The Construction Trade's M&A Boom Is Getting Selective. Unprepared Sellers Are Feeling It.

For the past several years, private equity has poured into HVAC, plumbing, and electrical businesses, pushing valuations higher and making the trades one of the most active corners of the lower middle market. That wave has not receded, but it has changed character. Buyers are still showing up, just not for every business that comes to market.

The shift is most visible in the $5 million to $50 million revenue range, where well-run companies still attract multiple bidders and close relatively quickly, while owners who assumed the sector’s heat alone would carry them to a premium are finding a cooler reception. According to Jim Tassoni at Ridge Trail Capital, a Great Lakes Midwest-based M&A advisory firm where roughly 80 to 85 percent of the client book is in manufacturing, logistics, and trades, the gap between prepared and unprepared sellers has widened enough to function as the primary sorting mechanism in the current cycle.

Revenue Up, Profits Down

One of the more striking patterns in the current environment is a disconnect between top-line growth and bottom-line performance. Rising material costs and labor expenses are compressing margins in ways that some owners have not fully registered until an outside review surfaces the numbers.

“We’ve seen some business owners who are surprised when we dig into their numbers and see, hey, my revenue is up year over year, but my profits are down,” Tassoni says. “And they didn’t realize that until we really pointed it out.”

That margin compression matters enormously in a sale context, because buyers price businesses on earnings, not revenue. An owner who sees growing sales and assumes the business is becoming more valuable may be heading in the opposite direction. Some operators, however, are adapting, sourcing materials through different channels, shifting toward on-demand labor models to avoid carrying staff between jobs. Tassoni notes that certain owners are “seizing on those headwinds and actually turning them into opportunities” by managing costs more aggressively than their competitors.

For owners considering a sale, the implication is direct: a revenue line that looks strong on the surface can mask declining profitability, and buyers will find the gap during diligence whether the seller has identified it or not.

What Kills a Deal Before the Finish Line

Two structural problems account for most of the deals that fall apart in the construction trades, according to Tassoni: messy financials and excessive owner dependency.

Clean books are the threshold requirement. Buyers conducting due diligence will uncover one-time expenses that were not properly categorized, or EBITDA adjustments earnings before interest, taxes, depreciation, and amortization, the standard measure buyers use to value a business, that do not hold up under scrutiny. “Any buyer is going to uncover that during due diligence and it can lead to issues,” Tassoni says.

The second problem – owner dependency – runs deeper and is harder to fix on a short timeline. In many trades businesses in the $5 million to $50 million range, the relationships, business development, and operational decisions all run through the owner. When a buyer discovers that the business has no standard operating procedures and no management team capable of running day-to-day operations independently, the deal either reprices or collapses.

“We’ve had deals fall apart simply because a buyer comes in and after getting under the covers a little bit during due diligence, they find out that all the relationships, all the business development, all of the various aspects of the business run through the business owner,” Tassoni says.

Owners who recognize this risk early enough can begin delegating and documenting processes. Those who discover it at the negotiating table have already lost leverage.

The Multiples Misconception

A persistent gap exists between what construction business owners expect their companies are worth and what the market actually supports at their revenue level. Tassoni traces the problem partly to media coverage of large transactions that sets unrealistic benchmarks.

Owners running businesses at $10 million, $20 million, or $30 million in revenue see headlines about companies selling at multiples that apply to firms doing $400 million or $500 million, and assume the same math applies to them. “Smaller business multiples are very different than medium or large size business multiples,” he says. “And that’s one thing that maybe if you haven’t been through this process, you may not be aware of.”

That expectation gap shapes whether an owner enters the process with realistic pricing or wastes months chasing a number the market will not support. Tassoni says the firm spends significant time helping owners understand that valuation depends on multiple factors beyond revenue and EBITDA, including how much revenue is recurring, how dependent the business is on its owner, and whether the operational infrastructure can stand on its own.

The Recurring Revenue Shift

The most consequential trend Tassoni identifies in construction and trades M&A right now is the move away from project-based revenue toward recurring or subscription-style income. Trades businesses with lumpy, project-driven revenue streams have always carried more risk in buyers’ eyes. Owners who have built maintenance contracts, quarterly HVAC servicing, and monthly service plans for commercial clients are presenting buyers with more predictable cash flows and commanding better valuations as a result.

“A lot of trades businesses, construction businesses, they’ve gotten wise to the fact that their business is worth more if they have less lumpy revenue and more sustained, stable revenue,” Tassoni says. He expects this shift from project-based to service-based and subscription-based revenue to continue across construction and trades.

For sellers entering the market in the near term, the calculus is straightforward. The construction trades M&A market still rewards strong businesses with attractive offers and competitive bidding. But the definition of “strong” has narrowed. Buyers are no longer paying a premium for a hot sector alone; they are paying for clean financials, independent operations, and predictable revenue. Owners who can demonstrate all three are still in a seller’s market. Those who cannot are learning that industry tailwinds no longer compensate for operational gaps.

About the Expert: Jim Tassoni is a Managing Director with Ridge Trail Capital, a Great Lakes Midwest-based M&A advisory firm focused on manufacturing, logistics, and trades businesses.

This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.