How to Value My Plumbing Business for Sale

How to Value My Plumbing Business for Sale: Calculating SDE, EBITDA, and Using Industry Benchmarks

When planning to sell a plumbing business, knowing its true market value is critical to ensure you get the best price. Understanding Seller’s Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) allows plumbing business owners to see the financial health of their business. But remember, these metrics are only guidelines; two nearly identical plumbing companies with the same EBITDA can have vastly different values. A detailed valuation from a professional, such as a Tampa business broker like Legacy Venture Group, provides not only a value range but also insights into what drives that value, so you can decide whether to sell now or improve profitability. Be sure to build the right advisor team and brush up on the facts.

What is SDE and Why is it Important for Plumbing Businesses?

SDE, or Seller’s Discretionary Earnings, is the total financial benefit the business provides to its owner. SDE is particularly useful for smaller plumbing businesses (typically with less than $2 million in revenue) because it adjusts net profit to reflect all discretionary or non-recurring expenses, giving a clearer picture of what a new owner could realistically earn.

Formula for SDE

$$\text{SDE}=\text{Net Profit}+\text{Non-Recurring Expenses}-\text{Non-Recurring Income}+\text{Non-Operating Expenses}-\text{Non-Operating Income}+\text{Depreciation}+\text{Amortization}+\text{Interest Expense}+\text{Owner’s Total Compensation}$$

SDE offers potential buyers a realistic view of cash flow, as it includes adjustments for personal or non-operating expenses. For owners, understanding SDE is essential to assess if the business is providing its full financial potential and where improvements can be made to increase its appeal in the market.

Calculating EBITDA for a Plumbing Business

For larger plumbing businesses or those with EBITDA over $500,000, EBITDA is typically a preferred metric. Unlike SDE, EBITDA assumes that the owner is not necessarily required to run the business; instead, a hired manager could replace them. By subtracting the hypothetical cost of a manager’s salary and benefits from SDE, EBITDA provides a standardized measure of profitability that attracts corporate buyers and investors.

Formula for Converting SDE to EBITDA

$$\text{EBITDA}=\text{SDE}-(\text{Manager’s Salary}+\text{Manager’s Benefits})$$

For example, if a plumbing business’s SDE is $641,138 and it would cost $120,000 to replace the owner with a manager, then EBITDA would be:

$$\text{EBITDA}=641,138-120,000=521,138$$

This EBITDA figure is a valuable metric when comparing with industry benchmarks, as it reflects the company’s earnings potential without owner-specific expenses.

Using Industry Multiples to Benchmark Plumbing Business Value

After calculating SDE and EBITDA, the next step in valuing your plumbing business is to apply industry multiples, which provide insight into how much buyers are willing to pay for similar businesses based on sales data.

The industry data for plumbing and similar service businesses reveal the following multiples:

• Revenue Multiple: Median 0.43, with a high of 1.56
• SDE Multiple: Median 2.93, with a high of 4.00
• EBITDA Multiple: Median 3.81, with a high of 5.52

These multiples help set value expectations, but keep in mind that two nearly identical companies with the same EBITDA can vary significantly in value due to factors unique to each business. This is why an assessment from a Tampa business broker, like Legacy Venture Group, is crucial—they not only provide a market price range but also identify drivers of value specific to your business.

Example Valuation Calculations for a Plumbing Business

Suppose your plumbing business has gross revenue of $3,231,847 and an EBITDA of $526,686. Here’s how to use the median and high industry multiples to calculate possible valuations.

1. Using Revenue Multiples:Median Multiple of Revenue:

   $$\text{Business Value}=\text{Gross Revenue}\times \text{Median Revenue Multiple}$$$$=3,231,847\times 0.43=1,389,693$$High Multiple of Revenue:

   $$=3,231,847\times 1.56=5,041,681$$

2. Using EBITDA Multiples:Median Multiple of EBITDA:

   $$\text{Business Value}=\text{EBITDA}\times \text{Median EBITDA Multiple}$$$$=526,686\times 3.81=2,006,666$$High Multiple of EBITDA:

   $$=526,686\times 5.52=2,905,321$$

3. Using SDE Multiples:Suppose the business’s SDE is $641,138.

   Median Multiple of SDE:

   $$\text{Business Value}=\text{SDE}\times \text{Median SDE Multiple}$$$$=641,138\times 2.93=1,878,533$$High Multiple of SDE:

   $$=641,138\times 4.00=2,564,552$$

These calculations show a range of possible valuations, but it’s essential to remember that these figures only provide a guideline. Working with Legacy Venture Group or another experienced Tampa business broker allows you to dig deeper into the factors that drive value, ensuring an accurate business valuation for your plumbing business.

Calculating EBITDA as a Percentage of Revenue

To further benchmark the profitability of your plumbing business, calculating EBITDA as a percentage of revenue is helpful. In the plumbing industry, the median EBITDA percentage of revenue is 11.48%, while the high end is 36.73%.

1. Using Median EBITDA Percentage of Revenue:\text{EBITDA} = \text{Gross Revenue} \times \text{Median EBITDA %}$$=3,231,847\times 0.1148=370,155$$
2. Using High EBITDA Percentage of Revenue:\text{EBITDA} = \text{Gross Revenue} \times \text{High EBITDA %}$$=3,231,847\times 0.3673=1,186,808$$

By comparing these benchmarks to your actual EBITDA, you can determine if your business’s profitability aligns with the industry norms or if improvements can be made to boost its value.

Key Drivers of Value for a Plumbing Business

When assessing the value of your plumbing business, certain factors will influence the final price buyers are willing to pay. Understanding these drivers can help you focus on areas to enhance before a sale:

• Customer Base and Service Contracts: Long-term maintenance contracts or regular customers add value as they provide reliable, recurring revenue.
• Skilled Staff: Retaining licensed, skilled plumbers and technicians can increase the value of the business, as it reduces buyer concerns over finding qualified employees.
• Reputation and Brand Strength: Positive online reviews and a solid reputation in the community can boost the perceived value of your plumbing business.
• Efficient Operations and Systems: Streamlined systems and documented processes that reduce dependency on the owner can make the business more attractive to buyers.

A thorough business valuation, such as the one provided by Legacy Venture Group, will analyze these elements to provide not only a market price but also insight into specific value drivers.

Conclusion

When it comes to valuing a plumbing business for sale in Tampa, SDE and EBITDA provide essential insights into profitability, but they should be seen as part of a larger valuation process. Two nearly identical businesses with the same EBITDA can have different values depending on what drives their market worth. Working with a Tampa business broker, like Legacy Venture Group, allows you to obtain a professional business valuation that goes beyond the numbers, focusing on the factors that truly drive the value of your business.

This comprehensive approach ensures that you have a clear picture of your plumbing business’s worth, enabling you to make informed decisions about when and how to sell, or whether to invest in improvements to increase its appeal to potential buyers. A well-prepared, realistic valuation ensures that you’re positioned to receive the best price and attract the right buyer for your business.

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