How Do You Value a Plumbing Business?
Every business has value, and your plumbing business is no exception. Whether built from the ground up or passed down to you from your relatives, the good name of your plumbing business is the first step in your plumbing business valuation. If you are asking yourself “How much is my plumbing business worth?” there are two basic elements to look for: the amount of free cash flow and the multiples of that cash flow that a buyer is willing to pay. Truly understanding these values will indicate your plumbing business worth and set you on a path to make the most from the sale of your business.
Free Cash Flow
When considering cash flow, the plumbing business valuation looks at the money your business will make on the first day the buyer owns the company. Though the world of plumbing is filled with complexities like EBITDA, the adjusted EBITDA, add-backs, and the SDE (Seller’s Discretionary Earnings,) the valuation of a plumbing company will be higher if you have more free-flowing cash. If your business is meant to help you pay personal bills or to change your tax status, just understand that free cash flow is the most important part of the situation when it comes to selling.
How much is my plumbing business worth?
In order to understand what your plumbing business valuation is, looking at the intricacies of free cash flow is imperative. The owner add-backs listed below are all part of your net income:1. Continual Items
- Salary of owner
- Payment to family in business
- Medical insurance for owners or family members
- Car expenses such as payments, insurance, and gas
- Meals, travel, and entertainment that are not 100% business
- Country clubs, golf clubs, health clubs, etc.
- Telephone expenses
2. Non-Recurring Items
ITEMS OF GAIN
- Loss on insurance claim unreimbursed
- Improvements, purchases, and major repairs
- Legal, accounting, or consulting expenses
- Insurance claims that aren’t reimbursed
- Bad debt
- Other Major expenses
Multiples Paid in Valuing a Plumbing Business
Once the cash flow is established in how to value a plumbing company, the next step is to determine how much of the cash flow the interested buyer will offer. With both primary and secondary considerations in play, it becomes easier to see how to value a plumbing company.
MAIN DETERMINANTS
Because cash is king, when determining the valuation of a plumbing company, the higher the cash flow, the higher the multiple the buyer will pay. There are groupings determined by size.
- Under $500k free cash flow – 2x-4x / Valuation range $500k – $2m
- $500k-$1m free cash flow – 3x-5x / Valuation range $1.5m – $5m
- $1m-$2.5m free cash flow – 4x-6x / Valuation range $4m – $15m
- $2.5-$10m free cash flow – 6x-10x / Valuation range $15m – $100m
- $10m-$25m free cash flow- 10x-20x / Valuation range $100m – $250m
- $25m+ free cash flow – 25x+ / Valuation range $600m+
Buyers often think of the multiple in terms of time: in other words, how many years of a given cash flow will it take to pay off a business. Multiples of two will take two years, four will take four years, and so on.
OTHER DETERMINANTS
The list below denotes other determinants in a buyer’s plumbing valuation that bear some weight. Careful consideration of these elements will impact the sale range.
- New Construction (the lower the better – aim for less than 20%)
- Maintenance Contracts (the more contracts the better – 20% increase is stellar)
- Growth of the Revenue (number grows each year- 20% increase is stellar)
- Reputation Management via Marketing (based on star rating and Google reviews)
- Generation of Leads (sustainable and frequent lead generation desired)
- Technician Crew (the more crew the better, with more than ten being advisable)
- Integration of Technology for Workflow (ServiceTitan or HouseCall Pro is a plus)
- Ability to Work Independently From Owner (Less owner involvement is good. If the owner can step away for a few weeks it is great.
How much is my Plumbing Business worth?
By multiplying the free cash flow by the multiples, you will easily determine your plumbing valuation. If you are wondering how to value a plumbing business, you also need to realize that all of the assets needed to run the business are also part of the deal. Think about desks, computers, inventory, trucks, other equipment, and even the employees! A buyer will also purchase on a cash free/debt free basis. Any leftover debts will be the seller’s responsibility, and there is generally an agreed amount of capital leftover in the business when the deal is closed. Make sure to consider all transactional expenses in your business plumbing valuations, such as taxes, fees, expenses, and other costs. A seller can expect 70-80% profit.
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