How can you assign a dollar value to your plumbing company?
The plumbing business has seen significant growth over the past few years. And due to the ever-growing demand for plumbing services, the industry has an expected growth rate of 12% from 2019 to 2029. This has led to an explosion of M&A activity, with buyers looking to consolidate small businesses into state or regional players. If you’re interested in selling a plumbing business, understanding how to value it is crucial. And working with a business broker is the best way to get an accurate evaluation. Here, we’ll focus on four ways experts use to determine the value of your plumbing business.
How Does a Business Valuation Work?
A business valuation is the process of analyzing the finances and operations of a business to determine its economic or fair market value. A business broker will use factors like the current market, the company’s tangible and intangible assets, company leadership, and future earnings prospects to determine valuation.
The tools for business valuation can vary among industries, businesses, and evaluators. However, there are a number of approaches used to value a plumbing business. these include market value, book value, and a multiple of earnings.
Performing a business valuation can help you plan for the future of your plumbing company. You could find out that your company is worth enough to sell it now, or it will need some improvement and investment so that you can get a higher price in a few years.
Calculating the Value of Your Plumbing Company
The value of your plumbing company depends on various factors, including its size, expected growth, your team, and several other elements. Business evaluators use a few formulas to calculate a company’s value.
Let’s take a look at some of the most commonly used methods of business valuation:
Book Value
One of the simplest methods of valuing a company is by calculating its book value using information from the balance sheet.
To calculate book value, you simply take the difference between business assets and liabilities to determine owners’ equity. Intangible assets are generally excluded. The figure you’re left with represents the value of your company. For example, if you have $90,000 in assets and $15,000 in liabilities, the value of your company is $75,000.
However, this method is notably unreliable because it does not paint an accurate picture of the true value of a business and relies on the assumption that assets will retain their value over time.
Market Value
The market value method is also called the comparative approach or market approach. It involves determining the value of a business by comparing it to other plumbing businesses with identical financials and characteristics. This valuation method is based on the theory that the value of a plumbing company is almost equivalent to another of similar characteristics that has been sold or received funding recently.
One of the advantages of the comp’s method is its reliance on hard data, which eliminates assumptions. However, having access to the financial data of other plumbing businesses with similar characteristics can be difficult. The current market conditions may also affect the value of the company.
Multiple of SDE
Seller’s discretionary earnings (SDE) refers to the net income of a business before deducting the owner’s salary. SDE is generally used to calculate the value of a small business doing less than $1 million in gross annual sales. This type of business is also more likely to be owner operated. With this method, the business broker will inspect the profit and loss statements, determine the owner’s addbacks and benefits, and add the numbers to the net income. They’ll then multiply the sum using the industry’s specific multiple.
For example, if a plumbing company has $400,000 in SDE and the industry has a 2.3x multiple, then the company would have an implied value of $920,000. Using this method gives your broker a ballpark figure to begin negotiations with prospective buyers.
EBITDA Multiple
The EBITDA is a more reliable valuation metric for a company that does more than $1 million in earnings. EBITDA stands for earnings before interest, taxes, depreciation and amortization. To calculate your plumbing business’s EBITDA, the same addbacks will be made as those in an SDE. However, the owner’s salary will be left out.
Instead of adding back the owner’s salary, EBITDA uses a manager’s earnings. For example, if you’ve been paying yourself $160,000 but the new owner could hire a manager whose salary is $90,000, then $70,000 would be added back.
Multiples will be applied to your EBITDA to determine the value of your plumbing company. If your plumbing company, for example, has an EBITDA of $710,000 and transacts at a multiple of 4x, the business is worth $2,840,000.
The multiple used for your business will be based on recurring revenue, customer base, owner involvement in sales, reputation, online presence, skilled employees, and additional services, among others.
Contact Lonnie Veasley for a Professional Business Evaluation and Selling a Plumbing Business
Now that you know a little about how to value your plumbing company, you may be ready to take the next steps. You can only determine whether or not you’re ready to sell your business when you know what it is worth and what it could potentially sell for. A business valuation also allows you to learn about areas for growth and helps you prepare your business so it can sell for maximum profit.
If you’re interested in selling a plumbing business in the greater Tampa Bay area, Lonnie Veasley will happily do a complimentary consultation with you. Lonnie and his team focus on providing valuable information to help owners grow and sell their plumbing businesses.
We will help you understand the valuation process and what you need to do to get maximum profit when you sell your business. Contact us today to get started on the right foot.
