How to Value a Plumbing Business

How Does a Plumbing Business Valuation Work?

A plumbing business valuation is the process of estimating the economic value of a business. 

The number derived, represents the amount investors—strategic buyers and private equity groups—may be willing to pay for the business.

When valuing a plumbing business, financial professionals—business brokers and appraisers—consider important factors like the assets the business owns, the liabilities it owes, recent earnings, and the current market conditions.

Valuations take place for multiple reasons such as:

• Before mergers & acquisitions

• Investment

• Estate planning

• Succession

• Litigation

• To purchase Insurance

• To plan for future growth

Additionally, knowing the value of your business ensures you get a fair price for your plumbing business.

Quoting Brian Cohen, business strategist at SF&P advisors, “If you don’t know what your business is worth, how do you know if the deal is any good or not?”

How to Value a Plumbing Business

There are different ways to approach the valuation of a business. But the major ones are earnings multiplier, book value, and market value approach.

Let's delve deeper into each one.

Pro tip: 

It's worth noting that investors use more than one method, to perform due diligence, given their individual limitations. So, it’s advisable to use them all when valuing your plumbing business

Earnings multiplier 

The earnings multiplier, also known as the price-to-earnings (P/E) ratio method, is a common approach used in business valuation to estimate the value of a company.

To arrive at a company's worth using this approach, valuation experts apply a multiple—earnings multiplier—to the company's earnings to determine its overall worth. The approach taken to determine the multiple, differs for each plumbing company, per its yearly revenue.

For a single-operator small business raking in less than $1million annually, SDE (seller’s discretionary earnings) is used to calculate the earnings multiplier.

SDE—or owner’s discretionary cash flow—is a figure that shows the full financial benefit of a single-operator business. It’s the net profits plus a series of addbacks. Typically, the addbacks can include:

• The owner’s official salary

• Health insurance

• Depreciation

• Amortization

• Health insurance

• Travel

• Meals and entertainment

…and other discretionary expenses.

Side note: If you’re running your plumbing business alongside a partner, SDE only allows you to addback the salary of one owner only. And it’s better to limit the addbacks, to make it easier for the buyer to justify any amount they’re seeking from a lender to fund the acquisition.

After calculating the SDE, an advisor or broker will calculate a multiplier by looking at sales reports of comparable plumbing companies with identical financials.

On the other hand, plumbing companies with more than $1million are more likely to have a system in place, a manager, CEO, etc. So, EBITDA—earnings before interest, taxes, depreciation, and amortization—which determines a plumbing company’s ability to generate profit in the long run, is used to derive the multiplier.

Unlike SDE, EBITDA excludes the owner’s salary in its calculation.

Whether you’re using SDE or EBITDA, the earnings multiplier increases with revenue. Why? 

Because the ability of a company to pay its debt comfortably and still make a profit, increases with the EBITDA (net profit). 

This reduces the perceived risk to investors. And since investors prefer less risky investments, the multiplier increases.

Another factor that affects the earnings multiplier, is your recurring revenue.

Unlike non-recurring revenue, recurring revenue—like long-term contracts—provide a steady, predictable cash flow. This makes the plumbing company a less risky investment, increasing its multiplier.

For example, say plumbing company A has an EBITDA of $2million (or an SDE of $900,000) and a recurring revenue—long term contracts—of $500,000. The multiplier may be 7x, which inflates its valuation to $14million (or $6.3million)

Now, consider another plumbing company, B.

B has the same EBITDA (or SDE) as A. But plumbing company B's recurring revenue is a mere $100000.

The multiplier will be lower, at probably 4x, bringing the valuation to $8million (or $3.6million).

What if your business doesn't have an EBITDA or SDE? It means you'd adopt a different approach known as book value.

Book value

Unlike other methods of business valuation, this is the easiest and direct.

The book-value-based valuation method, determines the worth of a business based on its net book value—company asset value minus its liabilities. It provides an overview of the financial position of a business at a specific point in time.

Mind you, the book value approach rarely solely gives the true value of a business for three main reasons:

• It covers only historical value, which isn’t reflective of the business’s current and future value.

• Intangible assets are discounted from the calculation since they're not represented in the balance sheet.

• There's rarely a correlation between the book value and market value of a plumbing business.

Hence, it's mostly used as a baseline of the valuation process, not as a standalone measure of value.

