The Ultimate Guide to Contractor Business Valuation: Know What Your Company Is Worth

Every contractor eventually asks: “What is my business actually worth?” Whether you’re planning to sell, bring in a partner, or simply want to know—understanding valuation is crucial.

Why Valuation Matters Now

You might be thinking, “I’m not selling anytime soon.” But knowing your business value matters for reasons beyond an exit:

Strategic Planning: Knowing your value helps set meaningful growth goals.

Partnership Discussions: Bringing in partners or passing to family requires fair value understanding.

Estate Planning: Your business is likely your largest asset—plan accordingly.

Financing: Lenders and investors need to understand value.

Exit Readiness: When opportunity comes, you’ll be prepared.

Performance Measurement: Track value growth over time.

The contractors who build the most valuable businesses understand valuation from the start—not when they’re ready to sell.

How Contractor Businesses Are Valued

The Three Main Approaches

1. Asset-Based Valuation

What it measures: The value of what you own minus what you owe.

Formula: Total Assets − Total Liabilities = Asset Value

When it’s used:

• Liquidation scenarios
• Asset-heavy businesses (lots of equipment/inventory)
• Baseline floor for value

Limitation: Doesn’t capture earning power or customer relationships.

2. Market-Based Valuation

What it measures: What similar businesses have sold for.

Approach: Apply industry multipliers to revenue or earnings.

When it’s used:

• Most common for small businesses
• Quick estimates
• Negotiation starting points

Limitation: Comparables may not be truly comparable.

3. Income-Based Valuation

What it measures: The present value of future earnings.

Methods:

• Discounted Cash Flow (DCF)
• Capitalization of Earnings

When it’s used:

• More sophisticated buyers
• Larger businesses
• Businesses with predictable cash flows

Limitation: Requires forecasting, which involves uncertainty.

The Multiplier Method: Most Common for Contractors

Most contractor business sales use a multiplier applied to Seller’s Discretionary Earnings (SDE) or EBITDA.

Understanding the Metrics

Seller’s Discretionary Earnings (SDE): Used for owner-operated businesses under $5M revenue.

SDE = Net Profit + Owner’s Salary + Owner Benefits + One-Time Expenses + Depreciation + Amortization

Example:

EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization): Used for larger businesses where owner won’t stay.

EBITDA = Net Profit + Interest + Taxes + Depreciation + Amortization

This assumes a replacement manager salary is already in expenses.

Typical Multiples for Contractors

Why the Wide Range?

Multiples vary dramatically based on:

• Profitability and trends
• Customer concentration
• Management independence
• Revenue mix (service vs. install)
• Recurring revenue percentage
• Market conditions
• Geographic location
• Growth potential
• Buyer demand

What Drives Higher Multiples

Factors That Increase Value

1. Recurring Revenue

Maintenance agreements, service contracts, and predictable revenue command premium multiples.

2. Management Independence

Does the business run without the owner?

3. Documented Systems

Buyers pay more for businesses that can be understood and replicated.

4. Financial Health

Clean, accurate financials build buyer confidence.

5. Growth Trajectory

Is the business growing or declining?

6. Customer Concentration

Diversified customer base reduces risk.

Factors That Decrease Value

• Owner-dependency
• Declining revenue/profit
• Customer concentration risk
• Poor online reputation
• Pending legal/safety issues
• Aging equipment
• Key employee flight risk
• Limited market opportunity

Calculating Your Business Value

Step-by-Step Example

ABC Plumbing Company

Step 1: Calculate SDE

Step 2: Assess Multiple

Step 3: Calculate Value

SDE × Multiple = Value $428,400 × 3.5 = $1,499,400

Typical Range: $1.3M - $1.7M

Building Business Value Over Time

The Value Creation Playbook

Year 1-2: Foundation

Focus on:

• Clean financials
• Documented processes
• Consistent profitability
• Reputation building

Impact: Move from 1.5x to 2.5x multiple

Year 2-4: Systems

Focus on:

• Management development
• Operating procedures
• Recurring revenue growth
• Customer diversification

Impact: Move from 2.5x to 3.5x multiple

Year 4+: Independence

Focus on:

• Leadership team in place
• Owner optional for operations
• Strong agreement base
• Scalable growth

Impact: Move from 3.5x to 4.5x+ multiple

The Math of Multiple Improvement

Starting: $400,000 SDE at 2.0x = $800,000 value

After improvements: $400,000 SDE at 3.5x = $1,400,000 value

$600,000 value created without increasing earnings.

