ValuAdder Business Valuation Blog

Heating, ventilation and air conditioning as well as plumbing contractors make up a very large industry with over $121 billion in annual gross revenues.

The industry is still highly fragmented with some 178,550 independent business competing across the US alone.

The average business in this industry, classified under SIC 1711, is privately owned and small – with $700,000 in annual revenues on average, employing 6 full time equivalent staff.

Factors that drive company valuations

Successful HVAC and plumbing contractors tend to focus on the service they provide to their target market. Differentiation is key to profitability and business owners must make key decisions on what service mix to offer to their commercial or residential clients.

Location of the busines premises is not as critical as say, for retail stores, because HVAC and plumbing contractors travel to their customer sites. However, local offline and online advertising visibility is very important for new business, as are referrals from your existing customers.

HVAC and plumbing contractors need to generate steady repeat business to smooth out income fluctuations. Ongoing service and maintenance contracts can be extremely useful for sustainable profitability.

Being flexible and in tune with emerging market trends is the hallmark of successful contractor businesses in this industry. Your profits, and company value, depend strongly on how well the service mix fits in with the current market needs.

Business valuation methods for HVAC and plumbing contractors

HVAC and plumbing contractors sell often, so there are private business sale comps you can use to come up with accurate valuation multiples in this industry.

The typical valuation multiples for these companies are:

  1. Price to annual revenue, plus inventory.
  2. Price to SDCF, plus inventory.

Why these valuation multiples?

We continuously analyze the private business sale comps in many industries. To select the best valuation multiples for a business, we look at the business selling price spread, low to high, in comparison to the average selling prices. In math terms, we look for the valuation multiple with the lowest coefficient of variation.

You can estimate your business selling price more accurately using the valuation multiples that show the relatively low variation around the average selling price.

Because most business buyers and sellers use them

What this means is that business buyers and sellers in your industry tend to rely on these valuation multiples more often to price their deals.

To get reliable estimates of business market value

Using such valuation multiples, you can come up with an accurate estimate of what your business is worth on the market.

Business valuation based on income and risk

For business appraisals of owner-operator managed businesses, you can use the Multiple of Discretionary Earnings business valuation method.

The method lets you calculate what your business is worth based on its earnings and 14 important financial and performance factors.

What is your business goodwill worth?

For well-established HVAC and plumbing contractors that have been around for a number of years, the question of business goodwill is important.

You can use the well-known Capitalized Excess Earnings business valuation method to determine the value of business goodwill – an important part of the total business value.

One Comment

calgary plumbers says:

I completely agree that specialization and differentiation is the way to go (when the economy is good). However, when the economy is down – I think you have to be prepared to do almost anything.