This is one of the most misunderstood topics in the trades. We know how to price a job to the penny, but when it comes to pricing the business, the standard "rules of thumb" are often flat-out dangerous.
Here is how valuation actually works when the ink meets the paper.
The 1x annual gross revenue rule is a myth for small businesses. If a company grossed $500k but only cleared $20k in net profit due to overhead, no sane buyer is paying $500k to buy themselves a stressful, low-paying job.
For trades under $2M, buyers use SDE (Seller’s Discretionary Earnings), not EBITDA:
- SDE = Net Profit + Owner's Salary + Owner's Perks + One-Time Expenses.
- A healthy, owner-operated trades business typically sells for 1.5x to 3x SDE (plus the fair market value of clean, working equipment).
- Breakeven companies with no retained earnings are generally valued at liquidation/asset value plus a small premium for a clean, active customer list.
Systemization is the entire ballgame. If the business relies on the owner’s personal cell phone and the mental Rolodex in their head, it is virtually unsellable.
To get a premium, you have to pass the "Hit by a Bus" Test:
- The Owner-Operator Penalty (1x to 1.5x SDE): If you are still pulling the trigger on the spray gun or turning the wrench every day, the buyer is just buying a job.
- The Systemized Premium (2.5x to 3.5x SDE): If a buyer sees a clean CRM (like Jobber) with automated dispatch, card-on-file billing, and clear SOPs for the crew, the risk drops to zero. If you can take a two-week vacation and the business still runs and gets paid, you command a premium.
Bringing in a peer who has their own trucks, crew, and clients is a great way to scale, but avoid the classic "50/50 handshake" trap. Use a Contribution-Based Vesting Model:
- Value current assets today: Establish a baseline value for your existing business.
- Value their contribution: Get a fair market value for their physical gear. Do not value their clients on "potential"—value them on actual cash collected over their first 12 months.
- Use a vesting schedule: Let them earn their equity over 2 to 3 years as they hit specific revenue and operational milestones.
- Separate labor from equity (Crucial): If you are both in the field, pay yourselves a market-rate hourly wage first. Only split the remaining profit at the end of the quarter based on ownership percentages. If one of you steps back to run admin, the field operator still gets paid for their physical labor, preventing any resentment.
