How to Value a Specialty Contracting Business
Specialty contracting is a great way to take part in the trillion-dollar construction industry. Individuals in this sector provide specialized trades like plumbing, HVAC, electrical, carpentry, etc… Whether you are buying, growing, or selling a specialty contracting business, it is important to receive a business valuation. During a specialty contracting business valuation, you will learn how to value a specialty contracting business. Additionally, it reveals key insights to help you maximize the value of a specialty contracting business.
The best way to learn how to value a specialty contracting business is by receiving a business valuation. When valuing a specialty contracting business, valuation experts look at its strengths, weaknesses, and opportunities. They also determine the fair market value of the company. This can help you take steps to increase the value of a specialty contracting business.
Peak Business Valuation, professional business appraiser, works with specialty contracting businesses across the country. As such, we are happy to provide you with a business valuation for a specialty contracting business. In addition, we can answer any questions you have on valuing a specialty contracting business whether you are buying, growing, or selling one. Schedule a free consultation below to get started!
How to Value a Specialty Contracting Business Using the Market Approach
Experts may use various business valuation approaches during a specialty contracting business valuation. At Peak, this generally includes the market approach and the income approach. A professional valuation analyst will determine which approaches are best for your specialty contracting business as part of the valuation process. This often involves a combination of valuation methods.
Valuing a Specialty Contracting Business Using the Market Approach
The market approach is very useful when valuing a specialty contracting business. This valuation approach is comparable to how a real estate appraiser values a property. They use similar properties recently sold in the area as a benchmark for the valuation. Similarly, a business appraiser compares other specialty contracting businesses recently sold on the open market. For privately owned specialty contracting businesses, a valuation analyst refers to private transaction databases to gather information.
Multiples for a Specialty Contracting Business
Business appraisers determine the most applicable valuation multiples when using the market approach. These are values that measure a specialty contracting business’s value based on its financial health. To determine the proper valuation multiples for a specialty contracting business, appraisers apply an NAICS or SIC code. Below, we discuss SDE, EBITDA, and REV multiples for a specialty contracting business.
SDE (Seller’s Discretionary Earnings) Multiples for a Specialty Contracting Business
SDE multiples measure a specialty contracting business’s value in relation to its seller’s discretionary earnings. This multiple is commonly used for small contracting businesses.
EBITDA Multiples for a Specialty Contracting Business
EBITDA multiples indicate a specialty contracting business’s earnings before interest, taxes, depreciation, and amortization. This multiple helps the business appraiser understand the return on investment (ROI) a contracting business can generate.
REVENUE or SALES Multiple for a Specialty Contracting Business
Revenue multiples help determine the value of a specialty contracting business in relation to the amount of sales it generates.
For more information on specialty contracting valuation multiples, check out What is a Valuation Multiple?
Valuing a Specialty Contracting Business Using the Income Approach
Moreover, the income approach is also common for specialty contracting business valuations. This valuation approach assesses the company’s value by estimating its future cash flow potential. The income approach also considers the risks associated with the company’s expected earnings. Some common risks in specialty contracting include:
- Industry-Specific Competition: The specialty contracting industry is competitive. To succeed, it is important to maintain a strong reputation and quality service offerings.
- Market Fluctuations: Demand for specialty contracting services may vary depending on economic cycles and industry trends. Efficient management of resources and labor is crucial to combat this.
- Location & Service Areas: A specialty contracting business’s success can depend on its geographic region and the type of projects available within its service areas. With a prime location, contractors can maximize sales revenue.
- Cost Management: Rising costs for materials, labor, and regulatory compliance can impact profitability. As such, efficient cost management and strategic planning are essential.
Methods to Value a Specialty Contracting Business Using the Income Approach
Under the income approach, there are two common variations for valuing a specialty contracting business. They are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value a specialty contracting business using these methods.
Capitalization of Cash Flow Method
Business appraisers typically use the capitalization of cash flow method for specialty contracting businesses with long and stable histories. This approach involves choosing an appropriate measure of cash flow over a specific period. This figure is then divided by a capitalization rate, which reflects the expected rate of return for the investor. The capitalization of cash flow method also accounts for the risks of a specialty contracting business.
Discounted Cash Flow Method
Next, the discounted cash flow method is often used for specialty contracting businesses with strong financial histories and reliable forecasts. The business appraiser projects future cash flows over a 3-5-year period and applies a discount rate that considers the time value of money. It is important to note that the discounted cash flow method is less reliable since it uses future estimates.
Summary
As part of a business valuation for a specialty contracting business, business appraisers determine an effective approach to determine its fair market value. At Peak, we use a combination of proven valuation methods when valuing a specialty contracting business. In addition, our valuation analysts will provide useful insights into your specialty contracting business’s value and growth potential. This can help you achieve your goals with specialty contracting.
If you need a specialty contracting business valuation, Peak Business Valuation, business appraiser, is happy to help you! We work with specialty contracting businesses on a regular basis. As such, we are happy to provide you with a business valuation. In addition, Peak can answer any questions about how to value a specialty contracting business. Schedule a free consultation with Peak Business Valuation to get started!
