How Much Is a Building Business Worth?

Why are many building businesses valued close to net assets?

Because the profit in a building business is mostly the product of the contracts in hand. Each job is won separately, earns its margin over its life and then finishes. The owner usually estimates, sells and supervises. The licence and insurance eligibility attach to individuals and to the company rather than passing automatically with a sale, and liability for defects stays with the business after each job.

A buyer who paid a multiple of last year’s profit would take on all of those risks without a contract book to support the price. That does not mean every builder is worth only its assets. Where earnings clearly repeat, a valuation tests both an assets approach and an earnings approach, and states which one it relies on and why. The factors are set out on our page on building business valuations. Every figure in this guide is illustrative and none is a benchmark.

In many small building businesses the owner estimates, sells, holds the client relationship and supervises the sites, and may also be the licence nominee. We deduct a market cost for those roles and ask which of them a buyer could fill. Most builders also deliver their work through subcontractors, so we ask how many there are for each trade, how long they have worked together and what happens to a job if a key trade fails or leaves.

What does work in progress tell a valuer?

How much of the reported profit has actually been earned. Profit on a building contract can be recognised as the work proceeds or when it completes, and the choice moves profit between years. We rebuild work in progress job by job: contract price, amounts claimed, costs to date, estimated cost to complete and the margin forecast.

Part-built jobs carry costs still to come and a margin that is not yet certain, and money received ahead of the work is an obligation to finish it. A balance sheet that shows healthy cash may be holding clients’ deposits. We also look at retentions held by clients and owed to subcontractors, and at the debtor position. The adjustments flow into both earnings and net assets.

How is the order book valued?

Modestly. Signed contracts that have not started are the closest thing a builder has to value beyond its net assets, but they are worth only what they will earn, not what they will bill. We test each one for contract status, deposit, approvals, finance conditions, start date and cancellation history, and we keep them separate from quotes and enquiries, which are worth little until signed.

Fixed-price contracts carry risk if costs rise before the start, so we compare the margin on recently signed jobs with the margin achieved on completed ones. Our guide to how trade businesses are valued explains how the assets and earnings approaches fit together.

What does a worked example look like?

The illustrative builder below has a balance sheet, three jobs under way and signed contracts waiting to start. We adjust the net assets, add a modest allowance for the order book, and then test the result against capitalised earnings.

The two routes land close together, at about $600,000, and adjusted net assets alone are about 90% of the higher figure. That is the pattern behind the statement that a builder is often worth close to its net assets: the earnings add little beyond what the balance sheet already holds. If the margin on the jobs in progress turned into a loss on completion, or the owner could not be replaced at the cost assumed, both routes would fall.

The order book allowance is deliberately modest and is added to net assets, not to earnings, because profit on contracts that have not started has yet to be earned.

Do the licence and insurance affect the value?

Yes. Builders are licensed by each state and territory, usually through a nominated individual such as a nominee or qualified supervisor. If that person is the owner and leaves, the company may be unable to contract for new work until someone else is nominated. A licence is therefore not an asset that passes with a sale. A buyer has to hold or arrange one, and should confirm what is required with the licensing authority.

Domestic building insurance or home warranty cover, depending on the state, is assessed against the company and its directors, including financial position and past insolvencies. It decides how much residential work the business can write, so we ask for the eligibility letters. Statutory warranties on building work also run for years after completion, so we review the defect and claims history and the provisions made.

What reduces the value of a building business, and what increases it?

What tends to reduce value

• A thin order book and jobs running over budget. Both suggest the profit already reported may not repeat.
• Margin recognised early on jobs still being built, which flatters profit and net assets.
• A licence held only by the owner, or directors whose history affects insurance eligibility.
• One developer or estate supplying most of the work. Our guide on customer concentration and business value explains why this lowers value for a given profit.

What tends to increase value

• A record of completed jobs finishing at or above the estimated margin. It is the best evidence an order book will deliver.
• Supervisors and estimators who can run jobs and price work without the owner, supported by job costing and scheduling systems.
• Signed contracts with deposits, approvals and start dates, kept separate from quotes.
• A spread of clients and referral sources, and subcontractors who have stayed and whose licences and insurances are checked.

What should you prepare before a building business valuation?

The work in progress schedule matters most, because it feeds both the earnings and the net assets. The most useful items are:

• A work in progress schedule by job: contract price, amounts claimed, costs to date, estimated cost to complete and forecast margin.
• Signed contracts not yet started, with deposits, conditions and expected start dates, kept separate from quotes.
• A completed job register for three years showing estimated and final margin.
• Licence details naming the nominee or qualified supervisor, and insurance eligibility letters, limits and conditions.
• A defect and warranty claims register, open and closed, and retentions held and owed.
• A subcontractor list with annual spend, insurances and payment terms.

Where there are several entities or a development division alongside the building company, the engagement may be a complex valuation, from $2,995 + GST. If you are a tradie weighing up a sale or a partner buying in, an independent valuation sets out the adjustments and the reasoning in writing. Our pages on business sale and shareholder transfer valuations explain what the report needs to address, and you can start online.