Profit Follows People. Never the Other Way Around

For most of us, it’s difficult to remember when we started our various construction businesses. We track the usual metrics and we know annual revenues, we look at profit margins quarterly. But I can pretty-well guarantee you are not tracking the numbers that buyers are. That fact could cost you dearly.

I conduct valuations in accordance with International Valuation Standards every week. When prospect buyers arrive with their due diligence checklists, they do ask for the standard financial documentation as a priority. Profit and Loss statements Balance sheets and Tax returns are predictably at the top of the list. However, I am witnessing significant evolutionary changes in the form and content of Due diligence activity..

Last year I spoke about Cyber Risk and System vulnerabilities. Now we find  embedded in the questionnaires we are receiving a new set of risk identifiers in the form of fresh “people” related questions.

These outliers are all about workforce metrics. Not simply headcount, wages and workers comp. We are being asked questions that reveal stability, capability, and sustainability within your labour force. These numbers have become valuation drivers as significant as your EBITDA. Perhaps more so given Australia’s ninety thousand worker shortage. I want to alert business owners that fumbling these questions will set off alarm bells in the eyes of the buying teams.

The Three Metrics Construction Business Owners Are Not Tracking
(But Buyers Are)

Average Employee Tenure

Why Buyers Care About It Now

When an acquirer evaluates your construction business, they are assessing workforce stability as a proxy for business risk. High employee turnover signals problems. It suggests poor management, inadequate compensation, dysfunctional culture, or all three. In a market where recruiting qualified tradespeople has become brutally difficult, buying a business with revolving door employment is purchasing a liability, not an asset.

Conversely, long average tenure tells buyers that your people stay because conditions are good. Your pay is competitive. Your projects are managed professionally. Your workplace culture functions. These factors reduce integration risk and increase the probability that your workforce will remain post-acquisition. Buyers pay premium prices for that certainty.

How to Calculate It

Take each current employee’s start date. Calculate their tenure in months. Sum all individual tenures. Divide by total number of employees. The result is your average employee tenure in months.

Simple mathematics – similar to the ratio “lifetime value of a client.” Yet I have sat across from business owners worth multiple millions on paper who could not produce this figure. One owner told me it would take him weeks to compile the data. His business employed forty-seven people. That tells me everything I need to know about his operational rigour.

What Good Looks Like

In construction, average employee tenure of thirty-six months or higher indicates strong workforce stability. Anything below twenty-four months raises serious questions. Below eighteen months, you have a retention crisis whether you recognise it or not.

But here is the thing. Tenure data becomes exponentially more valuable when segmented by role. Your apprentices will naturally have lower tenure than your site supervisors. Separate these cohorts. If your experienced tradespeople are leaving whilst apprentices stay, that reveals a different problem than if the pattern is reversed. Acquirers are asking these questions. You should ask them first.

Implementation Steps

Extract employment start dates from your payroll system today. Build a simple spreadsheet. Calculate average tenure monthly and track the trend. If tenure is declining, investigate why immediately. Exit interviews are worthless if nobody acts on the data. Your workforce is telling you something. Listen to them before they tell an acquirer the same story during due diligence.

Recruitment Cost Per Hire

Why Buyers Care About It Now

Every new hire represents replacement risk and we have all employed somebody who has up-and-left after three weeks/months. When an acquirer purchases your business, they assume the risk that your existing employees might leave. Industry recruitment costs are high, and with high staff turnover that risk becomes prohibitively expensive. If your recruitment costs are unknown, the acquirer will assume at the least the industry average and at the worst… well who knows! But your business value will be discounted accordingly.

Furthermore, a business that maps recruitment cost per hire reveals operational sophistication. Businesses that track this metric tend to manage hiring as a strategic process rather than a reactive scramble. They maintain pipelines. They invest in employer branding and word-of-mouth referrals. They understand their labour market. Acquirers recognise these characteristics and value them appropriately.

How to Calculate It

Recruitment expenses include the direct expenses like advertising costs, agency fees, background checks, internal time spent interviewing, but they also incorporate – the economic costs to management and organisation of on-boarding down time, short courses/licences and any other indirect costs to “bring-up-to-speed.” 