Market value

The market value method is also known as the market approach or comparative approach.

It involves determining the worth of a company by comparing it with publicly available data from plumbing businesses with identical characteristics and financials.

It's based on the theory that the value of a plumbing business is equivalent or almost equivalent to another of similar characteristics, that's been involved in a transaction recently.

One significant benefit of the market value approach is its dependence on hard data. This eliminates assumptions.

However, there are three major challenges:

• Finding financial data of plumbing businesses with similar characteristics can be difficult.

• The value may be affected by current market conditions. 

For example, the pre-covid valuation of a plumbing company  may be $10million since current inflationary pressures was absent.

So, using the sale of that plumbing company to evaluate another company now (even if they’re identical), cannot reveal its fair market price.

• It doesn't consider internal factors like the quality of the employees and managerial team.

So, it’s vital to consider its limitations before using it.

Additionally, you could use ServiceTitan’s FREE Service Business Valuation Calculator to get valuation estimates.

Try our free calculator

Disclaimer: the ServiceTitan Business Valuation Calculator is solely meant to provide an estimated valuation of your business. This calculator does not guarantee any price or value for your company. Please note that external factors may negatively or positively influence the valuation of your business. 

If you are looking for a more definitive valuation, please consult a professional.

Factors That May Affect Your Plumbing Business Valuation

The value of your plumbing business hinges on key factors. You can use your knowledge of these factors, to increase your business’s value prior to acquisition.

Also, remember investors rarely go for only one plumbing company. If they’re contacting you, it’s likely they’ve reached out to others too.

So, planning your business to adhere to each factor below, increases the likelihood of them choosing your company above others.

Licensed employees

Investors avoid high-risk plumbing businesses.

And one thing that brings risk is unlicensed employees. Because they have to pay for any injuries they suffer on the job—since they’re not insured—and can be sued for mistakes caused by an unlicensed plumber.

So, to increase the valuation of your business, it’s important to treat plumbing licenses as must-haves for every plumber.

Employing licensed plumbers ensures compliance with local regulations and building codes. This protects the business from the risk of legal issues, fines, and penalties, increasing its attractiveness, and positively influencing its value.

Also, having licensed plumbers denotes professionalism, expertise, and quality workmanship, which means satisfied customers. So, you’re more likely to get repeat customers, boosting annual revenue and valuation.

Hiring licensed professionals may seem costly. But the value it accrues to your business is understated.

Contracts and customer base

The availability of a stable customer base is crucial in the valuation of a plumbing company. 

A plumbing company with strong consistent cash inflow from long-term contracts and a diverse customer base, equates to consistent guaranteed revenue. This reduces significantly the risk associated with investing in the business.

Hence, the valuation will be high.

In contrast, a plumbing business whose revenue stream consists mainly of one-off repairs, 24/7 clients, and a few long contracts, commands a low valuation. Because they’re a risky investment. 

Their profits will take a hit if, for instance, one client suddenly ups and goes.

Additionally, a loyal customer base increases a business’ revenue, brings in more business through referrals, and reduces expenses on plumbing marketing.

So, to increase your valuation, invest in providing excellent customer service to build a loyal clientele. And keep marketing to bring in more big-money clients, instead of relying on the few you already have.

Reputation

A strong reputation and brand recognition within the local market enhances the value of a plumbing business. In fact, in business circles, reputation is considered an intangible asset.

That’s understandable. 

Besides, people lean on positive customer reviews from satisfied customers when choosing a plumbing company. And a well-established brand image grows a plumbing company’s market share and attracts more customers.

So, to boost your plumbing company’s reputation, capture your Google-my-business page. Then fill it up with reviews from real clients.

Also, take time out to respond to reviews. If it's a complaint, go above and beyond to fix it. Because investors use reviews and social media comments to gauge a plumbing business's reputation.

Owner involvement

A plumbing company over-reliant on the owner who’s actively running the phones and has a hand in every department, commands a low valuation.

Firstly, there’s a limit to what one person can do. So, a high involvement of the owner reduces the company's scalability and growth potential.

Secondly, potential buyers or investors, may be concerned about the business's ability to sustain sales and growth in the owner's absence. 

That's because the business may be over-relying on the owner’s personal relationships, skills, and grunt-work to pull in sales. The business may unravel once the owner leaves, making it a risky business to buy.

Therefore to grow your business and valuation, limit your involvement. Hire qualified employees capable of handling the business even if you're not around.

