Trying to chart a successful exit from your roofing business? Want to maximize your ROI and create a bright future?
An accurate business valuation is the key here.
But how do you calculate the valuation of a business? It’s not as simple as you might wish.
What’s a Private Company Valuation?
Let’s begin with the basics. What is the valuation of a private company?
It’s precisely what it sounds like –– the process of defining the economic worth of a privately held company. In the process, you’ll need to account for a range of factors, including the following:
- Financial performance
- Growth potential
- Industry factors
- Risks and threats
With an accurate private company valuation, you can do many things as a business owner.
You can sell it.
You can merge with another firm.
You can look for lenders to help you expand your company. Without it, none of that is possible. So, how do you value a private company?
There are many valuation methods out there including:
- market capitalization
- earnings multipliers
- times revenue
- discount cash flow
- book value
- liquidation value.
While each of these will give you an estimated business value, they’re not interchangeable so it’s important to understand what each offers so that you can choose the best valuation method to sell your roofing company.
How to Calculate Roofing Business Valuation
Before using any of the valuation methods we discuss below, you’ll need to:
- Clean up your financial statements
- Address business operation-related issues
- Handle all the prep work
Once done, you can move on to choosing the valuation method that fits your needs and goals best. Let’s discuss the three primary methods used to value a private roofing company.
1) Market Approach: Using Comparables and Precedent Transactions
The Market Approach is one of the most common ways to value a private company. It draws from the idea that similar businesses should have similar values if all other things are equal.
There are two primary techniques within the Market Approach:
- Comparable Company Analysis (CCA): In this method, the value of a private company is estimated by comparing it to similar publicly traded companies. Key financial metrics like revenue, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and profit margins are analyzed to find a multiple, which is then applied to the private company’s figures. For example, if public companies in the same industry are valued at 5x their annual EBITDA, a similar multiple can be applied to the private company to estimate its value.
- Precedent Transactions: Another technique involves analyzing past sales of similar businesses. By reviewing the prices paid for comparable companies in recent M&A (merger and acquisition) transactions, you can determine the potential market value of your private company. This method is particularly useful because it reflects actual market conditions and buyer behavior.
While the Market Approach provides a good indication of how a business might be valued based on revenue and industry performance, the availability of comparable data is often limiting.
We’ve already discussed the fact that such information may be scarce for smaller firms.
For many private companies, especially niche or unique businesses, finding appropriate comparables may be difficult. In that instance, an income-based approach might be the better solution.
2) Income Approach: Projecting Future Earnings
The Income Approach values a company based on its ability to generate future cash flows, with the most common method being the Discounted Cash Flow (DCF) analysis. Here’s how it works:
Discounted Cash Flow (DCF)
This method estimates the future cash flows of the business and discounts them back to their present value using a discount rate, which reflects the risk associated with the business.
For private companies, this discount rate is typically higher than for public companies due to factors such as less liquidity and more uncertainty. The DCF method is particularly valuable for companies with strong, predictable cash flow, as it focuses on the intrinsic value of the business rather than market comparisons.
The strength of the DCF analysis is that it takes into account the company’s future earning potential.
However, the challenge lies in making accurate financial projections, especially for businesses with volatile revenue or limited historical data.
3) Asset-Based Approach: Valuing Tangible & Intangible Assets
The Asset-Based Approach values a company based on the net value of its assets, minus its liabilities.
For instance, you might take the value of your equipment and physical location, subtract your debt, and have a decent idea of your business’s value.
This approach is particularly useful for asset-heavy businesses, such as manufacturing or real estate companies. That’s because assets like equipment, property, and inventory form the lion’s share of the business’s value.
There are two main versions of this method:
- Book Value Method: This method uses the company’s balance sheet to calculate the value of its assets and liabilities. It’s a straightforward approach, but it may not fully capture the market value of certain assets, such as intellectual property or brand value.
- Liquidation Value: In the worst-case scenario, the liquidation value estimates what the company would be worth if it were sold off in parts. While this approach is rarely used for thriving businesses, it provides a baseline for understanding the minimum value of the company.
Note: for many private companies, especially those with significant intangible assets (like patents, trademarks, or customer relationships), the Asset-Based Approach may not provide a full picture of the business’s worth.
