The Value of Your Fence Business
Do you need to raise money for business expansion, refinance or simply want to retire? If so, you need to know what your fence company is worth? I know, whatever someone is willing to pay for it is obviously the short answer, but this is not just your real estate, trucks and tools we are talking about here. Much more importantly is the “Good will” you and your business has established, and that can be worth a lot of money.
If your company is well organized with a comprehensive Business Plan, good financial records and a solid reputation for quality workmanship, you have built something very valuable. If not, sadly your company may not be worth much more than your real assets and inventory.
For major corporations valued in the billions of dollars, EV (Enterprise Value) is usually used. We are not going to talk about that. For smaller and mid-sized companies, like we find in the fence industry, other valuation estimates are used. Estimates derived from multipliers of earnings such as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) or EBIT (Earnings Before Interest and Taxes) and my personal favorite for the fence industry, SDE (Sellers Discretionary Earnings) are commonly used. For our purposes, I will speak about the more commonly used SDE valuation methods.
Let’s start with the valuation multiplier SDE. Even though this measure is not based on the U.S. Generally Accepted Accounting Principles (GAAP), it is among the most commonly used. In April 2016, the Securities and Exchange Commission (SEC) stated non-GAAP measures such as SDE and EBITDA would be a focal point for the agency to ensure that companies are not presenting results in a misleading manner. If SDE is shown, for example, the SEC advises that the company should reconcile the metric to net income. This should assist investors by providing information on how the figure is calculated. In other words, for this or any valuation method used, do your due diligence and verify results, do not take anything for granted.
There is NO set, agreed upon EBITDA or SDE multipliers for the fence industry, so I researched dozens of data bases from mergers and acquisition firms to colleges and universities and the US government Department of Labor and Statistics to calculate my own finding. I based my research on my 25 years consulting in the fence industry, and extrapolated calculations from estimates in the general construction industry.
Determining the multiple of SDE or EBITDA (by industry) to use for company valuation can be a challenging and debated decision. There are many attributes that factor into choosing an SDE or EBITDA multiple, with one of the most influential aspects being the industry in which the valuated business operates. This is primarily due to future growth considerations. For instance, high tech businesses will typically be valued at higher SDE and EBITDA multiples than manufacturing businesses, because of growth potential.
The fence industry SDE and EBITDA would be closely tied to that of general contractors, as they are the closest related industry for which a multiplier does exist. My SPV method would be much more specific and involve the nuts-and-bolts dynamics of the individual business. This calculation takes time and research into the workings and history of the individual operation.
There are many other factors that influence SDE and EBITDA other than general industry growth prospects. Risk vs. return is always a factor. The size of the business and the level of EBITDA itself plays a huge part in selecting an SDE or EBITDA multiple, with the general perception that investments in larger businesses have less risk.
The current economic climate, including the availability of financing, can have a considerable effect on SDE and EBITDA multiples, which will increase in a positive economic environment with low interest rates, and decrease when interest rates are higher (like now). Businesses that require a lot of working capital or significant investments in capital expenditures will earn lower EBITDA multiples.
The 2015 Capital Markets Report produced by the Pepperdine Private Capital Markets Project displays a chart showing EBITDA multiples by industry and by the size of EBITDA itself. The range of SDE and EBITDA multiples (for EBITDA between $1,000,000 and $10,000,000) is 3.3x to 8x, with the averages ranging from 4.5x to 6.5x.
That being said, here are some SDE valuation findings, ranging from the most conservative estimates to the most generous calculations and then my own conclusions:
First, according to BMI Mergers and Acquisitions of Philadelphia, the valuation multiples for 2017 thru 2022 for all construction companies between $300,000 and $6,000,000 in sales ranges from 2.6 x to 5.0x.
PitchBook Valuation Database, a commonly used platform for industry specific EBITDA valuation multipliers, posted information for the more general construction industry, again none of these are industry specific for fencing. The following valuation multiplier were published in 2022.
For construction and engineering firms doing one million dollars or less per year, the multiplier was 3.5X EBITDA. For firms doing 2 to 5 million dollars of business per year, the multiplier jumped to 4.5 x EBITDA and finally for firms between 6 and 10 million dollars in sales volume, the EBITDA multiplier was 5.5 times.
Finally “Equidam” Valuation Platform, with research submitted by Professor Aswath Damodaran of New York University for valuations for 2023, construction industry valuations has an EBITDA multiple of 8.56 for mid-size sales volume, while homebuilders having a EBITDA multiplier of 5.03. Personally I find this a bit far reaching and I disagree with this multiplier.
For my money, the most valid industry valuation multiplier for the fence industry would be base not on EBITDA, but on SDE’s or Seller’s Discretionary Earnings. I actually feel this valuation method can be among the more accurate determinations for smaller businesses. SDE is defined as EBITDA + Owner’s Compensation. SDE is typically the net income (or net loss) on the company tax return + interest expense + depreciation expense + amortization expense + the current owner’s salary + owner perks.
For many small to mid-size fence contractors, I prefer this method because, in addition to the adjustments of EBITDA + Owner’s Salary, other adjustments may be necessary. For instance, it’s no surprise that many small business owners run a lot of personal expenses through the business that have nothing to with operating the business. If properly documented, those personal and/or discretionary expenditures may be added back to SDE.
Here is an example of other types of Seller’s Discretionary Earnings adjustments
- Many small business owners personally own the real estate the business occupies. If the business is overpaying or underpaying facility rent, the amount needs to be adjusted up or down to reflect the rent a prospective buyer of the business would expect to pay.
- Occasionally there are non-recurring expenses, such as a consultation fee or an extraordinary legal bill due to a lawsuit, that may be added back to cash flow.
- There can also be non-recurring income (i.e. sale of a fixed asset at a large gain).
- Some businesses employ multiple family members who may receive above-market compensation. The above-market portion of their salaries can be added back to the extent there is sufficient expense remaining to enable a prospective buyer to replace those family members at a competitive market rate (or adjust their salaries if they stay on board).
- These are some of the common adjustments, but there may be justification for others.
When it comes to valuing a small business (under $5,000,000 or so in value), SDE is the common denominator to which a multiple is then applied. There are numerous other factors, including the industry itself, that can also affect the selection of an appropriate multiple.
Whether your business is growing and you need to increase your line of credit for expansion or you simply want to retire and sell your company for the highest possible dollar, knowing the true valuation of your business is a very important calculation and one you need to be as accurate with as possible.
For fence industry clients I have worked with, I have found the range of valuation multipliers in the fence industry, whether derived by EBITDA or SDE, usually lies between 2.2 and 7.6 times earnings.
I know that is a big spread and the range of valuations can be measured in the millions of dollars, so this is serious business for both the owner for refinancing, or for buyer and/or seller if the company is changing hands. Good luck and please reach out to me if I can be of any further assistance in the valuation of your fence company.
About the Author, Mr. Thomas Luby, and Profit Builders International
WORKING hard and putting in long hours running a fencing operation is one thing that most of you are quite familiar with. However, making a substantial profit and sustaining a quality life style with security and peace of mind is something that far too few fencing companies enjoy. Profit Builders International and their Business Partners in the fencing industry would like to help you get there and beyond.
These are things that are critical to successfully run your fencing company, Make More Money, achieve financial security and ultimately secure your future and peace of mind. The entire “Roadmap to Success” Program is available on CD, along with “The Close” and “The Roadmap to Success” user manual by contacting Profit Builders International at the phone or address below:
Profit Builders International
3421 10th Lane West
Palmetto, Florida 34221
www.profitbuilder.org
941-981-3677 Office 941-807-7666 (cell)