Key takeaways
- A buyer pays for the earnings the business can produce after the sale, so the owner’s unpaid labour has to be stripped out before any figure is credible.
- Work in hand, including signed contracts, approved progress claims and agreed variations, is better evidence of future income than last year’s turnover.
- The building licence is held by a person or company and does not pass automatically on settlement, so licence continuity must be worked out before a price is set.
- Key-person dependence lowers value, and reducing it through handover, documented systems and succession over several years is the most reliable way to raise it.
- Liabilities for past work, open disputes and insurance history transfer with the business, and disclosing them early is cheaper than a dispute after settlement.
Most small building businesses are valued on the back of an envelope. The owner remembers a good year, takes a rough view of the plant and the van, and names a figure that feels fair. The buyer, or the adult child who is taking over, works from the same instinct in the other direction. Neither party has looked at what actually transfers, and the gap between the two numbers is where most succession arrangements stall or fall over after settlement.
This article is about what a buyer looks at in a building business and why the owner’s own role changes the answer. It does not deal with the everyday cash-flow management of a business, which is a separate question. The focus here is value: work in hand, licence continuity, key-person risk, the liabilities that come with past work, and the records a careful buyer will test before settling on a number.
The commercial stake is high for both sides. An owner who overvalues the business can find that no one will buy it at the price, and the succession plan quietly stops. A buyer who pays for earnings that depend on the owner’s own hands can find, six months after settlement, that the clients have gone with the old owner and the business is worth a fraction of what was paid. Understanding the mechanism lets both sides see where the risk sits.
Why a buyer pays for future earnings, not past work
A buyer is not paying for the work the business has already done. They are paying for the earnings they expect it to produce after they take it over, adjusted for how confident they are that those earnings will arrive. That is why two businesses with identical turnover can sell for very different prices. The one with a steady pipeline, a licence that will transfer cleanly and no dependence on a single person will attract a higher multiple of its earnings than one where everything depends on the owner.
The first job in any valuation is to work out what the earnings really are. Owners often run the business with personal costs in it: a vehicle that is also the family car, a phone plan, a partner paid through the books, or the owner’s own labour counted as nothing. A buyer will strip these out and add back a realistic wage for the work the owner currently does for free. The result is the figure a buyer will test, and it is usually lower than the one the owner had in mind.
The multiple applied to those earnings reflects risk. Stable, diversified and well-documented earnings attract a higher multiple. Lumpy earnings, a few large clients and undocumented processes attract a lower one. None of these judgements has a fixed rule, which is why an advisor who has sold similar businesses is worth more than a formula. The point for a builder is to understand what moves the multiple, so you can work on it before selling.
Work in hand matters more than last year’s turnover
Last year’s turnover tells a buyer what the business did. Work in hand tells them what it will do. Contracts signed and not yet started, progress claims approved and payable, variations agreed in writing and deposits received are all evidence of the coming year’s income. A buyer will ask for a schedule of every contract, its value, its stage and its expected completion, and will check that schedule against the signed documents.
Work in hand is also where the hidden risks sit. A contract priced below cost, a fixed-price job with an unresolved variation, or a retention held for a defects period that has not yet expired all reduce what the buyer can rely on. Retention money that the business has earned but not yet collected is a real asset, but only if the release conditions are clear and the client is solvent. A buyer will look at each of these and adjust the figure accordingly.
The practical step for a seller is to tidy the work in hand before the sale. Close out finished jobs, get variations signed, chase progress claims that are overdue, and price the remaining contracts realistically. A business with a clean order book is easier to value, easier to finance and less likely to produce a dispute after settlement, when the question becomes which party carries the cost of a job that was underpriced.
Licence continuity: the licence is not the business
For a building business in New South Wales, the licence is the asset a buyer most needs to understand, and it is the one that is least like other businesses. A licence is held by a person or a company under the licensing rules, and it does not simply pass to a buyer on settlement. The General building work licensing pages are where to check who holds the licence and what the licence class allows the business to do, and a change of ownership or of the nominated person should be confirmed against them. Read those pages before you value anything, because a licence that cannot be continued after settlement is a licence that cannot be sold.
The continuing professional development obligations attached to the licence also transfer with it. Builders licensed in New South Wales must keep up their CPD, and the NSW Government pages for builders set out what that involves, as does the PointCPD guide to how NSW builder CPD works. A buyer taking over a business needs to know whether the person who will hold the licence is meeting those obligations, because a lapse affects the licence, not the business name on the van. Put the CPD records into the due diligence file alongside the licence documents, so the buyer can see the position for themselves.
