Do you own a small pest control company? Perhaps plan to buy one? In either case, knowing what the business is worth is essential.
Privately owned pest control firms, classified under the SIC code 7342 and NAICS 56171, are a common service business. Established companies in this industry, especially those with a track record of positive earnings, are a frequent acquisition target.
Large number of pest control business sales = reliable valuation multiples
This is good news indeed. Recent business sales of pest control companies offer you an excellent way to estimate the value of your company. The typical method is to use the valuation multiples derived from recent sales of comparable pest control businesses.
You can come up with a very comprehensive estimate of your business value by applying these valuation multiples to your business financials. Here is the list of the typical multiples used for pest control business valuation:
- Business price to gross revenues or net sales.
- Business price to gross profit.
- Business price to net income.
- Business price to EBIT and EBITDA earnings.
- Business price to Seller’s discretionary cash flow (SDCF).
- Business price to Furniture, Fixtures and Equipment (FF&E) Assets.
- Business price to total business assets.
Picking the valuation multiples that best reflect your company’s value drivers
Using a number of valuation multiples at once can tell you quite a bit about the key value drivers for your company. For example, established, highly profitable businesses are best valued using the earnings-based valuation multiples.
In fact, the business value spread is the smallest if you use the Price to Net Income multiples. This means that the business buyers and sellers tend to rely on the pest control company’s profitability as the preferred basis for business valuation in order to support the asking or offer price.
On the other hand, a young company may be showing good revenue but profits that lag behind the industry norm. In this case, the price to gross revenue valuation multiple is a better choice to demonstrate the business value.
Price to FF&E assets is another choice to value a company that has invested heavily in equipment, business automation and management systems.
Example – using valuation multiples to estimate the value of a small pest control company.
Let’s consider a typical small pest control business with the following current financials:
- Gross annual revenue: $650,000.
- Net Sales: $600,000.
- Net Income: $50,000.
- EBITDA: 65,000.
- Seller’s discretionary cash flow: 140,000.
- FF&E Assets: $350,000.
- Inventory: $80,000.
To calculate the fair market value of the business for this example, we pick these valuation multiples:
- Price to gross revenue: 0.7.
- Price to net sales: 0.76.
- Price to net income: 10.5.
- Price to EBITDA: 8.25.
- Price to SDCF: 3.2
- Price to FF&E assets: 1.4
Your business financials X valuation multiples = business value
Our estimates of the business value are as follows:
- Based on gross revenues: $535,000.
- Based on net sales: $456,000.
- Based on net income: $546,000.
- Based on EBITDA: $536,250.
- Based on SDCF: $528,000.
- Based on FF&E assets: $570,000.
Note that, by convention, the market value of business inventory is added to the value estimates based on gross revenues, SDCF and FF&E assets. When doing your own business valuation be sure to adjust your inventory levels to what is good and salable. Remove the inventory that is obsolete, damaged or lost.
You can use the business value estimates from above to come up with the value range or a single average number:
Business value range: $456,000 – $570,000.
Average business value: $528,542.
Incidentally, either way of concluding the business value is endorsed by the recent AICPA SSVS No 1 business appraisal standard.