What Is Your Trade Business Actually Worth?

Most business owners have a number in their head.

Sometimes it comes from what a mate sold his business for.

Sometimes it’s based on revenue.

Sometimes it’s simply the amount they’d need to walk away.

But buyers don’t value businesses based on what the owner wants.

They value them based on profit, risk and future opportunity.

And two trade businesses generating exactly the same revenue can be worth completely different amounts.

Let’s say you own a plumbing business turning over $3 million per year.

That sounds impressive.

But if the business only produces $150,000 in adjusted profit, a buyer is looking at a very different opportunity to a $3 million plumbing company generating $600,000.

Revenue gets attention.

Profit drives value.

Depending on the size of the business, buyers may look at metrics such as EBITDA, EBIT or Seller’s Discretionary Earnings (PEBITDA).

The goal is to understand the normalised earnings of the business - what the business actually produces after adjusting for legitimate owner-specific and non-recurring expenses.

Once maintainable earnings have been established, buyers will generally apply a multiple.

For example:

Adjusted earnings: $500,000

Multiple: 3.5x

Indicative enterprise value: $1.75 million

But the multiple isn’t randomly selected.

It reflects how risky and attractive the business is to a buyer.

The stronger the business, the more a buyer may be willing to pay for each dollar of earnings.

Imagine buying a business where:

The owner works five hours a week.

A general manager runs the operation.

There are experienced supervisors underneath them.

Customers are spread across dozens of accounts.

There are recurring maintenance contracts.

The business has strong margins.

There is six months of work already booked.

The financials are clean.

The company has built a recognised name in its market.

That is a very different acquisition from buying a business where the owner quotes every job, manages every employee, holds every major customer relationship and works 70 hours a week.

One is an investment.

The other can feel like buying yourself a job.

Recurring and contracted revenue can significantly change how buyers view a business.

Consider two commercial landscaping companies.

Company A generates $4 million from one-off construction projects.

Every month, it needs to win new projects.

Company B also generates $4 million, but $2 million comes from recurring grounds-maintenance contracts.

Company B has something buyers love:

Visibility.

The buyer has greater confidence that revenue will continue after settlement.

Now imagine your largest customer represents 55% of your revenue.

Even if you’ve worked with them for ten years, a buyer has to ask:

What happens if they leave?

Customer concentration creates risk.

The more diversified your customer base, the less dependent the business is on any single relationship.

Ask yourself a simple question:

If you disappeared for 90 days, what would happen?

If the business continued operating normally, you’ve built something valuable.

If everything stopped, you may have built an excellent income for yourself — but not necessarily a highly transferable business.

This is why building management, documenting systems and transferring customer relationships away from the owner can have such a major impact on an eventual sale.

Trade businesses often own substantial assets.

Trucks.

Excavators.

Machinery.

Tools.

Factories.

Equipment.

Those assets certainly matter.

But don’t confuse the amount you’ve spent building the business with what someone will pay for it.

A buyer is primarily buying the future economic benefit of owning the business.

There isn’t one universal multiple for every plumbing company, civil contractor, electrician, landscaper or construction business.

The answer depends on the individual business.

Two companies operating in exactly the same industry can sell for dramatically different amounts.

The important question isn’t simply:

“What’s the average multiple in my industry?”

It’s:

“What would make a buyer choose my business and pay a premium for it?”

That’s the question worth working on years before you decide to sell.

Got questions?

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