Lately, I’ve been working with several clients who are exploring opportunities to purchase businesses that rely heavily on bidding for contracts—particularly in service industries like plumbing, electrical work, HVAC, and similar trades. I want to share some key insights and potential pitfalls when it comes to evaluating these types of businesses. https://youtu.be/V-ejWqEQL3c
Two Types of Service Businesses
Let’s take a plumbing business as an example. Generally, there are two ways such businesses generate revenue:
1. Retail or Repeat-Service Model
In this model, the business services homeowners, property managers, or small landlords who call them on a regular basis. Even if a customer only needs help once or twice a year, there's still a steady, recurring flow of business.
This is true goodwill—it’s based on relationships, brand recognition, and customer loyalty. When a buyer purchases this kind of business, they are acquiring not just cash flow, but also a customer base that keeps coming back.
2. Contract or Project-Based Model
The second model is where the company primarily bids on projects—new apartment buildings, commercial developments, or infrastructure projects. These tend to be one-off contracts, often awarded by general contractors or government entities based on competitive tenders.
While this model can generate large revenues, it does not foster recurring customers. Each new job must be won through a fresh bidding process, and winning depends heavily on price competitiveness and timing—not customer loyalty.
The Illusion of Value in Contract-Based Businesses
I’ve seen many business brokers present these project-based businesses as high-value opportunities based on rising past revenues. However, here’s the problem:
The revenues aren't recurring.
There's often no order book—no backlog of secured contracts for the future.
A large percentage (sometimes 20–25%) of annual sales may be tied to a single, one-off project.
There is no guarantee those levels of sales will continue.
To make matters worse, some sellers underbid contracts in their final year to make the revenue figures look good, potentially leaving the buyer with unprofitable work after the deal closes.
So, What Is the Business Really Worth?
Valuing a project-based business like this can be challenging. While the business might have a strong reputation and skilled employees, the uncertainty of future cash flow undermines its valuation. Unlike recurring service models, project-based businesses do not build goodwill in the same way.
This often means:
Earn-Out Agreements: Instead of paying based solely on historical earnings, buyers may offer an earn-out where part of the purchase price is paid based on the business’s actual future performance.
Long Seller Involvement: The seller might need to stay involved post-sale for a significant time to continue bidding, pricing, and leveraging industry relationships.
Key Takeaway: Buy Stability, Not Just Revenue
If you're choosing between two similar businesses—one with regular, returning clients and the other dependent on new contract wins—the one with repeat business almost always offers greater long-term value and less risk.
Before you buy a business that’s driven by bidding on contracts:
✅ Look for an order book with future work secured.
✅ Understand whether the past revenue is repeatable.
✅ Be wary of underpriced contracts that may burden you post-purchase.
✅ Consider earn-out structures if the future income is uncertain.
✅ Expect to keep the seller involved longer than usual.
Thinking of Buying a Business This Year?
If you're planning to buy a profitable business within the next year, check out my Buy a Successful Business Accelerator Program. It’s a small, exclusive group where I personally work with participants to:
Analyze real deals
Structure offers
Navigate financing and negotiations
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Talk soon,
David Barnett
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