How PE Firms Evaluate Contractor Financials

Why This Matters Right Now

There have been roughly 800 private equity acquisitions of contractor and home services businesses since 2022. Forty to sixty PE platforms are actively buying right now. If you're a contractor doing $5M+ in revenue, the odds that you'll get a call (or already have) are high.

I spent two years in private equity at Vector Capital before getting my MBA at Stanford. I've sat on the buy side of contractor evaluations. I've built the financial models. I've seen what makes a PE firm write a check — and what makes them walk away.

Most contractors aren't ready. Not because the business isn't good, but because the financials don't tell the story. Here's what PE actually looks at, and how to get your house in order — whether you plan to sell next year or in ten.

The First 30 Minutes: What PE Looks At

When a PE firm gets a contractor's financials for the first time, they're not reading every line item. They're scanning for five things:

1. Revenue Quality and Predictability

PE wants to know: how much of your revenue is recurring or contractual vs. one-time project work?

The best contractors I've reviewed have 40-80% of revenue from service agreements and repeat service customers. The ones PE avoids are 90%+ project-based with no recurring customer relationships.

The metric: SA revenue as a percentage of total revenue. Above 50% is strong. Above 70% commands a premium multiple.

2. Gross Margin by Service Type

PE doesn't just want to see your blended margin. They want it by service type — because they're modeling which parts of the business to grow and which to restructure.

From working with over 1,000 contractors at BuildOps and now advising PE-backed portfolios, here's what I consistently see:

• Service/repair: 45-65% gross margin (highest)
• Maintenance/SA delivery: 40-45% median (if properly priced)
• Install/project: 25-40% gross margin (lower, more variable)
• T&M work: varies wildly — needs job-level tracking

If your install division is running 20% margins while your service division runs 55%, PE will model growing service and restructuring install. If you don't have this breakdown, that's a red flag — it means you don't have job costing discipline.

3. Customer Concentration

If your top 3 customers represent 40%+ of revenue, PE sees risk. If one customer is 25%+ of revenue, it's a deal concern.

Why: PE will model what happens if the largest customer leaves. If the answer is "the business collapses," the risk premium goes up and the valuation goes down.

The fix: This one takes time. Diversifying your customer base is a multi-year effort. But knowing the number — and having a plan to address it — matters in the conversation.

4. EBITDA Quality and Adjustments

PE values contractors on a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). For contractors in the $5-30M revenue range, typical multiples are 4-7x EBITDA. For $30M+, it can be 6-10x.

But the EBITDA they use isn't what's on your tax return. They'll adjust for:

• Owner's excess compensation: If you're paying yourself $500K but a hired GM would cost $200K, they add back $300K
• Personal expenses running through the business: Trucks, insurance, cell phones for family members
• One-time costs: Legal settlement, equipment write-off, move to new office
• Below-market rent: If you own the building and charge the business below-market rent, they adjust

Getting your EBITDA adjustments documented and defensible before a PE conversation matters. The difference between "our EBITDA is $800K" and "our adjusted EBITDA is $1.4M with these specific, documented adjustments" could be a $2-3M difference in valuation at a 5x multiple.

5. Financial Infrastructure

This is the one that kills deals — not because the business is bad, but because the numbers can't be trusted.

PE needs:

• Monthly financial close within 15-20 days of month-end
• Clean chart of accounts mapped to industry standards
• Job-level profitability data — not just total P&L
• Cash flow forecasting — trailing and forward-looking
• WIP schedule (for commercial contractors with bonding)
• Consistent accounting policies — no switching between cash and accrual mid-year

The most common deal-killer I've seen: the contractor's books are on QuickBooks Desktop, maintained by the owner's spouse, with no job costing, no standard chart of accounts, and a 90-day close cycle. The business might be great. But the PE firm can't verify it, which means they either walk away or discount the price by 20-30%.

What Kills the Deal

In my experience, the top reasons PE walks away from contractor acquisitions:

1. Owner-dependent revenue. If the relationships live in the owner's phone and the owner is leaving post-acquisition, the revenue walks out the door. PE wants to see that customer relationships, pricing authority, and key decisions are distributed across a management team — not concentrated in one person.

2. No financial infrastructure. As above. If it takes 3 months to produce a P&L and nobody can tell you which jobs made money, the deal doesn't close. Or it closes at a fraction of what it should.