"If you have a team that has a good operations person, a good salesperson, a good marketing person, really all the key players, as the company grows you can be focused on strategy rather than having to worry about every little detail of the day-to-day operations,” says Jeremiah Mann of Intrepid Investment Bankers.

Growth potential 

A key factor that determines a plumbing company’s valuation, is its potential to grow. Besides, no investor would love to purchase a business that's likely to go bust in a couple of years.

They prefer to see a plumbing business that's been growing year after year, with constant improvements.

These improvements include consistent training and retraining of employees, addition of new plumbing services, and better service delivery.

The first step to increasing the growth potential of your plumbing company is to have a documented growth plan. Then have a record of your progress towards the goals. Because investors only believe records.

Marcus Wagner, who recently sold his business, AcctTwo, to Baker Tilly understood this. So, he kept records of growth to show investors. 

According to him, “A lot of selling your business is just telling a story."

He adds that "you’re going to be telling a story about the future, because that’s what the investor is investing in, but you’re going to be supporting the story by pointing to the past and saying, look at our track record.”

Additionally, don’t be scared to invest in growth projects. Trust your intuition as an entrepreneur. Investors love to see projects that demonstrate growth.

For example, Kevin Comerford, president of Service Champions North, invested in building an in-house training academy for HVAC technicians. 

At the time it looked like a mere expense. But that investment played a role during negotiations for his company.

“(Investors) loved that story, because that's growth. I know it's a cost. I know it's an investment, it's a well-worth investment”, he says.

Environmentally-friendly products 

There’s a growing concern for the environment, leading to an increased preference for environmentally-conscious products and service companies among customers.

In fact, 78% of consumers believe companies must play a role in environmental sustainability. Plus, 53% prefer patronizing environmentally friendly Consumer Products and Retail (CPR) organizations. 

This proves one thing: sustainability is the future, even in the plumbing industry.

So, offering eco-friendly services and plumbing products like water-efficient fixtures, energy-efficient water heaters, or eco-friendly pipe materials, attracts the increasing number of environmentally-conscious customers willing to pay a premium for sustainable solutions.

It also presents the plumbing company as one that’s forward-looking, positioned to compete favorably in the future.

This pulls in more revenue, which makes plumbing companies more attractive to investors.

Use of technology 

There's an Increasing incorporation of technology in business processes. And the plumbing industry is no different. 

Technology helps plumbing companies streamline and automate their business operations, reducing costs and increasing profitability.

Additionally, modern customers are very conscious of their impact on the environment. So, they prefer to patronize plumbers with smart devices that help reduce water consumption.

Furthermore, technology helps plumbing companies deliver better service to customers and identify potential problems for upsells.

That's why many plumbing companies report an increase in revenue—and valuation in effect—once they incorporate technology.

A great example is Tioga Plumbing & Electric, who noticed an increase in revenue after they signed up to ServiceTitan.

“(ServiceTitan) increased our productivity and customer satisfaction exponentially when we started turning (on features).”, says Office Manager, Amanda Carter.

Hence, don't shy away from using technology. Invest in technology that increases the efficiency of field technicians.

How Plumbing Businesses Use ServiceTitan to Increase the Value of Their Businesses

ServiceTitan has helped plumbing companies of all sizes to scale. 

With the platform, plumbing companies take on more customers, manage the payrolls of their increased number of employees, and nurture one-off clients into long-term customers.

A great example is Rainforest Plumbing & Air.

According to operations director, Darlin Tippets, “When we joined up with ServiceTitan, we were just cracking $12 million,”

“In four years, we’ve hit the $22 million revenue mark for the 2022 calendar year. We've also gone from about 45 technicians or trucks on the road to 65, and moved from a one-acre complex to a three-acre complex", he adds.

This is possible, because of different features in ServiceTitan.

Scheduling and dispatching 

Handling scheduling and dispatching technicians may be easy at first. But it becomes a headache as the business grows— more employees are hired and the customer base explodes— or when there’s an increase in demand, particularly during winter.

It goes like this:

The customer calls. 

The CSR puts them on hold while struggling to find availability in the company's schedule—a calendar or chaotic dispatch board—to fit them in. 

Due to the delay, the customer either hangs up and calls a competitor, or remains on the line while retaining a poor perception of the company.

