When a building or trades business is put up for sale, the multiple that emerges often surprises the owner. Revenue might be $4 million. Normalised profit might be $600,000. And a buyer’s offer might anchor around $1.4 million, well below the three to four times earnings the owner had heard applies to business sales generally.
The gap between expectation and offer is rarely about the quality of the work. It is almost always about how construction-specific mechanics present to a buyer applying a standard commercial lens to an industry with genuinely unusual financial patterns. Work in progress accounting, retention balances, variation claims, and the personal nature of a builder’s licence all shape what a buyer sees when they open the books, often in ways that compress the apparent earnings and increase perceived risk.
EOFY is the natural moment to look at this honestly. A full year of project data is available. The WIP schedule and retention balances reflect a complete picture. And for owners who have been considering an eventual exit, whether that is two years away or eight, understanding what a buyer would see in the current accounts is the first step toward changing it.
Why WIP and Retentions Complicate the Earnings Picture
Work in progress, or WIP, is the accounting method construction businesses use to recognise revenue from projects that span more than one accounting period. Revenue is recognised as a percentage of project completion, typically based on costs incurred or milestones reached. This is technically correct, and your bookkeeper and accountant apply it exactly as the accounting standards require.
The question a buyer asks is different: does the WIP schedule reflect genuine project completion, or does it reflect optimistic stage assessments that moved profit into the current year? A pattern of WIP being written down shortly after financial year end is a reliable signal that reported earnings were not as clean as they appeared. Buyers and their advisers typically apply a discount to normalised EBITDA based on the credibility of the WIP schedule, even when the underlying business is genuinely profitable.
Retention balances add a different complication. In most Australian construction contracts, the client holds back between two and a half and five percent of the contract value as a defect liability retention, released twelve to twenty-four months after practical completion. This amount sits on the balance sheet as a receivable, but it is not cash. It is subject to disputes, offset claims, and the financial position of the client who holds it.
A buyer adjusting for WIP risk and uncertain retention collectability often arrives at a normalised profit figure that looks meaningfully different from the headline P&L. The business is not less profitable than reported; the accounts reflect the accounting standard applied correctly, and in construction that standard and the cash reality diverge more than in most other sectors.
The Owner Dependence Problem in Construction
In professional services, owner dependence is primarily a question of whether clients would stay if the principal left. In construction, the issue runs deeper, because the owner typically holds two things that cannot be straightforwardly transferred with a sale.
The first is the licence. In Queensland, the QBCC builder’s licence is held personally by the individual nominee, not the company. A buyer acquiring the business cannot continue operating as a licensed builder without their own nominee or an appropriate licence holder in place. This is manageable, but the transition period carries regulatory complexity that is absent in most other sectors, and buyers price this accordingly.
The second is the relationship network. Head contractor relationships built over a decade do not automatically transfer to a new owner. The projects a building business wins in year one under new ownership depend substantially on whether those relationships hold, and a buyer has no certainty about that until it happens. The seller remaining for a twelve to twenty-four month earn-out period is common in construction precisely because this relationship risk is real.
The combined effect is that construction and trades businesses typically trade at two to four times normalised EBITDA. Owner-dependent businesses with limited management depth sit at the lower end of that range. A comparable business with a capable site management team, some recurring maintenance or service work, and client relationships that extend beyond the principal will attract a materially stronger outcome.
What EOFY Is the Right Moment to Address
For building and trades business owners thinking about an eventual exit, the weeks after June 30 offer two practical starting points.
The first is understanding where the number actually sits. An indicative business valuation using three methodologies and a frank view of construction-specific adjustments, including WIP credibility, retention risk, and the discount for owner dependence, gives you a baseline that reflects what a buyer would actually pay rather than what the P&L implies. Most owners who commission this exercise find the gap between expectation and reality informative rather than discouraging, because it identifies exactly which factors are driving the discount.
The second is identifying which of those factors can be addressed before a planned exit. An Exit Readiness Diagnostic scores a construction business across the eight dimensions a buyer would examine, from financial records and WIP documentation through to team depth, licensing structure, and client concentration. For most building businesses, one or two factors dominate the discount. Addressing those specifically over two to three years changes the sale outcome materially.
ProfitPulse works with construction and trades business owners across Queensland and NSW at exactly this point in the calendar. If June has delivered strong project revenue and you have not yet formed a clear view of what the business is actually worth, that picture is worth building now. Book a complimentary 45-minute discovery call with ProfitPulse.
Frequently asked questions
What is a typical EBITDA multiple for a building business in Australia?
Construction and building businesses in Australia typically attract two to four times normalised EBITDA. Owner-dependent businesses with limited management depth and purely project-based revenue sit at the lower end. Businesses with recurring maintenance or service revenue, a capable site management team, and transferable client relationships can attract four times or higher. The spread within the sector is driven by structural factors more than size. An indicative business valuation using three methodologies clarifies where a specific business sits and what is compressing the multiple.
How does work in progress accounting affect a construction business’s sale price?
Work in progress recognises revenue as a percentage of project completion, which introduces judgment into reported earnings. Buyers and their advisers scrutinise the WIP schedule to assess whether stage-of-completion estimates are defensible and consistent year on year. A pattern of write-downs after financial year end suggests reported earnings were overstated. Buyers typically discount normalised EBITDA based on WIP schedule quality, which means clean, well-documented WIP records directly support a stronger offer.
What is a retention balance and how does it affect a building valuation?
A retention is the percentage of contract value, typically two and a half to five percent, held by the client until the defect liability period expires. Retention balances sit as receivables on the balance sheet but are not cash and can take twelve to twenty-four months to collect across a project portfolio. Buyers treat them as impaired receivables, which reduces apparent balance sheet quality and adds complexity to the normalised earnings calculation in any sale process.
Why does a builder’s licence make selling a building business more complicated?
In Queensland, the QBCC licence that authorises a business to operate as a licensed builder is held personally by the nominee, not the company. A buyer acquiring the business must establish their own licence or nominee before continuing operations, which creates transition complexity. Buyers typically reflect this through a reduced upfront payment and an earn-out structure requiring the seller to remain during the transition period. It is a manageable issue but one that affects both price and deal structure.
How early should a Queensland building business owner plan for sale or exit?
Starting three to five years before an intended exit allows enough time to address the factors that most suppress construction valuations: licensing transition, owner dependence in client relationships, and WIP documentation quality. An Exit Readiness Diagnostic at this stage scores the business across the eight dimensions a buyer would examine and identifies which specific improvements would most improve the valuation outcome before a planned transition.
What financial records does a buyer examine when acquiring a trades business?
Buyers typically request three years of financial statements, a current WIP schedule with stage-of-completion documentation, a retention ledger showing amounts held and their expected release dates, an aged debtors report, and details of any variation claims currently in dispute. For businesses using percentage-of-completion revenue recognition, the quality and consistency of WIP records is often more telling than the headline profit figure. Clean records reduce buyer scrutiny and support a stronger negotiating position.
Does a fractional CFO help construction and trades businesses prepare for sale?
For building business owners managing sites, clients, and subcontractors daily, the financial preparation required for a credible sale is genuinely time-consuming. A fractional CFO arrangement builds the WIP documentation, normalises EBITDA with defensible adjustments, maintains clean financial records across three years, and prepares the financial narrative that supports a strong offer. The investment is typically recovered many times over through a better sale outcome.
Leave a Reply