Most business owners dramatically underestimate this figure because they fail to account for the internal time. When your operations manager spends six hours interviewing candidates for a single position, that is a cost. Calculate it. Include it.

What Good Looks Like

Industry benchmarks vary by role and region, but for construction businesses, recruitment costs between four thousand and seven thousand dollars per hire generally indicate efficient processes. Costs above ten thousand dollars per hire suggest inefficiency or reliance on expensive agency recruitment. Costs below three thousand dollars might indicate inadequate screening or unsustainable referral-dependent hiring.

Track this metric separately for apprentices, trades, and management roles. Lumping them together obscures useful information. An acquirer may separate these categories during due diligence. Do it first.

Implementation Steps

Establish a recruitment cost tracking system immediately. Create a dedicated cost centre in your accounting system. Capture all hiring-related expenses. Review quarterly. If costs are high, audit your recruitment process. Are you advertising in the right places? Are you screening candidates effectively? Are your job descriptions attracting appropriate applicants? Most construction businesses can reduce recruitment costs by thirty to forty per cent through process improvement alone.

Training Investment Per Employee

Why Buyers Care About It Now

Investment in training reveals two critical factors. It demonstrates whether you are building capability or simply consuming it. Businesses that invest in training develop more skilled workforces over time. Second, training investment signals cultural commitment to employee development. Workers stay at businesses that invest in them. 

I have a lifetime of building businesses and watching successful businesses. Nearly all bosses state that people leave “for better pay.” That’s not entirely correct, people do sometimes seek better pay – but they leave bad bosses and businesses that extract value without reciprocation. An acquirer evaluating your workforce retention sees training investment as predictive of future stability.

I have watched private equity groups walk away from acquisitions specifically because the investment in people was negligible. When  building internal capability post-acquisition would require substantial additional capital investment the deal will collapse. Business owners never seem to ask why?

What Good Looks Like

Construction businesses that invest between two thousand and four thousand dollars per employee annually in structured training are building competitive advantage. Investment below one thousand dollars per employee suggests neglect. Investment above five thousand dollars per employee indicates either highly specialised work or poor training efficiency.

Context matters enormously. A business focused on complex commercial contracts should invest more than a residential maintenance contractor. Benchmarking against competitors in your specific sector, not the industry broadly, is important.

Valuation Impact

Training investment directly correlates with workforce capability. Capable workforces execute projects more efficiently, make fewer costly errors, and require less supervision. These factors flow through to profitability. But beyond financial impact, training investment reduces acquirer risk.

Implementation Steps

Audit your training expenditure immediately. If you are not tracking it, start. Establish annual training budgets by role and ensure they are spent. Document all training activities. Create individual training records for each employee showing skills acquired and certifications earned. When an acquirer requests due diligence documentation, these records demonstrate systematic workforce development. Their absence communicates that your workforce capability depends on external recruitment rather than internal development.

Where This Leaves You

I have explained three simple metrics that significantly influence how acquirers value construction businesses in the current market. If you cannot answer questions about average employee tenure, recruitment cost per hire, and training investment per employee, you are operating blind.

The national shame of having a ninety thousand worker shortage has fundamentally altered valuation methodology. Labour-force fundamentals now drive acquisition decisions as forcefully as financial performance. Businesses with strong people metrics are attracting higher valuations. Businesses without them are being discounted or passed over entirely.

This is not a theoretical concern. Alongside the legality of labour contracts these questions are being asked right now. I see it every week in real due diligence work with real consequences. Business owners who have built strong operational foundations are being rewarded. Those who have neglected workforce management by hiding behind sham contracts and high turnover are leaving substantial value on the table.

You have two options. You can continue operating without these metrics, hoping that acquirers will value your business based solely on revenue and profit. Or you can start tracking them today, understand what they reveal about your business, and take action to improve them before someone else conducts the audit.

If you want an honest assessment of where your business stands, call me directly on 1300 551 757. We will have a confidential conversation about your workforce metrics, what they mean for valuation, and what steps you should take now. No obligation. No sales pitch. Just professional advice from someone who conducts these valuations in accordance with International Valuation Standards every single week.

Pick up the phone. The number is 1300 551 757. Let us talk about your business honestly and work out what it is actually worth in the current market.

~ Kevin Lovewell