Additionally, dispatchers sometimes send techs to the wrong address or forget to dispatch a tech at all. Hence, the plumbing company loses the opportunity to add to their revenue.

In our interactions with several plumbing companies we’ve discovered that some—like Tioga Plumbing & Electric—tried other solutions. But they still faced the same problems as when they were using a manual system, until they started using ServiceTitan’s plumbing software.

ServiceTitan helps CSRs book jobs and assign them to technicians, without having to comb through chaotic calendars, put customers on hold, or dial technicians to know who's free.

CSRs can plan for weeks ahead without having to switch between screens.

Also, CSRs can categorize each job alongside their specific requirements, so techs arrive with all the tools required…

….and see the availability of each tech, how long they have until they’re free, and then queue up jobs for them to handle.

This way, CSRs can optimize tech schedules to finish as many jobs per day, and deliver the best customer experience possible.

Additionally, installing Schedule Engine on your plumbing website allows customers to book jobs from their smartphones, at any time—even after work hours—which automatically populates into your ServiceTitan dashboard.

This boosts customer satisfaction. 

As Michelle Micheletti, Marketing Director of Apex Midwest, says, “it's really important to allow customers to utilize the services we all provide based on their individual needs or preferences.”

She adds “When they [customers] schedule and know it's taken care of, it provides instant gratification and an instant peace of mind. ‘I have an expert coming out to take care of this problem.’”

“It really adds to the customer experience, as opposed to them not feeling satisfied and continuing down the road to call someone else.”

With the help of Schedule Engine's always-on customer service, brands under Apex Midwest have been achieving astounding results

• In five months, Whipple Service Champions received over 2,200 Schedule Engine bookings averaging more than 750 per month.

• For J&A Service Experts, after-hours-schedule-engine jobs reached 71% in October.

• Integrity Home Solutions experienced a massive inflow of new business in october. 60% of all bookings were net new customers through Schedule Engine.

• In two months, Academy Air processed 5,475 Live Voice, 5,475 and 1,090 booked appointments with the help of Schedule Engine's always-on support

This has led to a massive increase in their valuations.

Bottom line: With ServiceTitan, plumbing companies can manage customer overflows efficiently, and enable customer book conveniently.

Customer relationship management

To maintain a perfect reputation and boost customer loyalty, plumbing businesses must manage relationships with customers effectively.

With ServiceTitan's Customer Experience feature, plumbing companies can:

1. Show the real-time location of plumbing technicians to customers. This guarantees on-time arrival, leading to a satisfied customer.

2. Send automated texts and emails to confirm appointments, eliminating the need for calling customers. The text also includes the photo and details of the plumbing technician. This fosters a connection between the customer and technician, before they arrive.

3. Give Technicians have direct access to customer information via the mobile application. This eliminates the time dispatchers spend searching for the customer details to send to on-field techs.

This leads to an increase in positive customer reviews, you can leverage on to increase your valuation.

Recall we earlier stated that investors use reviews and social media comments to gauge a plumbing business’ reputation, right?

Here's the problem:

What if there’s no reliable method for capturing and replying to reviews and customer comments? Does that mean you'd spend hours switching between different platforms to respond to reviews? Or will you have to hire an extra employee to do so?

That's the challenge many plumbing companies face.

Here's an example:

Ease Plumbing currently averages 109 reviews a month. But previously—before they started using ServiceTitan—it was a paltry five reviews, in an entire month.

With ServiceTitan's Reputation Management feature, customers can easily leave reviews at their convenience.

In fact, according to Jordan Bolch, Ease Plumbing’s marketing head, their noticed increase in reviews is because ServiceTitan makes it easy for customers to leave a review immeadiately after the service is delivered.

Additionally, managing and responding to reviews is easy.

ServiceTitan sends notifications to plumbing companies once a customer leaves a review. They can then respond from a central dashboard, regardless of where the review was dropped.

ServiceTitan also collects customer information, and saves it to the cloud. This eliminates mistakes, enables you to track interactions and service history, deliver personalized service, and create targeted marketing campaigns. 

Bottomline: ServiceTitan helps plumbing companies cultivate relationships with customers, deliver exceptional service,  collect a plethora of customer reviews, and craft targeted marketing campaigns.

Invoices and payments

Invoicing and processing customer payments can get complex quickly, especially as you add high-paying customers.

They expect a seamless process that doesn’t involve wrinkled papers, missing digits, and numerous back-and-forth calls to confirm little details.

