Buyers price a contractor on adjusted EBITDA: profit after adding back owner compensation above market, family payroll, personal expenses run through the business and one-time costs. In construction there is a second step that matters more than the add-backs: earnings are normalised across several years, because a single strong year driven by one large project or one hot market is not a run rate. Percentage-of-completion accounting is also rebuilt in diligence, so revenue that is recognised cleanly, job by job, with work-in-progress schedules that tie to the financials, is worth preparing well before the sale. Owners who go to market on the back of one exceptional year, expecting the multiple to be applied to it, are usually the ones most disappointed by the offers that arrive.
Two contractors with identical profit routinely sell several turns apart, and the difference is almost always how the work is won. A backlog of negotiated and repeat work from long-standing customers is forecastable, and a multiple is fundamentally a price paid for forecastable earnings. A backlog assembled from competitive bids at thin margins has to be re-won every year. Customer concentration cuts the same way: a company doing most of its volume for one general contractor or one developer carries a risk the buyer has to underwrite, while diversified, creditworthy customers lift the multiple. End market matters too — recurring service and maintenance work prices above project work, and public or institutional backlog with funding in place prices above speculative private development.
Beyond the backlog, buyers underwrite the things that decide whether the earnings survive a change of ownership. They pay more when estimating, project management and field leadership run without the owner, when bonding capacity and prequalifications transfer, and when the safety record — including the EMR — is clean, because all of those are capacity a buyer cannot quickly build. They pay less when the owner is the estimator, the rainmaker and the senior project manager in one person. Equipment is normally included in the multiple as part of the working business, while owned real estate is valued separately with market rent charged against earnings first. Most of what moves the number is fixable, but it takes a year or two, which is why the useful time to ask the question is well before you intend to sell.
Profit, with backlog used to test whether that profit will repeat. Adjusted EBITDA, normalised across several years, is the basis for the multiple; the backlog tells the buyer how much of next year’s earnings is already secured and on what margins. A large backlog bid at thin margins can actually hurt the price, because the buyer inherits the obligation to deliver it. Negotiated, repeat work for diversified customers is what moves a contractor toward the top of its range.
Normally the multiple is applied to adjusted earnings with a normal complement of equipment included, because the machinery that generates the profit is part of what the buyer is paying for. Owned real estate is handled separately, with market rent charged against the business first, and genuinely surplus equipment can sometimes be sold separately. What buyers will not do is pay a multiple of earnings plus full value for every asset on the list.