How to Value a Plumbing Company
Plumbing companies install, maintain, and repair plumbing fixtures, fittings, and equipment. This typically includes working on toilets, venting systems, pipes, and drains as well as installing gas cooking and heating systems. An industry report on IBIS World suggests there are over 127,000 plumbing businesses in the United States. Together, these companies generate over $25 billion in revenue each year. In addition, the plumbing industry can expect further financial growth in the coming years. This is ideal whether you are buying, growing, or selling a plumbing company. Please note, that the plumbing industry is extremely fragmented and competitive. To succeed, it is beneficial to learn how to value a plumbing company.
To learn how to value a plumbing company, it is best to obtain a business valuation. During a business valuation, valuation analysts determine the fair market value of a plumbing company. Additionally, business appraisers can discuss the strengths and weaknesses of your plumbing company. With this information, you can take the next steps in maximizing the value of a plumbing company.
As a professional business appraiser, Peak Business Valuation is happy to help! Peak works with plumbing companies on a regular basis. As such, we can provide you with a business valuation for a plumbing company. In addition, Peak can discuss any inquiries you have on how to value a plumbing company. Start now by scheduling a free consultation with Peak Business Valuation below!
How to Value a Plumbing Company
There are many different business valuation approaches for valuing a plumbing company. Business appraisers often rely on the market approach and/or the income approach. Each valuation approach provides a different perspective on the value of a plumbing company. During a business valuation, a valuation expert determines which valuation approach is best for your plumbing business. This can include using a combination of valuation approaches.
Valuing a Plumbing Using the Market Approach
The market approach is a common business valuation method. To understand the market approach, consider how a real estate appraiser values a home. When valuing a home, real estate appraisers look at similar properties that were recently sold in the area. This helps them understand a fair value of the home. With the market approach, a business appraiser compares similar plumbing businesses that recently sold on the open market. If the plumbing company is private, the expert gathers data from private transaction databases.
Multiples for a Plumbing Company
Valuation multiples are a defining characteristic of the market approach. Multiples are financial ratios that measure the value of a plumbing company in relation to various financial metrics. Some common metrics are cash flow, earnings, and sales. To find the valuation multiples for a plumbing company, business appraisers apply the appropriate NAICS or SIC code. Below we discuss SDE, EBITDA, and REV multiples for a plumbing company.
SDE (Seller’s Discretionary Earnings) Multiples for a Plumbing Company
- SDE multiples are common when valuing a plumbing company. This multiple measures the seller’s discretionary earnings of a plumbing company.
EBITDA Multiples for a Plumbing Company
- EBITDA multiples reflect a plumbing company’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a plumbing company can expect.
REVENUE or SALES Multiples for a Plumbing Company
- REVENUE or SALES multiples value a plumbing company based on the total amount of revenue or sales it generates.
To learn more on how to value a plumbing company using the market approach, see Valuation Multiples for a Plumbing Business.
Valuing a Plumbing Company Using the Income Approach
Another common valuation approach is the income approach. The income approach assesses the cash flow potential of a plumbing company. This method also considers the risks associated with buying or selling a plumbing company. We highlight a few common risks of a plumbing company below.
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- Location: The location of a plumbing company has a significant impact on its value. For plumbing companies, it is best to locate in residential areas where the demand for services is high.
- Financial Performance: Profitability can fluctuate in the plumbing industry. As such, plumbing companies need to have strong financial budgeting and planning skills.
- Supplier Relationships: Plumbing businesses use a variety of supplies to provide services. As such, it is vital for operators to develop strong supplier relationships.
- Competition: The plumbing company is very competitive. To succeed, plumbing companies need to create various revenue streams to differentiate themselves.
Methods to Value a Plumbing 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. Below, we discuss how to value a plumbing 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 for plumbing companies with long and stable histories. When using the capitalization of cash flow method, valuation experts determine a reasonable amount of earnings for one period. These earnings are then divided by a capitalization rate which represents the rate of return a plumbing company can expect. The capitalization of cash flow method also evaluates the risks associated with a plumbing company. We discuss a few of these risks above.
Discounted Cash Flow Method
The discounted cash flow method is best for plumbing companies with strong financial histories and predictable forecasts. This valuation approach involves projecting future earnings over a 3-5-year period. The business appraiser then applies a discount rate rather than a capitalization rate to the earnings. This method measures the value of a plumbing company by taking the time value of money into account. Keep in mind, this method is less common since it uses future cash flow estimates which can be inaccurate.
Summary
If you are buying, growing, or selling a plumbing company, it is important to understand how to value a plumbing company. There are several ways to determine the value of a plumbing company. At Peak Business Valuation, we often use the market approach and/or the income approach. To understand which method is suitable for your plumbing company, receive a business valuation. As part of a business valuation, you will learn the value of a plumbing company as well as its risks and opportunities.
Peak Business Valuation, business appraiser, values plumbing companies throughout the nation. We are happy to help you! Peak can provide you with a business appraisal for a plumbing company. We can also answer any questions you may have on valuing a plumbing company. Start today by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing a Plumbing Business, Value Drivers for a Plumbing Business, and Valuation Multiples for a Plumbing Business.
