Operating your plumbing business might be starting to take its toll on you.
If not, it’s certainly taking up a significant amount of time that you’d rather spend doing other things, especially now that you’ve been in business for so long.
Even if you’ve only been in business for a few years, you may have found that your plumbing business’s recent growth is something you don't want to manage alone.
If these are thoughts and emotions you’ve found yourself experiencing recently, one of the best options for you to consider is selling your plumbing business.
Selling the business may be something you’ve considered before, or maybe you’ve never given it much thought. Either way, it’s one of the best ways to turn all your hard work into an exciting new endeavor, or even begin the retirement you deserve.
At MidStreet, we’ve helped hundreds of business owners in the home service industry just like you get the highest possible offers for their businesses.
But how do you begin?
How is your plumbing business valued, and how do you go about selling it?
In this blog, we’ll explain it all: the best ways to value your plumbing business, what you can do to maximize your purchase price, and who you should hire to help you throughout the process.
How to Value a Plumbing Business
Before we get into the best ways to value your plumbing business, let’s address a major misconception about business valuations we’ve encountered throughout the years.
The biggest misconception we’ve seen business owners fall victim to is that their business is best valued based on a percentage or multiple of its revenue.
Unfortunately, some professionals still rely on this method despite it leading to highly unlikely purchase prices.
Let us explain why this isn’t a good valuation method with an example:
ABC Plumbing does $10 million in revenue, and has $300,000 in inventory.
Another plumbing business, XYZ Plumbing, also does $10 million in revenue and has $300,000 in inventory.
The owners of ABC Plumbing and XYZ Plumbing both decide to sell their businesses, and they consult the same appraiser for a business valuation. This appraiser uses a valuation method based on the businesses’ revenues: 40% of revenue + inventory = purchase price.
Therefore, both ABC Plumbing and XYZ Plumbing should sell for the same price: $4.3 million (40% of $10 million = $4 million + $300,000 inventory = $4.3 million).
Sounds fair, right?
Maybe at first glance, but let’s take a few things into consideration.
ABC Plumbing has 6 employees and pays them fair salaries. ABC charges a little more for their services, but due to their reputation for outstanding work, their customers are willing to pay. They've been in business for 15 years, so their relationships with suppliers and vendors have earned them a little leverage on inventory pricing.
Because of all these factors, ABC Plumbing earns a 6% profit margin, and the business makes $600,000 annually in net profit.
XYZ Plumbing, however, does things a little differently.
This business also has six employees, but they are overpaid by several thousand dollars each year. XYZ gets a lot of business in their service area, but it’s mainly because they vastly underprice their work.
Additionally, they've only been in business for four years, so they haven't quite gained the leverage with suppliers that ABC Plumbing has, and they pay more for inventory as a result.
Because of all these factors, XYZ Plumbing has a profit margin of 3%, so the business makes a net profit of $300,000.
Despite the $300,000 difference in the two businesses’ net profits, they were valued at the same purchase price.
See the issue?
This is why business valuations based on revenue are unreliable: they fail to take into account the actual earnings of the business, which is the first thing most buyers will want to analyze when they begin making inquiries.
It’s even possible for a plumbing business with $10 million in revenue to be losing money. But again, this wouldn’t be considered when basing the business’s value on its revenue.
Because of this, the best way to value your plumbing business is by using a multiple of its Seller’s Discretionary Earnings (SDE) or Earnings Before Interest, Taxes, Deprecation, and Amortization (EBITDA).
Let’s look at each of these earnings metrics and explain their similarities and differences.
Multiple of SDE
If you’re an owner-operator of a plumbing business, then your business should be valued using a multiple of its SDE.
SDE is meant to show the total financial benefit your business can provide to one full-time owner-operator.
NOTESDE is generally used to value smaller companies doing less than $1 million in earnings, which are more likely to be owner-operated. As earnings grow, so does the likelihood of a business having a hired management team rather than an owner-operator, which is when EBITDA becomes a more useful valuation metric.
To calculate your business’s SDE, you would use the following formula:
Interest, taxes, depreciation, and amortization expenses are added back not because a buyer won’t depreciate assets or pay interest and taxes, but because the amounts they’ll expense in each of those categories will be different from those of the current owner.
