How to Value a Fence Company
Businesses in the fence construction industry build and install various types of fences. There are approximately 319,000 fence companies in the United States. An industry report from IBIS World notes that these fence companies generate about $3.5 billion dollars annually. In the coming years, we can expect the fence construction industry to experience increasing profit margins and steady revenue growth. This is ideal if you are looking to buy, grow, or sell a fence company. Whether you are entering or exiting the industry, it is helpful to learn how to value a fence company.
The best way to learn how to value a fence company is to receive a business valuation. During a business valuation, valuation analysts may discuss the strengths and weaknesses of your fence company. In addition, you will learn the fair market value of a fence company as part of the valuation process. This information is vital if you want to increase the value of a fence company.
Peak Business Valuation is a professional business appraiser. At Peak, we often value fence construction companies across the nation. We are happy to provide you with a business valuation for a fencing company you are buying or selling! If you have any questions, schedule a free consultation with Peak Business Valuation below!
How to Value a Fencing Company
When valuing a fence company, business appraisers consider several common business valuation approaches. Generally, valuation experts tend to rely on the market approach and/or the income approach. Each method uses a different basis of valuation. As such, the valuation expert will determine which method is most suitable for your fence company. This often includes using a combination of business valuation methods to value a fence company.
Valuing a Fence Company Using the Market Approach
The market approach is common when valuing small fencing companies. This approach is similar to the real estate appraisal process. When real estate appraisers value a property, they assess similar homes that recently sold in the area. This allows them to calculate an accurate value of the property. With the market approach, a valuation expert will consider similar companies when valuing your fence company. If the business is privately owned, the analyst refers to private transaction databases to gather relevant information.
Multiples for a Fence Company
Valuation multiples are a key component of the market approach. These are financial ratios that compare the value of a fencing company to various metrics. Some common financial metrics include earnings, sales, and cash flow. To find the appropriate valuation multiples for a fence company. Business appraisers apply the proper NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for a fence company.
SDE (Seller’s Discretionary Earnings) Multiples for a Fencing Company
- The SDE multiple measures the value of a fence company by assessing its seller’s discretionary earnings. This multiple is common when valuing fence companies.
EBITDA Multiples for a Fence Company
- EBITDA multiples measure a fence company’s earnings before interest, taxes, depreciation, and amortization. This helps the valuation expert understand the return on investment (ROI) a fence company can generate.
REVENUE or SALES Multiples for a Fencing Company
- REV multiples measure the amount of sales or revenue a fence company generates. Business appraisers can calculate the value of a fence company by applying the multiple to its revenue.
To learn more on how to value a fence company using the market approach, see Valuation Multiples for Fence Construction.
Valuing a Fence Company Using the Income Approach
The income approach is also common when valuing a fencing company. When using the income approach, valuation analysts assess the earning potential of a fence company. In addition, they will look at any risks associated with buying, expanding, or selling a fence company. We discuss a few of these risks in the following section.
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- Financial Performance: Profit and revenue levels can fluctuate in the fence construction industry. To succeed, it is important to have strong financial planning skills.
- Key Personnel: It is vital for fence companies to have skilled workers and effective management. This helps maximize efficiency at a fencing company.
- Competition: The fence construction industry is very competitive. As such, operators must differentiate from competitors and offer various revenue streams.
- Equipment and Supplies: Fence companies use a variety of equipment and supplies to provide services. To provide quality work, it is vital to acquire quality and reliable equipment.
Methods to Value a Fence Company Using the Income Approach
There are several variations of the income approach. The most common income methods are the capitalization of cash flow method and the discounted cash flow method. Both methods consider a fence company’s earning potential. Below, we discuss how to value a fence company 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 best if your fence company has a long and stable history. To value a fence company using this method, valuation experts determine an appropriate amount of earnings for one period. The earnings are then divided by a capitalization rate to calculate the rate of return investors can expect. Additionally, the capitalization of cash flow method assesses the risks associated with buying, growing, or selling a fence company.
Discounted Cash Flow Method
The discounted cash flow method is ideal for fence companies with strong financial histories and/or reliable forecasts. This method involves projecting future earnings over a 3 – 5-year period. Then, a business appraiser applies a discount rate to take the time value of money into account. Please note, that the discounted cash flow method is less reliable since it is limited to future cash flow estimates which can be inaccurate.
Summary
Whether you are buying or selling a fence company, it is beneficial to learn how to value a fence company. Business appraisers consider a wide variety of valuation approaches when valuing a fence company. To know which method is best for your fence company, receive a business valuation. During a business valuation, you will learn a fence company’s fair market value as well as the risks and opportunities associated with it.
Peak Business Valuation is happy to help! At Peak, we work with fence companies on a regular basis. As such, we can provide you with a business valuation for a fence company. In addition, Peak can discuss any questions you may have on how to value a fence company. Start now by scheduling a free consultation below!
For more information see also Valuing a Fencing Business, Valuation Multiples for Fence Construction, and Value Drivers for a Fence Construction Business.