Now add earnings growth: $550,000 SDE at 3.5x = $1,925,000 value

$1,125,000 total value created.

This is why understanding valuation matters early.

Exit Planning: When and How

Exit Options for Contractors

1. Strategic Sale Sell to a competitor or larger company looking to expand.

Pros: Often highest price, quick close Cons: May require staying on, cultural changes

2. Private Equity Sell to a financial buyer.

Pros: Capital for growth, professional management Cons: Loss of control, aggressive growth expectations

3. Management Buyout Sell to existing managers/employees.

Pros: Cultural continuity, rewards loyal team Cons: Typically lower price, financing challenges

4. Family Succession Pass to next generation.

Pros: Legacy preservation, estate planning benefits Cons: May not maximize value, family dynamics

5. ESOP (Employee Stock Ownership Plan) Employees become owners over time.

Pros: Tax advantages, employee retention Cons: Complex, costly to set up

Exit Timeline

Key Insight: The best exits take 3-5 years of preparation. Start now, even if you’re not sure when you’ll exit.

Getting a Professional Valuation

When to Get Formal Valuation

• Considering sale or partnership
• Estate planning
• Divorce proceedings
• Partner buyout
• SBA loan application
• Annual strategic planning

Types of Valuations

Broker Opinion of Value (BOV)

• Cost: Often free (from business brokers)
• Use: Preliminary estimate, listing preparation
• Limitation: May be biased toward selling

Certified Valuation

• Cost: $5,000-$15,000+
• Use: Formal transactions, legal matters
• Provided by: CPA with valuation credential

Informal Assessment

• Cost: $1,000-$3,000
• Use: Planning, goal-setting
• Provided by: Business consultant, advisor

Choosing a Valuator

Look for:

• Experience with contractor businesses
• Understanding of your specific trade
• Professional credentials (CVA, ABV)
• Clear methodology
• Defensible conclusions

Common Valuation Mistakes

Overestimating Value

• Using revenue multiples without understanding margins
• Comparing to much larger companies
• Ignoring owner-dependency
• Not accounting for market conditions
• Emotional attachment inflating perceived value

Underestimating Value

• Not counting all add-backs
• Undervaluing customer relationships
• Ignoring market position/reputation
• Dismissing growth potential
• Selling during business downturn

Process Mistakes

• Not preparing financial records
• Trying to sell without professional help
• Unrealistic timeline expectations
• Neglecting the business during sale process
• Poor confidentiality management

Action Plan: Know Your Value

This Month:

• Calculate your SDE
• Assess your multiple factors
• Estimate your current value range

This Quarter:

• Clean up any financial messiness
• Document key processes
• Identify value-building priorities

This Year:

• Implement value-building strategies
• Track progress quarterly
• Consider professional valuation

Ongoing:

• Review value annually
• Adjust strategy based on goals
• Build toward maximum transferable value

The Bottom Line

Your business is likely your largest asset. Understanding its value—and how to increase it—is essential financial literacy for any contractor.

Whether you’re selling next year or in twenty years, the same principles apply: build systems, reduce dependency, grow recurring revenue, and maintain clean financials.

The contractors who understand this build businesses worth multiples more than those who don’t.

Ready to understand and grow your business value? Let’s assess your situation →

At The KPS Group, we help contractors understand their business value and implement strategies to increase it. Because your hard work deserves to build lasting wealth.

Business valuation is one aspect of building a successful contractor business. Explore our complete resource library for more insights.

Related Reading:

• Financial KPIs Every Contractor Must Track
• Scaling Your Contractor Business
• Building a Maintenance Agreement Program