How to Value a Roofing Company
Roofing companies primarily install roofing and skylights for residential and commercial clients. According to IBIS World, there are approximately 79,000 roofing companies in the United States. These businesses generate about $11 billion in revenue each year. In addition, the roofing industry has the potential to continue to grow. This presents an opportunity for anyone looking to buy, grow, or sell a roofing company. It is important to note, however, that this industry is fragmented and competitive. Whether you are buying, growing, or selling a roofing company, it is important to learn how to value a roofing company.
Obtaining a business valuation is the best way to learn how to value a roofing company. As part of a business valuation, a valuation expert determines the fair market value of a roofing company. The valuation expert may also discuss the strengths and weaknesses of your roofing company. With this information, you can take the next steps in increasing the value of a roofing company you are buying or selling.
Peak Business Valuation is a professional business appraiser. We frequently value roofing companies across the country. As such, we are happy to provide you with a business valuation for a roofing company. Peak can also discuss any questions you may have on how to value a roofing company. Schedule your free consultation below to get started!
How to Value a Roofing Company
Valuation analysts consider a variety of valuation methods when valuing a roofing company. At Peak Business Valuation, our business appraisers often utilize the market approach and/or the income approach to value a roofing company. Both of these methods are effective, however, each uses a different basis of valuation. A business appraiser determines which approach is most appropriate for a roofing company during a business valuation. This often involves using a combination of valuation approaches.
Valuing a Roofing Company Using the Market Approach
The market approach is common when valuing a roofing company. To understand this approach, consider how a real estate appraiser values a property. When valuing a property, real estate appraisers assess similar homes that were recently sold in the area. This helps them understand the fair market value of the property. With the market approach, valuation analysts consider similar businesses that were recently sold on the open market. If the roofing company is private, the business appraiser refers to private transaction databases to gather relevant information.
Multiples for a Roofing Company
When using the market approach to value a roofing company, valuation experts rely on valuation multiples. Multiples are ratios that compare the value of a roofing company to metrics such as cash flow, revenue, and earnings. To find the multiples for a roofing company, business appraisers apply the appropriate NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for a roofing company.
SDE (Seller’s Discretionary Earnings) Multiples for a Roofing Company
- The SDE multiples measures the value of a roofing company in relation to its seller’s discretionary earnings. This is a common valuation multiple when valuing a roofing company.
EBITDA Multiples for a Roofing Company
- The EBITDA multiples assesses a roofing company’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a roofing company can expect to generate.
REVENUE or SALES Multiples for a Roofing Company
- REVENUE or SALES multiples assess the total amount of revenue a roofing company generates. By applying the multiple to a roofing company’s revenue or sales, valuation experts can calculate its value.
To learn more on how to value a roofing company using the market approach, see Valuation Multiples for a Roofing Company.
Valuing a Roofing Company Using the Income Approach
Another common valuation approach is the income approach. This method assesses the future income potential of a roofing company. In addition, the income approach considers the risks associated with buying or selling a roofing company. Below, we discuss a few common risks in the roofing industry.
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- Financial Performance: Many roofing companies struggle to increase or retain profits. To succeed, it is important to have strong financial planning and budgeting at a roofing company.
- Supplier Relationships: Roofing companies use a variety of supplies to complete roofing projects. As such, it is beneficial for roofing companies to have strong supplier relationships.
- Competition: The roofing industry is very fragmented and competitive. As such, roofing companies need to differentiate from competitors and create diverse revenue streams.
- Location: The location of a roofing company has a strong influence on its success. It is important for roofing companies to locate near key markets like residential construction areas.
Methods to Value a Roofing Company Using the Income Approach
Under the income approach, there are various valuation methods. The most common approaches are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a roofing 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 for roofing companies with long and stable histories. When using the capitalization of cash flow method, valuation experts determine an appropriate amount of income for one period. The income is then divided by a capitalization rate which represents the rate of return investors can expect. The capitalization of cash flow method also considers any risks that may prevent investors from meeting expected earnings. We discuss a few of these risks above.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for roofing companies with strong financial histories or reliable forecasts. This income 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 roofing 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
When valuing a roofing company, valuation analysts may use a variety of valuation approaches. Peak Business Valuation often uses the market approach and/or the income approach to value a roofing company. To know which method is most applicable to your roofing company, obtain a business valuation. As part of a business valuation, you will learn about the risks and opportunities of a roofing company you are buying, growing, or selling. In addition, business appraisers will calculate the fair market value of a roofing company. This can help you understand how to maximize the value of a roofing company.
Peak Business Valuation is happy to help! We work with roofing companies on a regular basis. As such, Peak is happy to provide you with a business valuation for a roofing company. Additionally, Peak can answer any inquiries you may have on how to value a roofing company. Schedule your free consultation by clicking the link below!
For more information see also Valuing a Roofing Company, Value Drivers for a Roofing Company, and Valuation Multiples for a Roofing Company.
