Electrical

Electrical Business Valuation & Worth

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How Do You Value an Electrical Business?

With as much time and energy as you have taken to build your electrical business, it is important for you to understand what type of gold mine you are sitting on. If you want to know how to value an electrical business, there are really only two main components that come to mind: free cash flow, and the multiples of that cash flow that the buyer is willing to pay. If you have ever asked yourself, “How much is my electrical business worth,” delving into the cash flow and the multiples will get you your answer.

Free Cash Flow
Multiples of Cash Flow

Electrical Business

Free Cash Flow

When you are wondering how to value an electrical business, look no further than to the cash flow to know what you are dealing with. How much money will the business generate to the buyer on day one? That is the cash flow. Sure, the electrical business valuation includes other things like the EBITDA, adjusted EBITDA, SDE (Seller’s Discretionary Earnings), and add-backs, the bottom line is all about free cash flow. Don’t get caught up in minimizing tax liabilities or other ancillary ideas: cash flow is king.  

“How much is my electrical business worth?” is a common question

In order to answer it, think about the owner’s add-backs that are often recurring items.

Elements that Recur

  • Compensation owner receives
  • Any business compensation for other family members
  • Medical insurance coverage for owners or family members
  • Car expenses of owner and family members, such as insurance, gas, and monthly payment
  • Travel, meals and entertainment not 100% business-related
  • Expenses for phones
  • Country clubs, golf clubs, hunting or fishing clubs

One-Off Items

REVENUE ITEMS

  • PPP or EIDL loans
  • Sale of asset

EXPENSE ITEMS

  • Unreimbursed loss on insurance claim
  • Purchases, repairs, improvements
  • Any accounting, consulting, or legal expenses
  • Any other major expenses
  • Expenses incurred from bad debt

Understanding Multiples

The valuation of an electrical business is based on how much of the cash flow the buyer is willing to pay. Obviously, there are several considerations in the electrical business valuation that will ensure the buyer pays two times, four times, six times, etc.

FIRST RULE OF MULTIPLES

If you are considering your electrical business worth, the initial range size of adjusted cash flow works together according to size. It stands to reason that the higher the cash flow, the higher the multiples.

  • Under $500k free cash flow – 2x-4x / Valuation range $500k – $2m
  • $500k-$1m free cash flow – 3x-5x / Valuation range $1.5m – $5m
  • $1m-$2.5m free cash flow – 4x-6x / Valuation range $4m – $15m
  • $2.5-$10m free cash flow – 6x-10x / Valuation range $15m – $100m
  • $10m-$25m free cash flow- 10x-20x / Valuation range $100m – $250m
  • $25m+ free cash flow – 25x+ / Valuation range $600m+

In other words, how many years of the cash flow will it take to pay off the purchase price of the business? Two times will take two years, four times will take four years, etc. Because larger businesses have more diversified options, a larger customer base, a fuller geographic reach, and broader revenue streams, they are more stable and reduce the risk to the buyer. Buyers will pay the higher multiple because the company is less volatile. As cash flow grows, so does the multiple.

SECOND RULE OF MULTIPLES

Valuation of an electrical company takes into consideration some secondary considerations that make an impression on the sale. Even though they might be considered secondary, they are still quite impactful when it comes to the electrical business valuation.

  • Amount of new construction (Aim for 20%, and lower is better)
  • Amount of maintenance contracts (Aim for 20%, and higher is better)
  • Revenue growth (Aim for more than 20%, and higher year by year)
  • Marketing reputation management (number of Google reviews and average star rating)
  • Lead generation program (consistent and repeatable lead generation flow is better)
  • Size of technician crew (more technicians is better – aim for 10)
  • Internal workflow technology integration (ServiceTitan or HouseCall Pro is great)
  • Business independent of owner involvement (Aim for the owner being able to leave on vacation and turn phone off, and less day-to-day involvement is better.)

So, how much is my electrical business worth?

Multiply the free cash flow by the multiples, and you have your electrical valuation. There are several other things to consider. The buyer is purchasing anything needed to run the business, such as trucks or other equipment. Also, the buyer will purchase this electrical business debt free, so you will have to pay off any debts before the sale. Lastly, there will need to be an agreed upon amount of working capital left in the business at closing. 

Understand that there are many fees involved in the sale of a business, and you can expect to net 70-75% of the sale price.

WE’RE HERE TO HELP

Valuing Your Electrical Business

The valuation of your electrical company involves many variables, but once you understand its true worth you can move forward with making the best possible sales deal. Although there are so many things to consider, when it comes time to figure out how to value an electrical business, a little help would go a long way.

At Brentwood Growth, we have a wide variety of investment partners waiting to pair with you, in order to get a high electrical business valuation.

Contact us today to investigate our seller side loyalty and ability to close the deal for you.

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