ServiceTitan simplifies the invoicing and payment process for plumbing businesses.

Customers can pay using any method of their choice—cash, credit card, financing, or check, thus preventing dropped payments and increasing your plumbing tech's ability to sell and book jobs on the field.

With the ServiceTitan payment feature, techs can securely take photos of checks and credit cards, or direct customers to a one-click-pay, custom-tailored payment portal.

This ensures every invoice is paid on time—increasing your cash flow.

Additionally, every credit card and check payment is transferred to your bank account automatically, 24 hours after payment. This saves time, which employees can devote to other activities with direct impact on revenue and your plumbing company's growth.

Furthermore, all electronic payments are automatically reconciled with bank deposits—meaning you can easily get an accurate financial statement in minutes, instead of spending hours manually reconciling figures.

This feature comes in handy when you wish to sell out or value your plumbing business, because you'll need a strong record of financial statements, to survive the scrutiny of investors.

It’s rigorous. President Fred Silberstein of SF&P Advisors, calls it “...a colonoscopy without the anesthesia.”

Marcus Wagner adds “They [potential buyers] are going to want gap financial statements. They may want an audit. And they want that information in a timely manner. That is where a lot of the payoff of getting systems and processes in place is going to occur.”

So, having an up-to-date and accurate financial statement speeds up the process and minimizes objections to whatever amount you wish to sell for.

Finally, the ServiceTitan offers a free invoice generator.

Simply fill the data fields with the relevant customer information, and it will generate a ready-to-pay professional invoice right away.

This way, plumbing technicians can generate customer invoices on the field, without having to return to the office, increasing booking rates and allowing plumbing technicians to close deals from the field.

Bottomline: You can use the ServiceTitan invoicing and payment features to speed up the billing cycle, improve cash flow, and reduce administrative tasks associated with manual invoicing and payment processing.

Marketing and communication

Plumbing companies that attract new customers and communicate effectively with customers, are highly-valued. 

For example, Service Champion North grew from one truck in 2003 to $15 million in revenue in four years because “We were a sales and marketing machine,” says Kevin Comeford. And part of the reasons behind the growth was ServiceTitan's Home Services Marketing Software.

With it, you can track the performance of marketing campaigns and ads, and see which ones are generating calls. This ensures you spend only on revenue-generating campaigns, freeing up resources you can invest to grow your company.

Additionally, you can create audiences for targeted email and direct mail campaigns, using existing customer information saved on ServiceTitan.

For example, you could create a campaign to target only prospects who requested an estimate but are yet to book an appointment.

This increases conversions, translating into more revenue for your company.

Furthermore, as your business grows, the back-and-forth calls from technicians begins to wear out dispatchers. And things like vital customer data can get lost in the process.

With ServiceTitan’s Mobile app, on-field technicians can access job details, customer information, and necessary documentation on their mobile devices.

This improves communication and coordination between the office and field teams, reduces paperwork, and allows for real-time updates on job progress.

Bottomline: ServiceTitan enables you to run targeted campaigns and boost employee efficiency.

Analytics and reporting

Once you make the decision to sell, expect requests for data to come flooding in like a tsunami.

“Potential Buyers like to see how you're managing the business, which KPIs you’re using, and how effective you are using those KPIs,” says Fred Silberstein, President of SF&P Advisors.

ServiceTitan provides advanced analytics and reporting tools that enable plumbing businesses to gain valuable insights into their operations.

Businesses can track key performance indicators, analyze revenue trends, monitor technician productivity, and identify areas for improvement. This helps them discover areas to optimize, to boost profitability, and deliver a structured report when investors come calling.

Additionally, it helps plumbing companies to easily provide any data investors request for when they wish to buy.

Bottom line: ServiceTitan provides plumbing companies with insights they can use to make data-driven decisions, optimize processes, and increase overall profitability. It also makes it easy to fulfill investor’s data requests.

To Sum Things Up

Business valuations reveal the true worth of your business, which you can use to plan for growth or justify your asking price to investors.

To increase your valuation, implement the factors above with the help of ServiceTitan—the all-in-one plumbing business software.

ServiceTitan is a comprehensive plumbing software built to help plumbing companies streamline and automate their operations, interact with customers, and grow their revenue. With the plumbing software, several plumbing businesses have been able to increase their revenues and interact with investors from a point of strength.