Tagging a few Searchfunders that have posted or commented about Commercial General Contractors in the past and may be able to contribute to this thread: ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌,^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌, ^[redacted]‌ (To our friends & commenters, THANK YOU for helping to make Searchfunder a collaborative community! Be sure to take full advantage of our brand new integration with BVR Deal Stats, now available under the VALUATIONS tab at the top of this screen. https://www.searchfunder.com/bvr. With Best Wishes, ^[redacted]‌).

Dan, the value of a company is substantially based on the buyers projection of future earnings. Oftentimes the revenue of a GC is dependent upon bidding activity and accuracy as well as aggressive marketing. If the GC has a niche advantage over the competition, but has not been leveraging it, then a positive going-forward projection may be appropriate assuming that you, as the new owner, can make the growth happen. You need to understand why the sales have declined (the story). Otherwise the past is the predictor of the future. If it were me, if the owner can’t persuade you as to why the future will be substantially better, I would take a pass. While I dislike earnouts, it might be appropriate in this case. Feel free to call me.

First, valuation multiples are a rule of thumb derived from DCF. It is tricky to reliably apply a rule-of-thumb adjustment to what is already a rule-of-thumb multiple. The result can be as far from reality as it is from finance theory. For example, a negative CAGR can increase valuation multiple if growth (or a reversion to the mean) is anticipated, but it can reduce valuation multiple if it is indicative of the future.

Second, it is useful to adjust 2020 to consider what it would have looked like without covid. It's instructive to value a company for what it would have been worth if covid never happened.

To tag onto the above, also be weary of over adjusting as the value has come down with the revenue, and presumably the EBITDA along with it. Might be double, or partially double counting to also reduce the multiple by ~20%. The trick with declining revenue, COVID aside, is to determine why, and if that will continue in the future.

There’s some good points already mentioned, I tend to think of the multiple as expressing the “quality” of a business (tying back to the DCF point above, a lower quality business will likely require a higher discount rate and translates to lower multiple). So if the revenue decline increases things like revenue/profit concentration, lower visibility etc then maybe you’d want to adjust the multiple you’re paying too, otherwise as Ron mentions above you’re double counting the decline in the financials all else being equal

Ron has made an excellent point above. The key is to determine why the revenue declined and to determine if the revenue will continue in the future. Is the revenue decline due to the owner stepping back from being the main contact with clients? Take that into consideration and determine if multiple reductions is appropriate or overkill.

In addition to all the above great comments, what I have ensured in my due-diligence is truly understanding the levers, assumptions and the impact of these levers & assumptions to the Valuation and EBITDA - primarily because the sensitivity tells you how yuo can negotiate and adjust accordingly. And also, how you plan to grow/change the operations that would enable the post-acquistion story and TV. Hope that helps.

1. Even 2.75 may be too high if the fundamentals of the business, as mentioned by many above, are weak.
2. If the fundamentals are good and the primary risk is "timing", then consider even higher offer with an earn-out, earn-down, a seller note with contingent payout schedule, or some sort of preference structure.
3. Be careful of structuring with sales. If I read correctly, 27% drop in sales in 2019 caused 60% drop in profit. This could be related to accounting and/or fixed costs.

Dan - glad to see you on the forum and congrats on getting a deal this far! All great points above on the valuation, but take a step further back and look at the business - a 27% drop in revenue equated to a 60% drop in EBITDA= tells me they have an operating expense problem. If you can identify how to create some operating leverage back in the business then you have something to measure the impact of the 50% gain in revenue the owner is bringing to the table, which is going to tie into the DCF and valuation. Another item to think about with declining revenue and large variations in EBITDA is capital structure and debt ratios - make sure you have the right amount of leverage that is sustainable during the EBITDA variations.

Great points Dan and I suspect it has something to do with a major shift to GC work compared to CM/Owner's Rep previously.