Valuation Multiples for a Plumbing Business
The plumbing industry includes businesses and contractors installing and maintaining plumbing fixtures, fittings, and equipment. The growth of the plumbing industry is primarily dependent on the growth of the U.S. construction market, and overall economic health. In the United States, there are nearly 122,350 plumbing businesses. These businesses generate nearly $107 billion in revenue. This industry is highly fragmented with no major business having greater than five percent market share. Because of the high fragmentation in the plumbing industry, there are dozens of transactions involving plumbing businesses. As such, it may be a great time to consider buying or selling a plumbing business.
Valuing a Plumbing Business
If you plan on selling a plumbing business, obtaining a business valuation can help you understand what the value of your company is today. It can also provide you with ideas to help maximize the value of the plumbing business and aid in negotiations with potential buyers. If you are considering buying a plumbing business, a business valuation can help you feel confident in the purchase price. The first step of either process is understanding the value of a plumbing business. Get started today by scheduling a free consultation with Peak Business Valuation, business valuation California.
Many individuals wonder how a valuation expert determines the fair market value of a plumbing business. One of the ways a valuation expert values a plumbing business is by using valuation multiples. Here is a brief overview of what valuation multiples look like in the plumbing industry. Keep in mind these numbers are only a guide, for a more extensive valuation and specific information about a plumbing business you are looking to buy or sell, schedule your free consultation. Be sure to also check out our articles on Valuing a Plumbing Business and Value Drivers for a Plumbing Business.
Disclaimer: These multiples have been provided for educational purposes only. As such, the information provided does not constitute valuation advice and should not be acted as such. These multiples do not represent the valuation opinion of Peak Business Valuation or any of its valuation professionals. Instead, you should seek the guidance and advice of a qualified business valuation professional with respect to any matter contained in this article.
What is a Valuation Multiple?
One of the ways a valuation expert values a plumbing business is by using valuation multiples. A valuation multiple is like a ratio. A ratio compares two factors to each other. For instance, one of the more common ratios in valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings of the business, with the implied value of the company. A valuation expert uses the multiples of other similar plumbing businesses that have recently sold on the open market and applies the multiple to your plumbing business to get a range of value.
For example, if a plumbing company has $350,000 in SDE, and receives a 1.97x SDE multiple, then the business would have an implied value of $689,500 ($350,000 times 1.97) On the contrary, a 2.63x multiple would imply the value of the company would be $920,500. ($350,000 times 2.63)
As a business appraiser California, Peak Business Valuation has worked with dozens of individuals who were looking to buy, sell, or expand a plumbing business. As we have worked with multiple plumbing companies, here is a range of valuation multiples that plumbing businesses transact at and are valued at. Every plumbing business is unique. As such, the range of value can be significant. Below we discuss the average ranges of SDE, EBITDA, and REV multiples for a plumbing business.
Average SDE Multiple range: 1.68x – 2.97x
According to our data, plumbing businesses transact between a 1.68x-2.97x average SDE multiple. To derive an implied value of a plumbing business, apply the multiple by the most recent 12-month period of revenue. The calculation is as follows:
SDE X Multiple = Value of the Business
For instance, if a plumbing business generates $550,000 in sellers’ discretionary earnings and transacts at a 2.34x multiple, then the business value is worth approximately $1,287,000.
$550,000 X 2.34x = $1,287,000
Seller’s discretionary earnings is a common cash flow multiple used in valuing small business transactions specifically plumbing businesses. It starts by calculating the company’s operating profit and adding back potential expenses that may not be incurred by a new owner. These expenses may include the owner’s compensation, the owner’s personal expenses, and other expenses such as non-recurring or non-related business items.
Average EBITDA Multiple range: 2.43x – 4.45x
The average EBITDA multiples for a plumbing business range between 2.43x – 4.45x. Apply this multiple to EBITDA to derive an implied value of the business. The calculation is as follows:
EBITDA X Multiple = Value of the Business
For example, a plumbing business has an EBITDA of $730,000 and transacts at an EBITDA multiple of 4.03x. Using the above metrics, the plumbing business is worth approximately $2,941,900.
$730,000 X 4.03x = $2,941,900
An EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings a buyer can expect from the business.
Average REV Multiple range: 0.34x – 0.66x
According to our data, plumbing businesses sell for an average of 0.34-0.66x revenue multiple. You can calculate the implied value of the business by multiplying the amount of revenue or sales a plumbing business makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, if a plumbing business makes $950,000 in revenue and transacts at a 0.49x multiple, then the business is worth approximately $465,500.
$950,000 X 0.49x = $465,500
A revenue multiple does not consider the operations of the business. As such, a valuation expert may less frequently rely on this multiple. Therefore, it is important to look at cash flow multiples. Cash flow multiples – SDE and EBITDA – consider expenses that impact the cash flow. For instance, COGS, salaries, rent, expenses, among others.
When looking at valuation multiples, keep in mind there are many factors that may impact the business and the multiple a valuation expert uses to value that business. As such, Peak Business Valuation, business valuation California, would love to talk with you more about the factors that may impact the value of a plumbing business.
Peak Business Valuation, business valuation California, loves working with small business owners to maximize the value of a plumbing business. We focus on providing valuable information to help you grow, sell, or buy a plumbing business. Peak works on valuations for plumbing businesses monthly. Questions are always welcome! Get started today by scheduling your free consultation below!
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