Where the successor is a family member or an employee who does not yet hold the right licence, the timeline becomes part of the deal. The buyer may have to hold the business while the successor qualifies, or may need the owner to remain as the licensed person for a period. Each of those arrangements changes the value and the risk, and they should be worked out with the licensing rules in front of you rather than assumed.
What a buyer checks, and what it tells them
| What the buyer checks | What it tells them |
|---|---|
| Work in hand and its stage | How much income is already contracted, and how much of it is at risk |
| Licence holder and its continuity | Whether the business can keep trading after settlement without a gap |
| Dependence on the owner | How much of the income would leave with the owner |
| Past work and open claims | What liability transfers, and whether it has been disclosed |
| Records and systems | Whether the figures can be verified and the work can be taught to someone else |
Key-person risk and what the buyer is really paying for
Key-person risk is the risk that the business depends on one individual who may not be there after the sale. In a small building business that person is usually the owner. They hold the client relationships, price the jobs, supervise the sites, sign the paperwork and answer the phone when a client has a problem late at night. A buyer who takes over a business like that is buying a set of tasks that are currently done by someone else, and they will value it accordingly. The wider pattern is set out in the guide to key-person dependence in a small building business.
The fix is not to hide the dependence but to reduce it before sale. Move client relationships onto the business rather than the person, by introducing the new site supervisor or project manager to the main clients well before the sale. Write down the estimating method, the subcontractor list and the supervision routine, so they can be taught rather than remembered. A business where the owner has started to step back is worth more than one where the owner is still doing everything, because the buyer can see the risk falling.
The structure of the deal can also address the risk. A handover period, during which the owner stays on in a defined role, is common, and it gives the buyer time to learn the clients and the systems. A portion of the price tied to earnings after the sale, sometimes called an earn-out, moves some of the risk back to the seller. Each approach has trade-offs for both sides, and the terms should be written, not agreed in a conversation at the end of a site visit.
The costliest mistake. Pricing the business on earnings that include the owner’s unpaid labour, then discovering after settlement that the licence holder is not able to continue the work. The buyer pays for income the business cannot generate without the seller, and the dispute that follows usually turns on what was said about the licence rather than on the figures.
Liabilities that travel with the business
A sale transfers more than the assets. A building business carries warranty and defect exposure for the work it has already done, and the buyer needs to understand how far that exposure runs. Statutory warranties under the Home Building Act apply for periods set out in the Act, and a claim can arrive long after the job has been completed and invoiced. The seller who sells the business does not necessarily escape those claims, and the buyer who takes over the trading name may find that past customers still expect the business to answer.
Insurance matters here too. Residential building work in New South Wales is generally covered by the Home Building Compensation Fund where the Act requires it, and the cover for past work is part of what a buyer should review. Ask for the insurance history for each job that is still within its warranty period, and check which entity was named on each policy. A business that changes its legal structure or its trading name can create gaps that the buyer only discovers when a claim is made.
Finally, look at the disputes. Any open claim, any matter before the tribunal, any unpaid subcontractor and any unresolved defect on a completed job belongs in the disclosure. A buyer who finds these after settlement will price them in hindsight, and the trust that the sale depends on is damaged. Disclosing them up front, with a plan for each, costs less than the argument that follows. Signs that a business is under strain, which a buyer will also watch for, are covered in the guide to builder insolvency early warning signs.
The records a careful buyer will test
A buyer doing proper due diligence will ask for records rather than descriptions. They will want the job files for the last several years, the signed contracts and variations, the compliance documents for each completed job, the licence and CPD records, the subcontract agreements, the insurance history and the accounts. Where a job was subject to the BASIX scheme, the compliance certificate for that home belongs in its file, because a buyer will want to see that the obligation was met rather than take the owner’s word for it.
The records are also the business’s memory. A business whose records are complete and easy to find is worth more than one whose history lives in the owner’s head and a shoebox of receipts, because the buyer can verify the figures and the risk is visible. Start the clean-up well before the sale. A year of tidy records is more persuasive than a single weekend of frantic filing in the month before a sale.
How succession changes the number
Succession is different from a straightforward sale because the buyer is often someone the seller knows, the price is often paid over time, and the seller’s role may continue after the change of ownership. Each of those features changes the value. A price paid over several years reduces the buyer’s upfront risk but leaves the seller exposed to the business’s performance. A family transfer may carry an expectation of a lower price, which the tax and legal advisers need to address separately.
The sequence matters. Succession works best when the business is prepared for it over several years, with the successor brought into the client relationships, the estimating and the supervision in stages. The timeline below shows the usual order of work. The steps are not fixed, but skipping any of them tends to move the difficulty to the point of sale, where it is hardest to fix.
The order of work in a planned succession
- Stock takeThe licence, the work in hand, the liabilities and the records are listed honestly.
