What Is My Landscaping Company Worth?
The US home remodeling services market in 2023 is valued at $527B. Leading market research firm, Grand View Research, has forecasted a compound annual growth rate (CAGR) of 4.6% through 2030 for the industry.
“The demand for aesthetically pleasing housing interiors and exteriors has seen a rise in the recent past due to the change in preferences of homeowners and increasing expendable income which has led to leading to changing trends in materials and products used in residential construction and interior designing. The upgrading of home automation technology and continuous innovation in the field of appliances has led to a rise in the remodeling of households to incorporate better systems in households, especially for consumers who are constantly increasing their use of smart appliances.”1
With such favorable market conditions, many home remodeling business owners are considering selling their business and retiring or buying another home remodeling business to expand. In either case the most important first step is to get a valuation of the business.
Valuation Models and the ‘Multiple’
The most commonly used valuation model for small (under $25M) companies is the ‘Multiple of Seller’s Discretionary Earnings (SDE)’ model. See our blog post here to learn more about SDE. For companies in the $25-50M range the ‘Multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)’ model is more typically used.
Both models start with a financial baseline - SDE or EBITDA – which is then multiplied by a risk factor, the ‘Multiple’. This risk factor is an assessment of how likely the business is to continue to thrive under new ownership. The lower the risk, the higher the multiple and the higher the risk the lower the multiple.
Disclaimer: Industry ranges are determined by analyzing offers and sales of actual companies in the past 5 years. They are presented here for educational purposes only. Seek the guidance of a business valuation professional before engaging in a business buying or selling transaction.
Calculating a Valuation
Let’s look to two home remodeling companies with very similar finances but very different management.
- Company AAA has a Net Profit of $1.5M and an SDE of $2M
- Company ZZZ also has a Net Profit of $1.5M and an SDE of $2M
- The owner of Company AAA handles scheduling and spends most of the day out in the field directing the crews to ‘make sure things are done right’.
- The owner of Company ZZZ has an in-house handles scheduler and two experienced crew chiefs. This owner spends most of the day working on new business and company improvements.
A buyer looking at both of these businesses will see they the same financial benefit - but the risk factor, the Multiple, would be very different. Company ZZZ has a strong management team to handle the day-to-day while Company AAA’s owner does it all himself. In this case the buyer would assign a much smaller multiple to Company AAA.
Company AAA: SDE x Multiple = Valuation
- The buyer assigns a multiple of 2.5 to Company AAA
- $2M x 2.5 = a buyer’s valuation of $5M for Company AAA
Company ZZZ: SDE x Multiple = Valuation
- The buyer assigns a multiple of 3.5 to Company ZZZ
- $2M x 3.5 = a buyer’s valuation of $7M for Company AAA
Even though the two companies had the same annual earnings, Company ZZZ was ‘worth’ $2M more to the buyer because of their strong management team.
Can I increase My Valuation?
Yes! There are many strategies and techniques that can be put in to place in a business that will either increase earnings (raise the SDE) or reduce risk (raise the Multiple) – and the best time to start is now.
We specialize in working with our clients to significantly improve their valuation before they sell their company.
Click here to schedule a free assessment and determine the multiple for your home remodeling company and discuss several things you can do to increase it.
We hope this blog post has shed some light on the concept of the Multiple and its importance for your business exit. Until next time, happy selling!
- S. Residential Remodeling Market Size, Share & Trends Analysis Report By Service Type (Full-remodeling Service Providers, Specialized Service Providers), By Application (Flooring, Walls), By Country, And Segment Forecasts, 2024 - 2030
