser who would need to hire replacement personnel. On the other hand, excessive compensation can understate the company’s sustainable profitability.
For construction companies, normalization should consider reasonable owner compensation, unusual project gains or losses, related-party transactions, nonrecurring expenses, and necessary capital expenditures.
How Is A Construction Company Valued In An Illinois Divorce?
There isn’t one formula for determining a construction company’s fair market value. As discussed above, the court in In re Marriage of Grunsten explained that experts may differ in their methodologies and conclusions when valuing a closely held business. 304 Ill. App. 3d at 17 (quoting In re Marriage of Gunn, 233 Ill. App. 3d at 183).
BVR discusses three traditional valuation approaches, which are the income approach, market approach, and asset approach. What It’s Worth: Valuing Residential and Commercial Construction Companies 23-25.
The Income Approach
Under the income approach, a construction company’s value is based on its anticipated future earnings. There are two main methods: capitalization of earnings and discounted cash flow, both of which convert expected future income into present value while accounting for risk. Id. at 24-25.
Projections need to consider contract profitability, backlog, working-capital requirements, and future capital expenditures. Appraisers can evaluate the reliability of projections by comparing historical project estimates to actual results and assessing existing backlog. Id. at 25.
Projected earnings must reflect the company’s transferable earning capacity instead of income attributable to the owner’s future personal labor. In re Marriage of Frazier, 125 Ill. App. 3d at 476-77.
The Market Approach
The market approach estimates value by comparing the construction company to similar businesses that have already been sold. Yet, finding similar construction companies may prove difficult, as contractors differ in their specialties, profit margins, and operating risks.
BVR explains that private-company transaction databases usually contain limited information, which makes comparisons hard. What It’s Worth: Valuing Residential and Commercial Construction Companies at 24.
Illinois courts have likewise highlighted how important proper comparisons are. In In re Marriage of Cutler, the appellate court rejected an insurance-agency valuation based on a revenue multiple derived from materially different agencies; the expert failed to account for contractual restrictions impacting the business’s marketability. 334 Ill. App. 3d 731, 736-37 (2002).
Cutler involved an insurance agency, but its reasoning nonetheless illustrates why applying an industry multiple without considering differences between businesses may create an unreliable valuation.
The Asset Approach
Under the asset approach, value is estimated by evaluating a company’s assets and liabilities, including inventory, real estate, equipment, vehicles, receivables, and outstanding debts.
Competitive bidding and relatively low profit margins may cause smaller construction businesses to sell at or near their net asset value. What It’s Worth: Valuing Residential and Commercial Construction Companies at 23.
The asset approach is often appropriate for contractors with a lot of equipment, inconsistent earnings, or limited goodwill. However, book value does not always reflect fair market value, and an asset-based valuation can overlook valuable customer relationships or ongoing operations.
Overall, an appraiser may, and often does, consider multiple approaches depending on the company’s profitability, asset composition, financial risks, and ability to generate future earnings.
Does A Construction Company Have Personal Or Enterprise Goodwill?
A construction company’s goodwill may contribute to its value, yet Illinois law distinguishes between goodwill belonging to the business and goodwill attributable to its owner.
Enterprise goodwill exists separately from the owner’s personal efforts. Often, it survives a change in ownership. Examples of this include an established trade name, experienced management, transferable customer relationships, or an established business reputation.
By contrast, personal goodwill depends on the owner’s reputation, skills, and relationships. A contractor who independently secures projects and maintains developer relationships may possess goodwill that could go away if that contractor left.
In In re Marriage of Talty, the Illinois Supreme Court concluded that goodwill existing independently of the owner’s personal efforts “should be considered an asset of the business, and hence of the marriage.” 166 Ill. 2d 232, 240 (1995). In In re Marriage of Schneider, the Court reinforced that personal goodwill is not a divisible marital asset since its characteristics are already considered through the statutory property-division factors. 214 Ill. 2d 152, 173-74 (2005).
Goodwill is complicated in construction, as many contractors compete mainly on price. As BVR explains, “many construction contractors have little, if any, goodwill value” due to intense competition. What It’s Worth: Valuing Residential and Commercial Construction Companies at 22. Yet, contractors with negotiated contracts and established customer relationships can have greater goodwill. Id.
An appraiser must determine whether the company’s intangible value would survive the owner’s departure. Remember, only enterprise goodwill should be included as a divisible business asset.
Is A Construction Company Marital Or Nonmarital Property?
Before dividing a construction company in an Illinois divorce, the court must classify the ownership interest as either marital or nonmarital property. Under Section 503(a) of the Illinois Marriage and Dissolution of Marriage Act, marital property includes “all property, including debts and other obligations, acquired by either spouse subsequent to the marriage,” subject to statutory exceptions. 750 ILCS 5/503(a).