Adjustments in Private Company Valuations
In addition to the primary valuation methods, several adjustments are often needed for an accurate valuation of a private company. These include:
- Control Premiums: A control premium reflects the added value that a buyer is willing to pay to gain control of the company. This premium compensates for the ability to make strategic decisions and influence the future direction of the business. Typically, a private company with strong management or valuable strategic positioning will command a higher control premium.
- Lack of Marketability Discount: Private companies are not as easily sold as public companies, which have liquid markets for their shares. As a result, the lack of marketability discount accounts for the difficulty and time it may take to sell a private business. Depending on the company’s industry and market conditions, this discount can range from 10% to 30% of the company’s value.
Other factors, like the size of the business, industry trends, and competitive positioning, will also influence the final valuation.
These adjustments help ensure the valuation reflects not only the business’s financial performance but also the real-world challenges involved with selling a private company.
Other Valuation Methods
Market Capitalization
For a simple direct solution on how to calculate business valuation, the market capitalization method could be just the ticket.
It’s simple and direct and just involves multiplying your business’s share price by the total number of shares outstanding.
However, while this method is pretty direct, it does have some shortcomings. One of the most important to understand is that it only accounts for equity value. Today, most businesses operate on both debt and equity, so it may not give you an accurate picture of your business’s total value.
Another drawback here is that shares are often under or overvalued by the market.
That can skew your calculations. Note that this method is not particularly useful for a merger or acquisition, either.
Times Revenue Method
The times revenue method is another way to achieve a business valuation.
In this situation, you’ll take a stream of revenue for a given period of time and then apply a specific multiplier to it. The actual multiplier varies depending on your industry, however.
Other factors that affect the multiplier include market potential, timing, the management team within the business, the potential growth or value of the business idea, and the goals of the investor.
While this is a popular method of how to calculate a business valuation, it’s not the most straightforward and if you don’t have a good grasp of the underlying factors, it’s easy to make mistakes.
Note that revenue doesn’t equal profit, so this method may not be the most accurate when it comes to the value of your business. It’s also important to understand that an increase in revenue doesn’t always boost profits.
Earnings Multiplier
A similar option for how to calculate a business valuation is to use the earnings multiplier method.
This offers a more accurate picture of your business’s true value because it’s based on profit rather than projected revenue streams. You may be more familiar with it as the price-to-earnings ratio, and if you have shareholders, they’ll likely prefer this method.
Here, you take your business’s price per share and divide it by the earnings per share to get your net profits earned per share.
The higher your earnings per share, the better your valuation. That said, this method may require that you calculate earnings before taxes and earnings after taxes, which can require extra work.
When Should You Calculate Business Value?
When might a business owner go through a valuation?
The most common point is if you want to sell your business.
In this case, using a business valuation calculator can give you an accurate value to bring to market. However, you may also need to value your business in other situations, including:
- Mergers and Acquisitions: Contemplating a merger or an acquisition? An accurate business valuation is important for acquirers seeking to determine if a business is worth purchasing.
- Funding: Looking for funding to accelerate growth? Perhaps you need to invest in physical assets, like equipment or a building. A business valuation provides concrete information for lenders, helping them make informed decisions.
- Tax Purposes: Business valuations are essential for tax purposes when selling a business, as well as during the estate planning process.
How Can AXIA Advisors Help?
Valuing a roofing company is complicated.
The process requires a deep understanding of financial principles, market trends, and industry-specific factors.
Whether you’re considering selling your business or simply want to know its worth, it’s important to choose the right valuation method for your firm and make appropriate adjustments for an accurate estimate.
At AXIA Advisors, we specialize in helping roofing business owners navigate the complexities of private company valuation and the M&A process. As a trusted M&A advisory partner, we provide personalized, strategic advice tailored to your unique needs and goals.
Our M&A advisory services provide you with detailed guidance and all the assistance required to not just sell your business but to do so confidently, assured that you’re getting the best ROI and making the most informed decision.
If you’re ready to take the next step and get a detailed, personalized assessment, we invite you to reach out to Axia Advisors for expert guidance on how to value your company and prepare for a successful sale.