- Clients and systemsClient relationships and the estimating and supervision routines move onto the business.
- Successor qualifiesThe person who will hold the licence completes the qualification and the CPD obligations are tracked.
- Valuation and structureEarnings are adjusted, the price method is chosen and any handover period or earn-out is written down.
- Settlement and handoverThe owner steps back in the defined role, and the agreed terms are followed through.
Whatever the structure, write it down. The valuation method, the earnings adjustments, the licence arrangements, the handover period and any earn-out terms all need to be in signed documents, and each needs to be reviewed by an adviser who acts for the party it affects. A handshake deal between a retiring builder and a successor who has worked on the tools for years is still a deal that can fail, and the failure usually surfaces as a dispute about money that was never properly defined.
Worked example: a sole operator in western Sydney
A builder in western Sydney runs a small renovation business with two employees and a steady stream of kitchen, bathroom and extension work. The owner is in his late fifties and wants to step back over the next few years. His son, who has worked on the business for several years, is keen to take it on but holds a trade qualification rather than a builder’s licence, and the owner has not yet worked out how the licence will continue.
The first valuation the owner obtains is based on last year’s turnover and a generous view of the van and the tools. The adviser who reviews it strips out the owner’s personal vehicle costs, adds back a realistic wage for the estimating and supervision the owner does, and asks for the work in hand. The order book is strong, but two large jobs have unresolved variations and one has a retention that is not yet due for release. The figure falls, and the adviser says so plainly.
Over the following two years the owner makes three changes. He introduces the employee who runs most of the sites to the main clients, writes down the estimating method and the subcontractor list, and tidies the variations. The son sits the licence pathway with the support of the business and the CPD obligations are tracked in the file. When the succession is finally structured, the price is paid partly at settlement and partly over time against the earnings, and the owner stays on for a defined handover period. Both sides can see the risk, and neither party is surprised by it afterwards.
The lesson is that the number changed because the business changed, not because the market moved. The owner could have sold a year earlier at the first figure, and the buyer would have inherited a dependence that the price did not reflect. Preparing the business for succession is what turned a number that felt fair into one that both sides could defend.
Preparing the business for the first conversation
Before any buyer or successor sees the numbers, the owner should be able to answer five questions. Who holds the licence after the sale, and what does that require? What work is in hand, at what stage and on what terms? Which clients and suppliers depend on the owner personally? What liabilities and open disputes exist, and what is their status? And where are the records that would support each answer?
If those answers take a week to assemble, the business is not ready to sell, and the first conversation will be about the gaps rather than the value. If they can be produced in a day, the conversation can turn to structure, timing and price, which is where it should be. The work of preparing those answers also tends to reveal problems that are cheaper to fix now than after a buyer has found them.
Questions builders ask
How is a building business valued in NSW?
Most buyers start with the earnings the business can produce after the sale, adjusted for owner costs and a realistic wage for the work the owner currently does. They then apply a multiple that reflects risk, such as dependence on the owner and the strength of the work in hand. The method should be written down and reviewed by an adviser who acts for the party it affects.
Does a building licence transfer when a business is sold?
Not automatically. A licence is held by a person or a company under the licensing rules, and a change of ownership or nominated person has requirements of its own. Check the General building work licensing pages before you value the business, because a licence that cannot continue after settlement changes the price.
Why does key-person risk affect the price so much?
A buyer who takes over a business that depends on one person is buying tasks that are currently done by someone else, and they will price the risk accordingly. Reducing that dependence before sale, by moving client relationships and documenting the systems, is usually the most reliable way to protect value.
What is work in hand, and why does it matter?
Work in hand is the contracted and approved work that has not yet been completed, including signed contracts, progress claims that are payable and variations agreed in writing. It is better evidence of future income than last year’s turnover, so a buyer will check it against the signed documents.
Do past defect claims go with the business?
Liability for past work can outlast the sale, and the buyer may find that past customers still expect the business to answer. Warranty periods are set out in the Home Building Act, and insurance cover for past work should be reviewed job by job. Disclose open claims and disputes before settlement rather than after.
Should a succession be paid all at once or over time?
Either can work, and the choice depends on the buyer’s capacity, the seller’s need for income and how much of the future earnings depend on the owner. Payment over time moves some of the risk back to the seller, so the terms need careful drafting. Get advice from an accountant and a lawyer who act for the relevant party.
Sources
- BASIX · NSW Planning Portal
- Continuing professional development for builders and swimming pool builders · NSW Government
- General building work licensing · NSW Government
Published 25 October 2026. General information for builders, not legal, financial or engineering advice for a specific job. Check current requirements with the relevant regulator or standard before relying on them.
