Value Drivers for a Lumber Wholesaler
There are about 8,000 lumber wholesalers in the United States. The lumber wholesaling industry generates about $96.4 billion in revenue. This industry is mature with low barriers to entry, increasing sawmill lumber prices, and a growing number of housing starts. These driving forces are evidence of the opportunities to buy or sell a lumber wholesale company. These forces also impact the value of a lumber wholesale company.
In this article, we explore key factors that influence multiples for lumber wholesalers. At Peak Business Valuation, we call these key factors value drivers. If you are considering buying or selling a lumber wholesale company, it is important to consider these factors. A professional appraiser can help you understand the value of a lumber wholesale company. Get started by scheduling your free consultation today!
Value Drivers for a Lumber Wholesaler
Below are key factors that drive the value of a lumber wholesaler. For more information see Valuing a Lumber Wholesale Company as well as Valuation Multiples for Lumber Wholesales.
First, the quality of revenue is an important factor to consider when appraising a lumber wholesale company. For instance, if a lumber wholesaler only collects 80% of revenue then it has a low revenue quality. In this case, consider firing clients or adjusting credit terms to increase revenue quality. Whereas, a lumber wholesaler with repeat clients often has higher-quality revenue. To increase revenue quality, build a loyal customer base by offering strong customer service. For ideas see, The Value of Customer Loyalty.
Proximity to Key Markets
Customer groups for lumber wholesalers include home builders, industrial building construction companies, and lumber and building materials stores. As such, demand from these customers is higher in the following areas:
- Areas with high levels of home renovation and improvement activity
- Housing starts
- Areas where the value of private nonresidential construction is high
A lumber wholesaler close to these key markets experiences greater demand. Whereas distance from key markets may lead to higher advertising and shipping costs. One might consider merger and acquisition activity to increase exposure to key markets. Additionally, strategic marketing activities can increase the value of a lumber wholesale company. One way to achieve this is through the use of technology.
While many customers view lumber at the site to ensure quality, the use of an e-commerce site can help increase sales. Having a website to drive sales can increase web presence and exposure to new customers. A website allows customers to place orders on their own time, increasing operating hours. Customers can also place orders for pick up. This helps decrease the amount of time spent placing orders. This increased efficiency can help decrease labor costs. A quality website also informs your customers about extra value-adding services.
Lumber is a commoditized product, which leaves little room for product differentiation. Plywood, lumber, and particle board are close to identical at any wholesaler. Lumber prices are determined by supply and demand factors and can be volatile. The unpredictability can work against lumber wholesalers, especially in an inflationary environment. A good solution is to differentiate where you can. Some lumber wholesalers add value-adding services to their product offering, including:
- Customized Millwork
- CAD drawings and custom profiles
- Delivery and Shipping
Offering these services can increase service revenue, and stabilize margins when prices are volatile. They can also lead to the sale of other differentiated products, such as doors and windows. These value-adding services and products often generate greater profit. Additionally, they can help increase the predictability of sales. A business valuation professional will help identify these value-adding activities when appraising your lumber company. Schedule a free consultation today to get started.
Next, a professional appraiser examines a lumber wholesaler’s supplier and customer concentration. Concentration in either can indicate risk. Conversely, having a diversified supplier pool and customer base can increase the value of a lumber wholesale company. The list below asks several questions to consider when evaluating supplier concentration. This can include:
- What percentage of purchases do your top five suppliers represent?
- How would a supplier’s shortage of inventory or other difficulties affect the company?
- Could the Lumber Wholesale Company easily switch suppliers?
- How reliant are the main suppliers on the Lumber Wholesale Company for business?
There are no hard and fast rules about concentration. But, one or two suppliers supplying the bulk of purchases could be a sign of abnormal risk. Long-term contracts can decrease a lumber wholesaler’s flexibility during adverse conditions. The same types of questions apply to customer concentration. The top 10 customers’ percentage of revenue can be a good sign of concentration. A great way to diversify your customer base is to apply the value drivers discussed above!
There are many factors to consider that impact the value of a lumber wholesale company. Implementing some of the value drivers above can help increase the value of a business. At Peak Business Valuation, business appraiser, we value lumber wholesalers often. We understand what drives the value of a business, and are happy to discuss these value drivers with you.
Whether you are buying or selling a lumber wholesale company, Peak Business Valuation, business appraiser, can help increase your confidence at the negotiating table. Reach out at the link below to schedule a free consultation with us!
Schedule Your Free Consultation Today!