How to Value a Towing Company
In recent years, the towing industry has experienced a slight decrease in sales revenue and profitability. According to IBIS World, this is due to a decrease in demand as well as intense competition from both internal and external competitors. Fortunately, we can expect the automobile towing industry to recover in the coming years. However, competition remains high. If you are looking to buy, grow, or sell a towing company, this may present challenges. However, success is still attainable with a careful and informed approach. You can start by learning how to value a towing company.
To determine the value of a towing business, seek a business valuation. A professional business appraiser at Peak Business Valuation will determine what methods and multiples are applicable to your towing company. A business appraisal will also determine a fair market value of the towing company. For questions about valuing a towing company or to get started, schedule a free consultation by clicking the link below.
How to Value a Towing Company
Business appraisers may use the market approach and/or the income approach when valuing a towing company. The method the expert uses depends on various factors. As such, business appraisers use their knowledge and expertise to determine the best valuation approach for a towing company. This can include using a combination of approaches depending on the reason for the business valuation.
Valuing a Towing Company Using the Market Approach
Often, business appraisers use the market approach to determine the fair market value of a towing company. This approach is similar to how a real estate appraiser values a home. The real estate appraiser compares the home to similar properties that recently sold in the area. This helps them calculate an accurate value of the home. When a business appraiser uses the market approach to value a towing company, they compare similar companies that recently sold on the open market. If the towing company is private, the appraiser refers to private transaction databases to gather information.
Multiples for a Towing Company
The market approach relies on valuation multiples to determine the value of a company. Valuation multiples are ratios that compare the value of a towing company to a financial metric. These metrics can include sales, cash flow, or earnings. To find the valuation multiples for a towing company, valuation analysts use the appropriate NAICS or SIC code. Below, we highlight basic valuation multiples for a towing company.
SDE (Seller’s Discretionary Earnings) Multiples for a Towing Company
- The SDE multiple assesses a business’s cash flow by multiplying its seller’s discretionary earnings by the multiple. This is a common method for determining the value of a towing company.
EBITDA Multiples for a Towing Company
- The EBITDA multiple measures a towing company’s potential return on investment.
REVENUE or SALES Multiples for a Towing Company
- The revenue multiple measures the value of a towing company based on the total amount of revenue or sales it generates. Business appraisers apply the multiple to a towing company’s revenue to determine a fair market value.
The valuation expert will decide which valuation multiple is most applicable depending on the type of transaction and the reason for the business valuation. To learn more, see Valuation Multiples for a Towing Company, Valuing a Towing Company, and Value Drivers for Automobile Towing Companies.
Valuing an Automobile Towing Company Using the Income Approach
Another popular valuation method for determining how to value a towing company is the income approach. The income approach considers the risks associated with buying or selling a towing company. Below, we discuss a few common risks a business appraiser assesses when valuing a towing company.
- Competition: The automobile towing industry is extremely competitive. As such, it is crucial for towing companies to differentiate from competitors.
- Equipment: Towing companies require special vehicles and equipment to operate successfully. Be sure to acquire high-quality and reliable equipment. Peak provides towing machinery and equipment appraisals for towing company transactions.
- Location: The location of a towing company can affect its value in various ways. It is best for towing companies to be located in high-traffic areas.
- Reputation: Consumers are more likely to request your towing services if you have a good reputation. There are various components to building a strong reputation.
Methods to Value an Automobile Towing Company Using the Income Approach
Under the income approach, two common methods for valuing a towing company are the capitalization of cash flow method and the discounted cash flow method. Both methods help determine the value of a towing company based on its income potential. See the following paragraphs to learn how to value an automobile towing company using these methods.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is typically used for towing companies with a long and stable history. This method estimates an appropriate amount of economic income for one period. This period is then divided by a capitalization rate which reflects an appropriate rate of return a buyer can expect. This method also assesses the risks a buyer may encounter.
Discounted Cash Flow Method
- The discounted cash flow method relies on 3-5 years of projections to calculate the value of future cash flows. Business appraisers divide the future cash flows using a discount rate rather than a capitalization rate. This helps them determine the value of a towing company based on the time value of money. The discounted cash flow method is best for towing companies that have strong financial histories. It is also useful for companies with reliable forecasts. Keep in mind, this method is less common since it uses future cash flow estimates which can be unreliable.
Summary
There are various valuation approaches a business appraiser may use when valuing a towing company. Many business appraisers use the market approach and/or the income approach. These methods provide important information to help valuation experts determine the value of a towing company. To learn which method is best for your towing company, receive a business valuation. During a business valuation, a business appraiser calculates the value of a towing company you are buying, growing, or selling. In addition, they can highlight the strengths and risks associated with your towing company. This information is crucial if you are looking to maximize the value of a towing company.
Peak Business Valuation, business appraiser, is happy to help! At Peak, we work with many towing companies throughout the nation. We are happy to provide you with a business valuation for a towing company. In addition, we can answer any questions you may have about how to value a towing company! Schedule a free consultation with Peak Business Valuation below!
