How to Value a Carpentry Business
Carpentry businesses specialize in construction services such as framing, door and window installation, finishing work, etc… According to IBIS World, there are approximately 215,000 carpentry businesses in the United States. These businesses generate about $7.9 billion in revenue annually. We can expect healthy growth in the carpentry industry moving forward. As such, it may be a great time to buy, expand, or sell a carpentry business. Whether you are looking to buy, grow, or expand a carpentry business, it is helpful to understand how to value a carpentry business.
To learn how to value a carpentry business, it is best to obtain a business appraisal. During a business appraisal, valuation experts assess the strengths and weaknesses of your carpentry business. In addition, business appraisers can calculate the fair market value of a carpentry business. This information can help you understand the next steps in maximizing the value of a carpentry business.
As a professional business appraiser, Peak Business Valuation works with carpentry businesses on a regular basis. We are happy to provide you with a business appraisal for a carpentry business! Additionally, Peak can answer any questions you may have on how to value a carpentry business. Schedule your free consultation by clicking the link below!
How to Value a Carpentry Business
When deciding how to value a carpentry business, valuation experts consider a variety of common business valuation approaches. At Peak, our business appraisers often rely on the market approach and/or the income approach. Both approaches are effective, however, each method provides a different perspective on the value of a carpentry business. As part of a business appraisal, a valuation expert determines the best method for your carpentry business. This may include using a combination of business valuation approaches.
Valuing a Carpentry Business Using the Market Approach
The market approach is common in small business valuation. To understand the market approach, consider the real estate appraisal process. When valuing a property, real estate appraisers assess similar homes that recently sold in the area. This helps them understand the fair market value of the property. To value a carpentry business with the market approach, valuation analysts look at similar companies that were recently sold on the market. If the business is private, the valuation expert refers to private transaction databases to gather relevant information.
Multiples for a Carpentry Business
When using the market approach, business appraisers work with valuation multiples. Multiples are financial ratios that measure the value of a business based on various metrics. These metrics often include cash flow, earnings, and sales. To find the valuation multiples for a carpentry business, a valuation analyst applies the proper NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for a carpentry business.
SDE (Seller’s Discretionary Earnings) Multiples for a Carpentry Business
- The SDE multiple measures a carpentry business’s value based on its seller’s discretionary earnings. This is common when valuing a carpentry business using the market approach.
EBITDA Multiples for a Carpentry Business
- EBITDA multiples measure a carpentry business’s earnings before interest, taxes, depreciation, and amortization. The EBITDA multiple reflects the return on investment (ROI) a carpentry business can expect.
REVENUE or SALES Multiples for a Carpentry Business
- REVENUE or SALES multiples represent the total amount of revenue or sales a carpentry business generates. Apply the multiple to a carpentry company’s revenue to calculate its fair market value.
To learn more on how to value a carpentry business using the market approach, see Valuation Multiples for a Carpentry Business.
Valuing a Carpentry Business Using the Income Approach
Next, the income approach is another common valuation approach for carpentry businesses. When using the income approach, business appraisers look at the cash flow potential of a carpentry business. In addition, the income approach assesses any risks associated with buying or selling a carpentry business. We highlight a few common risks in the following section.
- Competition: The carpentry industry is extremely fragmented and competitive. To succeed, it is vital for operators to create diverse revenue streams and differentiate from competitors.
- Financial Performance: Many carpentry companies struggle to retain or increase profits. As such, it is important for carpentry businesses to have strong financial planning skills.
- Key Personnel: Carpentry is tedious and demanding work. To succeed, it is best for carpentry businesses to hire skilled and experienced carpenters.
- Location: The location of a carpentry business plays an important role in its success. The most successful carpentry businesses are located near residential and commercial construction markets.
Methods to Value a Carpentry Business Using the Income Approach
Under the income approach, there are several ways to value a carpentry business. The most frequently utilized methods are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a carpentry business using the capitalization of cash flow method and/or the discounted cash flow method.
Capitalization of Cash Flow Method
The capitalization of cash flow method is ideal if your carpentry business has a stable history. When valuing a carpentry business with this approach, business appraisers determine a reasonable amount of cash flow for one period. Then, the expert applies a capitalization rate to calculate the rate of return investors can expect. The capitalization of cash flow method also considers the risks associated with a carpentry business. We highlight a few common risks above.
Discounted Cash Flow Method
The discounted cash flow method is best for carpentry businesses with strong financial histories and/or predictable forecasts. With this income approach, valuation analysts project future cash flows over a 3-5-year period. Then, instead of using a cap rate, valuation experts apply a discount rate to the earnings. This process measures the value of a carpentry business by taking the time value of money into account. Keep in mind, the discounted cash flow method is less common since it is limited to future earning estimates which can be subjective.
If you are looking to buy, grow, or sell a carpentry company, it is beneficial to learn how to value a carpentry business. When valuing a carpentry business, valuation experts consider a variety of business valuation methods. To understand which method is best for your carpentry business, receive a business appraisal. During a business appraisal, a valuation expert will discuss the risks and opportunities of your carpentry business. You will also learn the fair market value of a carpentry business you are buying or selling. This information can help you take the next steps to maximize the value of a carpentry company.
Peak Business Valuation, business appraiser, is here to assist! At Peak, we help carpentry businesses throughout the country. As such, we are happy to provide you with a business appraisal for a carpentry business. Peak can also discuss any questions you may have on valuing a carpentry business. Start now by scheduling a free consultation with Peak Business Valuation below!