Non-recurring expenses (i.e. legal fees), and discretionary expenses (i.e. personal phone and fuel) are added back because they don’t represent expenses required to operate the business.
Since the buyer of a business valued using SDE will be taking over as owner-operator, we also add back the salary you’ve been paying yourself. The buyer may choose to take a higher or lower salary, but regardless, your salary represents earnings of the business, so it gets added back.
After making all these add-backs, the resulting value will be your business’s SDE.
Once your SDE is calculated, your business broker or M&A advisor will apply a multiple to your SDE which will give you your purchase price.
The range of possible multiples that will be applied to your earnings are found in comparable sales reports, which report on the sales of businesses with similar earnings and locations.
The more appealing your business is, the higher the multiple you’ll receive.
Multiple of EBITDA
If your plumbing company does more than $1 million in earnings, then it’s more likely to be valued using EBITDA. This is because as your purchase price increases, the likelihood of selling to an individual buyer (who would likely take over as owner-operator) decreases.
Financial buyers, like strategic or private equity groups become more likely candidates as the purchase price increases, so EBITDA becomes a more reliable valuation metric.
To calculate your company’s EBITDA, the same add-backs will be made as those in an SDE valuation with one exception: the owner’s salary.
Rather than add back the entire owner’s salary, excess owner’s salary will be added back instead. This is because the buyer of a company valued using EBITDA won’t take over as owner-operator, but will instead employ a manager to fulfill that role.
For example, if you’ve been paying yourself $180,000, but the buyer could replace you with a manager earning $100,000, then $80,000 would be added back.
Companies valued using EBITDA usually command higher multiples than companies valued using SDE for two reasons:
- A company’s EBITDA will be lower than its SDE because of the owner’s salary add-back. Therefore, a higher multiple must be applied to make up the difference.
- Companies valued using EBITDA generally have higher earnings, which buyers are willing to pay a higher multiple for.
Just like an SDE valuation, a range of multiples will be applied to your EBITDA to arrive at your company’s low-end and high-end purchase price.
But what determines if you receive a higher multiple or a lower one?
Let’s take a look at some of the most important factors that will impact the multiple applied to your plumbing business.
What Impacts Your Multiple?
The number one thing that affects your multiple is your business’s earnings.
Higher earnings present a better opportunity for buyers, so they’re generally willing to pay higher multiples as earnings increase.
This is because multiples are highly dependent on the risk associated with acquiring your business.
The more risk associated with acquiring your business, the lower the multiple.
The less risk associated with acquiring your business, the higher the multiple.
Are there any factors that can impact your multiple besides your earnings?
Let’s address some of the factors that buyers look at to gauge risk, which ultimately determines the multiple they’re willing to offer.
Buyers will usually offer a higher multiple for a business with recurring revenue because it represents a predictable, guaranteed source of income, and thus, less risk.
Plumbing businesses with a significant amount of revenue coming from contracts with individuals, property management companies, etc. will generally command higher multiples.
The type of customers you serve can also have a big role in the multiple you receive.
Currently, residential plumbing businesses are in high demand because of their potential to gain residential contracts.
Having property management companies or HOAs as customers can also be exciting to a buyer since it shows that future work can be guaranteed.
Like most home service businesses, plumbing businesses can benefit greatly from a strong online presence and positive reviews, which buyers have been scrutinizing more and more since businesses have started competing for reviews and Google rankings.
Since online presence contributes to the reputation of your business and increases access to customers, it can make a positive impact on the multiple buyers offer for your business.
Here are a few stats from Invoca about consumer searches for plumbers:
- 76% of consumers looking for a plumber don’t have one company in mind when they begin their search
- There has been a 288% year-over-year growth in searches for “plumbers near me”
- 93% of consumers looking for a plumber call after making a search
- 40% of consumers who call from a search make a purchase
- 54% of consumers make a call before converting
If you don’t have a Google Business Profile, you should get one ASAP. This is a free service that will allow you to gain online exposure and customer reviews, which can both boost revenues and be a selling point for your business.
Owner Involvement in Sales
Like most businesses, the less involved you are in sales, the less risk a buyer will perceive when acquiring your business.