A construction company established or purchased during marriage will typically be presumed marital property, regardless of which spouse holds legal title, but there are exceptions. These include property acquired before marriage, received by gift or inheritance, or excluded through a valid agreement. 750 ILCS 5/503(a)(1), (4), (6).
In In re Marriage of Werries, the appellate court held that a husband’s partnership interest, acquired partly before marriage and partly through a gift from his father during marriage, was nonmarital property, despite substantial growth in the business. 247 Ill. App. 3d 639, 643-44 (1993). Likewise, a construction company established before marriage does not necessarily become marital simply because it expands during the marriage. Yet, classification becomes more complex when marital funds purchase additional ownership interests, ownership is transferred between spouses, or assets are held through related entities.
Overall, determining when and how the ownership interest was acquired is necessary to identify the marital estate and any potential reimbursement claims.
What Happens If A Construction Company Grows During The Marriage?
A construction company established before marriage can appreciate during the marriage without becoming marital property. Under Illinois law, appreciation of nonmarital property typically remains nonmarital, although the marital estate may be entitled to reimbursement. 750 ILCS 5/503(a)(7).
Section 503(c)(2)(B) states that a spouse’s personal efforts toward nonmarital property are contributions from the marital estate. Reimbursement may be available when those efforts are “significant and result in substantial appreciation,” unless the marital estate has already been reasonably compensated. 750 ILCS 5/503(c)(2)(B).
Reasonable compensation matters as well. In In re Marriage of Werries, the appellate court reasoned that the marital estate is not entitled to reimbursement for a spouse’s personal efforts toward a nonmarital business when the spouse has already been reasonably compensated for the efforts. 247 Ill. App. 3d at 648.
For example, imagine a contractor receives reasonable compensation while expanding a premarital business. The marital estate may already have been compensated for those efforts. However, substantial uncompensated contributions may support reimbursement.
Marital funds invested in a nonmarital construction company can create separate reimbursement rights if the contributions are properly traced and were not intended as gifts. 750 ILCS 5/503(c)(2)(A).
Thus, an appraiser may need to examine the company’s appreciation, the owner’s compensation, marital investments, and external factors contributing to its growth.
Why Does The Valuation Date Matter In An Illinois Divorce?
A construction company’s value may significantly change during a divorce because it obtains contracts, completes projects, purchases equipment, or incurs losses. According to Section 503(k), the valuation date is generally the date of trial unless the parties agree to another date or the court selects one within its discretion. 750 ILCS 5/503(k).
The timing of the valuation is important for construction companies since their financial circumstances may fluctuate considerably. For instance, a contractor may have multiple profitable projects underway when a divorce is filed yet experience cost overruns or losses before trial. By contrast, the company may secure valuable new contracts during that period.
So, an appraisal must reflect the company’s contracts, equipment values, financial performance, and liabilities as of the applicable valuation date, instead of relying on outdated financial statements.
What Financial Records Are Needed To Value A Construction Company?
To accurately value a construction company, an appraiser must evaluate the company’s financial condition, contractual obligations, and project profitability. Relevant records may include:
- Business assets: Real estate records, equipment inventories, financing agreements, and depreciation schedules.
- Construction records: Work-in-progress schedules, backlog, job-cost reports, change orders, and estimated costs to complete.
- Financial records: Balance sheets, general ledgers, income statements, tax returns, and debt schedules.
- Ownership and operations: Operating agreements, significant contracts, payroll, owner compensation, and bonding records.
- Receivables and liabilities: Accounts receivable, accounts payable, underbillings, overbillings, retainage, and subcontractor obligations.
Work-in-progress schedules are especially important, as they help decide whether anticipated project profits are supported by actual costs.
BVR explains that construction-company forecasts can be evaluated by comparing historical project estimates against actual results. What It’s Worth: Valuing Residential and Commercial Construction Companies at 25. Further, in In re Marriage of Grunsten, the appellate court rejected a valuation because it failed to properly consider a prior transaction regarding the same company and its subsequent financial growth. 304 Ill. App. 3d at 17-18.
Accordingly, an appraisal should consider historical financial performance and the records supporting the company’s projected earnings.
How Is A Construction Company Divided In An Illinois Divorce?
After a construction company’s marital interest is identified and valued, the court must determine its equitable distribution. Under Section 503(d), Illinois courts divide marital property “without regard to marital misconduct in just proportions,” considering factors such as each spouse’s contributions, the marriage’s duration, financial circumstances, and future earning opportunities. 750 ILCS 5/503(d).
Instead of dividing ownership directly, a court can award the construction company to one spouse and compensate the other through marital asset offsets or equalization payments.
In In re Marriage of Schlichting, the appellate court reversed an order that required a spouse to transfer her ownership interest in a rock quarry LLC to her former husband in violation of the company’s operating agreement. 2014 IL App (2d) 140158, ¶¶ 60-69. The court reasoned that when a business interest cannot practically be divided, it can be awarded to one spouse while the other can receive compensation through cash or an offset of other marital property. Id. ¶ 73.
