How to Value a Flooring Company
Companies in the flooring industry primarily install various types of flooring such as carpet, linoleum, wood, etc… In recent years, the flooring industry has benefited from steady conditions, generating over $5.8 billion in revenue each year. These conditions will likely remain steady moving forward. As such, it may be a good time to buy, grow, or sell a flooring company. However, IBIS World notes that the flooring industry is extremely fragmented and competitive. To succeed, it may be helpful to learn how to value a flooring company.
The best way to learn how to value a flooring company is to receive a business valuation. As part of a business valuation, you will learn the fair market value of a flooring company. Additionally, business appraisers can discuss the risks and opportunities of your flooring company during the appraisal. With this information, you can begin to maximize the value of a flooring company you are buying or selling.
As a professional business appraiser, Peak Business Valuation works with flooring companies on a regular basis. As such, we are happy to provide you with a business valuation for a flooring company. In addition, Peak Business Valuation can discuss any questions you may have on how to value a flooring company. Start now by scheduling a free consultation with Peak today!
How to Value a Flooring Company
There are several common business valuation approaches to consider when valuing a flooring company. Generally, business appraisers rely on the market approach and/or the income approach. Both methods are effective, however, each uses a different basis of valuation. As such, a valuation analyst will determine which method is best for your flooring company during a business valuation. This may involve using a combination of business valuation methods.
Valuing a Flooring Company Using the Market Approach
The market approach is common when valuing a flooring company. This approach is similar to how a real estate appraiser values a property. When valuing a home, a real estate appraiser assesses similar properties that recently sold in the area. Doing so helps them understand the fair market value of the home. When valuing a flooring company with the market approach, valuation experts consider similar businesses that were recently sold. If the flooring company is privately owned, the expert refers to private transaction databases to gather information.
Multiples for a Flooring Company
Valuation multiples are a key characteristic of the market approach. These are financial ratios that determine the value of a flooring company based on various metrics. Some common metrics are cash flow, earnings, and sales. To find the valuation multiples for a flooring company, business appraisers apply the proper NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for a flooring company.
SDE (Seller’s Discretionary Earnings) Multiples for a Flooring Company
- The SDE multiple measures the value of a flooring company in relation to its seller’s discretionary earnings. SDE multiples are common when valuing a flooring company.
EBITDA Multiples for a Flooring Company
- EBITDA multiples measure a flooring company’s earnings before interest, taxes, depreciation, and amortization. This helps the valuation analyst calculate the return on investment (ROI) a flooring company can generate.
REVENUE or SALES Multiples for a Flooring Company
- The REVENUE or SALES multiple reflects the total amount of revenue or sales a flooring company makes. Apply the multiple to a flooring company’s revenue to calculate its fair market value.
To learn more on how to value a flooring company using the market approach, see Valuation Multiples for a Flooring Business.
Valuing a Flooring Company Using the Income Approach
Another common business valuation approach is the income approach. When valuing a flooring company with the income approach, valuation experts assess its future income potential. Additionally, the income approach assesses the risks associated with buying, expanding, or selling a flooring company. In the following section, we highlight some common risks in the flooring industry.
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- Financial Performance: Financial conditions can fluctuate often when operating a flooring company. To combat this, it is important to have strong financial budgeting and planning skills.
- Location: The location of a flooring company has a significant impact on its value. The most successful flooring companies are located near residential and commercial construction markets.
- Competition: The flooring industry is extremely competitive. To succeed, operators need to differentiate from competitors and create diverse revenue streams.
- Key Personnel: Flooring can be tedious and physically demanding work. As such, it is important to hire skilled and able employees.
Methods to Value a Flooring Company Using the Income Approach
There are many variations of the income approach. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. Both methods consider the income potential of a business. Below, we discuss how to value a flooring 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 ideal if your flooring company has a long and stable history. When using this income approach, valuation analysts determine a reasonable amount of income for one period. The income is then divided by a capitalization rate which indicates the rate of return investors can expect. The capitalization of cash flow method also evaluates any risks that may prevent investors from meeting expected earnings. We highlight a few common risks above.
Discounted Cash Flow Method
The discounted cash flow method is best for flooring companies with strong financial histories and/or predictable forecasts. When valuing a flooring company using this method, business appraisers project future cash flows over a 3-5-year period. The valuation expert then applies a discount rate rather than a capitalization rate. This process takes the time value of money into account. Keep in mind, the discounted cash flow method is less common since it relies on future earning estimates which can be subjective.
Summary
Whether you are buying, growing, or selling a flooring company, it is helpful to learn how to value a flooring company. When valuing a flooring company, there are various methods a business appraiser may utilize. To understand which valuation approach is best for your flooring company, obtain a business valuation. During a business valuation, a business appraiser can discuss the strengths and weaknesses of a flooring company. They will also determine the fair market value of a flooring company. This information is vital if you are looking to increase the value of a flooring company.
Peak Business Valuation, business appraiser, works with flooring companies across the country. We are happy to provide you with a business valuation for a flooring company. In addition, Peak can discuss any inquiries you may have on the value of a flooring company. Start now by scheduling a free consultation with Peak Business Valuation below!
For more information see also, Valuing a Flooring Installation Company, Valuation Multiples for a Flooring Business, and Value Drivers for a Flooring Installers.
