A contracting business is harder to value than most. Last year's earnings tell a buyer what the jobs you finished made. They say much less about the jobs still running, the ones signed but not started, and whether the company can keep winning work once the owner's name is off the bond. So a buyer of an electrical, mechanical, plumbing or specialty trade contractor spends most of diligence looking forward, and the owner who can answer those forward questions with paper tends to have the easier sale.
1. Backlog: how much, and how good
The first question is how much signed work sits ahead of the company and what it is expected to earn. A buyer will want a backlog report by job: customer, contract value, how much is already billed, the estimated margin and the expected finish date. Volume alone does not impress anyone. A backlog full of work bid thin to keep crews busy is worth less than a smaller one priced properly. A buyer will also separate signed contracts from verbal awards and bids you expect to win. Keep the three apart in your own reporting and the conversation goes better.
2. The work-in-progress schedule and margin fade
In most project businesses, the monthly work-in-progress schedule is the document a buyer's financial people read hardest. It compares, job by job, what you have billed with what the work completed so far has actually earned. When billing runs ahead of the work, the company has collected cash it has not yet earned, and the buyer will treat that as money owed back to the jobs, not as profit. When billing runs behind, the question is whether you can collect it. A schedule kept every month, tied to the financial statements, tells a buyer the earnings are real. One pulled together for the sale tells it to dig.
The same schedule shows margin fade. A buyer will compare the margin each job was bid at with the margin it finished at. Some fade is normal. A steady pattern of jobs losing several points between estimate and closeout says something about estimating, project management or both, and a buyer will price the backlog accordingly. The reverse is one of the strongest things a contractor can show: a few years of closed jobs finishing at or near the bid. It tells a buyer the margin in the backlog is likely to arrive, which is what it is paying for.
3. Bonding and who stands behind it
If your work requires performance and payment bonds, a buyer needs to know how much bonding capacity the company has and what it rests on. In many owner-run contractors, the surety relies on the owner's personal indemnity and personal balance sheet. When the owner leaves, that support leaves too, and the buyer has to replace it. Expect a buyer to talk to your surety early. Knowing your current program, your largest single job and your total bonded work in hand, before anyone asks, shows a buyer the gap it has to fill and makes it easier to plan for.
4. Who the work comes from, and how it is paid
A buyer will look at how much revenue comes from a handful of general contractors or owners, and whether those relationships run through the company or through you personally. It will look at retainage, the share of each payment a customer holds back until the job is finished, and how much of it is outstanding and how old. Retainage that is collected on schedule is simply part of the business. Old retainage on finished jobs makes a buyer wonder what the dispute is about.
5. How each buyer reads it
A competitor in your trade reads the backlog and the crews first. It knows what a job should cost and will spot thin bids quickly, and it may already have bonding of its own, which can make your surety question easier. A private equity group building a platform focuses on the work-in-progress schedule, margin consistency and whether there is a management layer that wins and runs jobs without the owner. An individual buyer with bank financing faces the hardest version of the bonding question, because the surety and the lender both want to see someone stand behind the work, and that buyer is usually starting with less.
The takeaway
A buyer of a contracting company is buying the work ahead of it, so show the work ahead clearly: a backlog report that separates signed work from hope, a work-in-progress schedule kept every month, a record of jobs finishing near their bid, a plain account of your bonding and what it depends on, and a customer and retainage picture with no surprises. Get those in order a year before you go to market and the buyer spends its time on price instead of on doubts.
