How to Value an Electrical Company
Electrical companies primarily install electrical power and systems for commercial, residential, and institutional clients. IBIS World notes that there are over 239,000 electrical companies in the United States. These businesses generate over $46.5 billion in revenue annually. In addition, we can expect healthy revenue growth to continue in the near future. As such, now may be a great time to buy, grow, or sell an electrical company. Keep in mind, that the electrical industry is extremely competitive. To succeed, it is beneficial to learn how to value an electrical company.
The best way to learn how to value an electrical company is to receive a business appraisal. During a business appraisal, valuation experts calculate the fair market value of an electrical company. Additionally, they will discuss the risks and opportunities of your electrical company. With this information, you can take the next steps in maximizing the value of an electrical company.
Peak Business Valuation is a professional business appraiser. At Peak, we work with electrical companies on a regular basis. We are happy to provide you with a business appraisal for an electrical company you are buying or selling. In addition, Peak can discuss any inquiries you may have on how to value an electrical company. Schedule your free consultation with Peak Business Valuation below!
How to Value an Electrical Company
Business appraisers consider a variety of valuation approaches when deciding how to value an electrical company. At Peak Business Valuation, our business appraisers frequently utilize the market approach and/or the income approach. Both of these methods are effective, however, each uses a different basis of valuation. Business appraisers determine which approach is best for an electrical company during a business appraisal. In many cases, this involves using a combination of valuation approaches.
Valuing an Electrical Company Using the Market Approach
The market approach is common when valuing an electrical company. This valuation method is similar to the real estate appraisal process. When valuing a house, real estate appraisers assess similar properties that were recently sold in the area. This helps them understand the fair market value of the house. When valuing an electrical company with the market approach, business appraisers consider similar companies that were recently sold. If the company is privately owned, the business appraiser refers to private transaction databases to gather relevant information.
Multiples for an Electrical Company
When using the market approach, valuation analysts work with valuation multiples. These are ratios that measure the value of electrical companies based on financial metrics such as cash flow, revenue, and earnings. To find the proper valuation multiples for an electrical company, a valuation expert applies the appropriate NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for an electrical company.
SDE (Seller’s Discretionary Earnings) Multiples for an Electrical Company
- SDE multiples are common in small business valuation. This valuation multiple measures the seller’s discretionary earnings of an electrical company.
EBITDA Multiples for an Electrical Company
- The EBITDA multiple reflects an electrical company’s earnings before interest, taxes, depreciation, and amortization. This helps the valuation analyst understand the return on investment (ROI) an electrical company can expect to generate.
REVENUE or SALES Multiples for an Electrical Company
- REVENUE or SALES multiples represent the total amount of revenue an electrical company generates.
To learn more on how to value an electrical company using the market approach, see Valuation Multiples for an Electrical Company.
Valuing an Electrical Company Using the Income Approach
Another common valuation approach is the income approach. The income approach measures the earning potential of an electrical company. Additionally, this valuation method assesses any risks associated with buying, expanding, or selling an electrical company. We discuss a few common risks of electrical companies below.
- Competition: The electrical industry is very fragmented and competitive. As such, electrical companies need to differentiate from competitors and create diverse revenue streams.
- Financial Performance: Operating an electrical company can be expensive. To remain profitable, it is important to have strong financial planning and budgeting skills.
- Location: The location of an electrical company has a significant impact on its success. Electrical companies near commercial and residential construction areas are likely to see the most success.
- Equipment and Supplies: Electrical companies require a variety of equipment and supplies to provide services. As such, it is important to acquire quality and reliable equipment and supplies.
Methods to Value an Electrical Company Using the Income Approach
There are several variations of the income approach. The most common approaches are the capitalization of cash flow method and the discounted cash flow method. Both methods assess the future earning potential of an electrical company. In the following paragraphs, we discuss how to value an electrical company with 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 electrical companies with long and stable histories. When valuing an electrical company with the capitalization of cash flow method, business appraisers determine a reasonable amount of earrings for one period. The earnings are then divided by a capitalization rate which calculates a reasonable rate of return investors can expect. The capitalization of cash flow method also assesses the risks that may prevent investors from meeting expected earnings.
Discounted Cash Flow Method
The discounted cash flow is best for electrical companies with strong financial histories and predictable futures. This method involves projecting future earnings over a 3-5-year period. The valuation expert then applies a discount rate rather than a capitalization rate to the earnings. This approach measures the value of an electrical company while taking the time value of money into account. Keep in mind, the discounted cash flow method is less common since it is limited to future cash flow predictions which can be inaccurate.
Summary
Whether you are buying, growing, or selling an electrical company, it is helpful to understand how to value an electrical company. There are several common business valuation approaches to consider when valuing an electrical company. To understand which method is most suitable for your electrical company, obtain a business appraisal. As part of a business appraisal, a valuation expert will also calculate the fair market value of an electrical company. This information can help you understand the next steps to increase the value of an electrical company.
Peak Business Valuation is here to help! We work with electrical companies throughout the nation. As such, we can provide you with a business appraisal for an electrical company. In addition, we can answer any questions you may have about the value of an electrical company. Start today by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing an Electrical Company, Valuation Multiples for an Electrical Company, and Value Drivers for an Electrical Company.
