How to Value a Lumber Wholesale Business
Lumber wholesalers distribute lumber, plywood, wood panel products, and millwork to various markets such as contractors, home improvement stores, and hardware stores. According to IBIS World, there are about 7,100 lumber wholesale businesses across the United States. Recently, this industry has seen healthy revenue growth, generating over $145 billion. We can expect this growth to continue as lumber prices normalize. This is ideal if you are looking to buy, expand, or sell a lumber wholesale business. Whether you are entering or exiting the lumber wholesale industry, it is important to understand how to value a lumber wholesale business.
Obtaining a business appraisal is the best way to learn how to value a lumber wholesaler. During a business appraisal, a valuation analyst calculates the fair market value of a lumber wholesale business. In addition, the business appraiser will likely discuss the risks and opportunities associated with your lumber wholesaler. This information can help you understand the next steps in maximizing the value of a lumber wholesale business.
As a professional business appraiser, Peak Business Valuation works with lumber wholesale businesses regularly. We are happy to provide you with a lumber wholesale business valuation! Peak can also discuss any questions you may have on how to value a lumber wholesale business. Schedule your free consultation with Peak by clicking the link below!
How to Value a Lumber Wholesale Business
When valuing a lumber wholesale business, there are various business valuation approaches to consider. Peak Business Valuation often utilizes the market approach and/or the income approach as part of the valuation process. Both approaches are effective, however, each uses a different basis of valuation. As such, a business appraiser will determine the best valuation approach during a lumber business valuation. This often includes using a combination of valuation methods.
Valuing a Lumber Wholesale Business Using the Market Approach
The market approach is common in small business valuation. This valuation method is similar to how a real estate appraiser values a property. Real estate appraisers assess similar homes that recently sold in the area. This helps them accurately determine the value of the property. Similarly, business appraisers look at comparable businesses when valuing a lumber wholesaler with the market approach. If the business is privately owned, the business appraiser refers to private transaction databases to gather information.
Multiples for a Lumber Wholesale Business
When utilizing the market approach, a valuation analyst relies on valuation multiples. These are financial ratios that compare the value of a business to metrics such as earnings, sales, and cash flow. To find the appropriate valuation multiples for a lumber wholesale business, a valuation analyst applies the proper NAICS or SIC code. In the following section, we discuss SDE, EBITDA, and REV multiples for a lumber wholesaler.
SDE (Seller’s Discretionary Earnings) Multiples for a Lumber Wholesale Business
- SDE multiples measure the value of a business based on its seller’s discretionary earnings. This multiple is common when valuing a lumber wholesale business.
EBITDA Multiples for a Lumber Wholesale Business
- The EBITDA multiple represents a lumber wholesale business’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a lumber wholesaler can expect.
REVENUE or SALES Multiples for a Lumber Wholesale Business
- The REVENUE or SALES multiple measures the value of a lumber wholesale business to the total amount of sales or revenue it generates.
To learn more on how to value a lumber wholesale business using the market approach, see Valuation Multiples for Lumber Wholesalers.
Valuing a Lumber Wholesale Business Using the Income Approach
The income approach is also common when valuing a lumber wholesale business. This method measures a lumber wholesaler’s earning potential. In addition, a business appraiser looks at the risks associated with a lumber wholesale business when utilizing the income approach. We highlight a few common risks below.
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- Location: The location of a lumber wholesale business has a strong influence on its value. By locating near key markets, operators can reduce costs and maximize profits.
- Supplier Relationships: To succeed in the lumber wholesale industry, it is important to have strong relationships with lumber suppliers. It is also important to ensure that your business does not rely on only one supplier.
- Financial Performance: Profit margins can fluctuate in the lumber wholesale industry. As such, it is crucial to have strong financial planning and budgeting skills.
- Competition: The lumber wholesale industry is extremely fragmented and competitive. To succeed, lumber wholesale businesses must find ways to differentiate from competitors.
Methods to Value a Lumber Wholesale Business Using the Income Approach
Under the income approach, there are several ways to value a lumber wholesale business. The most common income methods are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a lumber wholesale 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 best if your lumber wholesale business has a long and stable history. When using the capitalization of cash flow method, a business appraiser determines a reasonable amount of earnings for one period. The business appraiser then applies a capitalization rate which calculator the rate of return an investor can expect. The capitalization of cash flow method also discusses the risks associated with buying, growing, or selling a lumber wholesale business. We discuss a few common risks above.
Discounted Cash Flow Method
The discounted cash flow method is ideal for lumber wholesalers with strong financial histories and/or predictable forecasts. This valuation approach involves projecting future cash flows over a 3-5-year period. The earnings are then divided by a discount rate to take the time value of money into account. Keep in mind, the discounted cash flow method is less common since it relies on future cash flow estimates which can be subjective.
Summary
If you are looking to buy, expand, or sell a lumber wholesale business, it is helpful to learn how to value a lumber wholesaler. There are several valuation methods a business appraiser may use to value your business. To understand which approach is most applicable, receive a lumber wholesale business valuation. As part of a business appraisal, you will also learn about the strengths and weaknesses of a lumber wholesaler. This information can help you take the next steps to increase the value of a lumber wholesale business.
Peak Business Valuation, business appraiser, is happy to help! At Peak, we work with lumber wholesale businesses throughout the nation. As such, we can provide you with a business appraisal for a lumber wholesale business. In addition, Peak can answer any questions you may have on valuing a lumber wholesale business. Start now by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing a Lumber Wholesale Company, Value Drivers for Lumber Wholesale Company, and Valuation Multiples for Lumber Wholesalers.
