how to value contractors?

i’m in business valuation and we’re advising a client as it attempts to buy out a 20% owner of their firm. its a building contractor and its obviously not a great time to be in their business. its a specialized building contractor operating in very specific markets, so we don’t have good comparables to use. We have a few transactions, but none of them are very good. we’re trying to use just a simple capitalization of earnings methodology, but that’s tough since the earnings are so volatile as you move through the business cycle (which is definitely the situation in 2008 as revenue is expected to fall by as much as 20-30%). we’re also trying an old-fashioned dcf, but its difficult to feel good about projections more than a year or two out due to its he cyclical nature. my boss, who’s not working on the project, suggested taking the book value of the company and adding its backlog, net of direct operating expenses and overhead. he’s used that a few times over the years. i guess i’m just wondering what other people have used to value companies like this one. also, has anyone ever used/heard of the book value plus backlog approach? thanks.

Take it for what it’s worth as I’ve never valued a contractor before. I did, however, used to be one in a past life and from the sounds of it, you’re bosses approach sounds reasonable, albeit a bit optimistic, given that there is essentially no customer loyalty or brand management in this business. Contracting is a fairly commoditized service with few barriers to entry and exit. Competitors will steal your client base or your client base will move away from you… basically, it’s a shite business, which is why I got out and sought greener pastures and a career in finance. At the time I was in it, the standard practice if you wanted to get out of the business was to sell your equipment and any remaining contracts you had left to the highest bidder, usually for about 20% of the expected profits on the job, give or take some. For example, you might have a 100k contract to build out an addition on someone’s house and expected to make 25% net of materials and labor, you could only get about 7-10k for the job, with the buyer taking the rest of the profits. Your ability to get more was dependent on your skill and reputation for giving a tight bid on the job. Hope this helps.