This is true for a few different reasons. Most buyers won’t be thrilled to learn that when they step in, they’ll be working 60-hour-work weeks operating the company and handling new customers.
Additionally, when an owner is too involved in sales and getting customers, buyers have will worry that once the owner walks, so will the business.
So, if you know your business relies a little too heavily on you, especially regarding sales, it’s a good idea to start offloading some of those responsibilities onto your most trusted and experienced employees.
Skilled Employees/Multiple Licensees
As you’re probably aware, finding and keeping good apprentice plumbers and journeyman is a job in and of itself.
Buyers know this, so they’ll be asking about how many plumbers you have on staff, their levels of experience, and how long they’ve been with you.
When buyers feel comfortable they won’t have to spend a lot of time hiring once they step in as owner, they may be willing to offer more for the business.
It’s also a big plus if you aren’t the only licensed master plumber within your business. It’s hard to become a licensed plumber. Top tier licensure takes several years to acquire, so if you’re the only one with master plumber licensure, this can present a problem for buyers if they aren’t licensed.
If you are the primary license holder, depending on your state laws, it will likely extend your deal timeline significantly. This is because for your business to continue operating under a new buyer, someone in the business must hold master plumber licensure.
This means only master plumbers or buyers willing to hire one would be able to purchase your business.
More and more companies in the plumbing industry are offering environmentally friendly products that conserve water and reduce waste.
As more and more commercial and residential properties include water conserving toilets, tankless water heaters, etc., it can be beneficial to offer them as part of your product and service mix.
Not only can these products increase income due to their higher profit margins, they also show buyers you are keeping up with your competition and operating with the future of the business in mind.
Many companies offer both HVAC and plumbing services; some also do electrical.
If including these additional services is feasible for you, it could make your company more attractive to strategic buyers (we’ll address the different types of buyers shortly).
Buyers for your Plumbing Business
Depending on the size and scale of your plumbing business, you could attract individual, strategic, or private equity buyers.
Let’s talk about what each of these buyers brings to the table, and the likelihood of selling to each.
If your plumbing business does less than $1 million in earnings, there’s a high likelihood that it will be sold to an individual buyer.
In many cases, these buyers will be master plumbers leaving a larger plumbing company with the goal of going into business for themselves.
Individual buyers will often get financing for the deal through the SBA, seller financing, or a combination of the two.
Selling your plumbing business to an individual can be advantageous if you want someone like you to take over and keep the business running once you exit.
Strategic buyers are other businesses within your industry (or an adjacent industry) who see value in acquiring your company.
For your plumbing business, this could be an electrical contractor, HVAC company, or other company in the home service industry.
For example, an HVAC company may want to acquire your plumbing business to upsell your services to their current customer base.
Strategic buyers generally become interested once your earnings have surpassed $1 million.
Private Equity Buyers
Private Equity Groups buy businesses with the goal of growing them in a few years’ time and selling them at a greater value.
These buyers are probably the least likely candidates for your plumbing business, but it isn’t entirely unheard of; it all depends on the size of your operation.
Like strategic buyers, private equity buyers may become interested once your earnings surpass $1 million.
How to Sell Your Plumbing Business
The best way to sell your plumbing business is to begin with a business valuation.
This will help you decide whether or not you’re ready to sell, and give you an idea of how to create an exit plan for the future.
Many business brokers and M&A advisors offer free business valuations as a way of building relationships with potential clients, but some do charge a fee, especially if they don’t plan on taking you on as a client.
Once you’ve chosen a broker or advisor to work with, they will charge a success fee for their services to help you sell your business.
What they charge will depend on the size of the deal and their own fee structures.
For more on business broker pricing and fees, click here.
For more on M&A fees, click here.
Get Started with a Valuation
Now that you know a little more about what impacts your plumbing business’s value and who you should hire to sell it, you may be ready to take the next steps.
Getting a business valuation is the only way to know for certain that you’re ready to sell your business.
A business valuation doesn’t just let you know what your business could potentially sell for, but it also allows you to learn about potential areas for growth, and helps you develop a timeline for when you’ll list your business.
Whether you think you’re ready to sell today, or you want to start preparing for a sale in the coming years, contact us today. We’d love to offer a free business valuation and get you started on the right foot.