This is especially relevant for construction companies that have multiple owners or contractual transfer restrictions. For instance, a spouse holding a partial interest in a construction LLC may not be able to freely transfer that interest to a former spouse.
Additionally, the company’s financial condition matters when structuring equalization payments. A contractor may possess substantial business value, but the contractor may have limited available cash because funds are committed to equipment, payroll, and subcontractors.
Overall, dividing a construction company means that equitable distribution must be balanced with the practical need to preserve its financial stability and ongoing operations.
Conclusions Regarding Valuing And Dividing A Construction Company In An Illinois Divorce
Valuing a construction company in an Illinois divorce requires more than simply looking at equipment, annual revenue, or industry multiples. Project profitability, customer concentration, construction accounting methods, contract backlog, bonding capacity, owner dependence, and working-capital requirements can all impact fair market value.
Further, the court must determine whether the ownership interest is marital or nonmarital property, whether the marital estate has a reimbursement claim, and whether the company’s goodwill is attributable to the business or its owner. These considerations influence how the business is valued and divided.
Two construction companies with the same revenue can have significantly different values. An appropriate appraisal examines each company’s financial condition, contractual obligations, operating risks, and ability to generate future earnings.
If you or your spouse own a construction company and either of you live in Illinois read my business owners divorce page an contact my Chicago, Illinois divorce law firm to discuss how a construction company may be valued and divided in your divorce.
Russell D. Knight is a Chicago divorce and family law attorney who has practiced family law since 2006. He represents clients in complex Illinois divorce matters involving closely held businesses, business valuations, property division, and other difficult-to-value marital assets. Russell is a member of the Illinois Institute for Continuing Legal Education (IICLE) Business Valuation committee. He has also served as faculty for IICLE’s Trial Training for Family Lawyers and Courtroom Basics programs and authored the chapter on obtaining orders of protection in IICLE’s 2024 family law practice handbook. Russell has been selected to Super Lawyers every year from 2024 through 2027 and is recognized in The Best Lawyers in America® 2027 for Family Law.
CASES, STATUTES, AND OTHER SOURCES REFERENCED IN THE VALUING AND DIVIDING A CONSTRUCTION COMPANY IN AN ILLINOIS DIVORCE ARTICLE
750 ILCS 5/503 — Illinois Marriage and Dissolution of Marriage Act. Marital And Nonmarital Property, Business Valuation, Appreciation, Reimbursement, Equitable Distribution, Fair Market Value, And Valuation Dates.
30 ILCS 550/1 — Illinois Public Construction Bond Act. Bonding Requirements For Public Construction Contracts, Including Performance And Payment Obligations.
30 ILCS 500/30-22 — Illinois Procurement Code. Responsible Bidder Requirements For Covered Public Construction Contracts.
820 ILCS 130/3–4 — Illinois Prevailing Wage Act. Prevailing Wage Requirements For Contractors And Subcontractors Performing Covered Public Works.
815 ILCS 603/20 — Illinois Contractor Prompt Payment Act. Retainage Limitations For Covered Private Construction Contracts.
In re Marriage of Frazier, 125 Ill. App. 3d 473 (1984) — Business Valuation, Future Personal Earnings, And The Owner’s Post-Divorce Labor.
In re Marriage of Gunn, 233 Ill. App. 3d 165 (1992) — Fair Market Value, Expert Valuation Methodologies, And The Subjective Nature Of Closely Held Business Valuation.
In re Marriage of Werries, 247 Ill. App. 3d 639 (1993) — Nonmarital Partnership Interests, Business Appreciation, Tracing, Reasonable Compensation, And Reimbursement.
In re Marriage of Talty, 166 Ill. 2d 232 (1995) — Personal Versus Enterprise Goodwill And The Treatment Of Goodwill In Marital Property Division.
In re Marriage of Grunsten, 304 Ill. App. 3d 12 (1999) — Closely Held Business Valuation, Expert Testimony, Prior Share Transactions, And Subsequent Business Growth.
In re Marriage of Cutler, 334 Ill. App. 3d 731 (2002) — Fair Market Value, Contractual Transfer Restrictions, Comparable Businesses, And Inappropriate Revenue Multiples.
In re Marriage of Schneider, 214 Ill. 2d 152 (2005) — Personal Goodwill, Enterprise Goodwill, And The Valuation Of Closely Held Businesses In Divorce.
In re Marriage of Schlichting, 2014 IL App (2d) 140158 — Division Of LLC Ownership Interests, Operating Agreement Restrictions, Business Valuation, And Compensation Through Cash Or Marital Property Offsets.
Business Valuation Resources, What It’s Worth: Valuing Residential and Commercial Construction Companies (2020).