3. Undocumented EBITDA adjustments. Every contractor has personal expenses in the business. PE expects that. But if the adjustments aren't documented, defensible, and consistent, they'll discount them — and your valuation drops.

4. Hidden liabilities. Workers comp audits pending. Unresolved liens. Tax filings behind. Lease obligations not disclosed. Environmental issues on properties. PE does diligence, and surprises kill trust.

5. Declining metrics. Revenue going up but margins going down. Customer concentration increasing. Collection rate declining. DSO getting longer. PE models trends, not snapshots. If the trend is negative, the conversation gets harder.

The PE Readiness Checklist

Whether you plan to sell next year or want to run a better business (these are the same things), here's the financial infrastructure PE expects:

Accounting & Reporting

• Monthly close within 15-20 days of month-end
• Clean, standardized chart of accounts
• Accrual basis accounting (not cash basis)
• GAAP-compliant financial statements
• Consistent treatment of revenue recognition

Job-Level Visibility

• Job costing set up and maintained — every transaction tagged to a job
• Gross margin by service type (service, install, maintenance, T&M)
• Overhead allocation applied to jobs
• WIP schedule (for commercial work)

Cash Flow

• Collection rate tracked and above 90%
• AR aging reviewed weekly
• Retainage forecast maintained
• Billing speed measured — invoicing within 1 day of completion
• 6-12 week cash flow forecast maintained

Growth & Revenue Quality

• SA revenue as % of total tracked and growing
• No single customer above 20% of revenue
• Revenue growing without margin compression
• Pricing reviewed annually — rates keep pace with cost inflation

People & Process

• Management team in place (not owner-dependent)
• Key roles documented: who does estimating, billing, AR, scheduling
• Employee retention data tracked

The Valuation Math

Here's a simplified view of how PE values contractor businesses:

Every point of EBITDA margin matters. At $20M revenue, the difference between 15% and 20% EBITDA margin is $1M in annual profit. At a 6x multiple, that's $6M in enterprise value. Financial optimization — better job costing, improved collection, proper SA pricing — directly translates to higher valuation.

When PE Isn't the Right Move

Not every contractor should pursue a PE exit:

Under $5M in revenue, most PE platforms aren't interested (the deal economics don't work for them). Focus on building the business and the financial infrastructure. If a PE firm approaches you at this size, be cautious — the terms may not be favorable.

If you love running the business and don't want a boss. PE acquisitions come with reporting requirements, growth targets, and a board. If your goal is lifestyle and independence, a PE exit trades freedom for liquidity. That may or may not be the right trade for you.

If the business is owner-dependent and you're not willing to transition. PE needs you to stay for 2-3 years post-close to transition relationships and knowledge. If you're burned out and want to walk away immediately, the deal structure won't work.

If your financials need 12+ months of cleanup. Don't rush to market with messy books. You'll get a lower price. Take a year to get the financial infrastructure right, demonstrate 12 months of clean financials, and then go to market from a position of strength.

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The Bottom Line

PE evaluates contractors on five things: revenue quality, margin by service type, customer concentration, EBITDA quality, and financial infrastructure. The business itself might be excellent. But if the financials can't prove it, the valuation suffers.

The good news: everything PE wants to see is also what makes your business run better. Monthly closes, job costing, collection tracking, cash flow forecasting — these aren't "PE prep." They're the financial foundation of a well-run contractor.

Q: Can Level help me prepare for a PE exit? A: Yes. We've been on both sides — I spent two years in PE evaluating contractor financials, and now we help contractors build the financial infrastructure PE expects. We'll clean up your chart of accounts, implement job costing, build the cash flow forecast, and document your EBITDA adjustments. When you're ready for the conversation, your numbers tell the right story.

Q: How long does PE readiness take? A: For a contractor with basic bookkeeping in place, typically 6-12 months to get the financial infrastructure to PE standards. The first 90 days focus on chart of accounts, job costing setup, and monthly close process. The next 6 months build the track record of clean monthly financials that PE needs to see.

Q: What multiple should I expect? A: For $5-30M revenue contractors with strong financials, 4-7x adjusted EBITDA is the current market. Higher multiples go to contractors with strong recurring revenue (high SA penetration), diversified customer bases, and a management team in place. The biggest lever on valuation isn't revenue growth — it's proving the quality and sustainability of your existing earnings.