Capital Valuation Group

Transferability

Dear Cathy,

I’ve owned a plumbing business for 20 years. As I work with my financial planner on retirement planning, I need to gain a better understanding about the value of my business. 

A little background: I am a licensed plumber and do not have any employees, but my wife takes care of the business side of things.  I’ve been successful and have grown a strong client list with repeat customers over the years. I specialize in older homes, which is a unique niche.  

Do you have any experience appraising plumbing businesses?

Sincerely,

Jerry

Hi Jerry,

Thank you for your email. It sounds like you’ve built a nice business. Yes, we have worked with a number of plumbing companies. However, while having some familiarity with an industry does help, the industry itself is not as important based on the multi-step process and tools we use to value a company. Through the valuation process we really dive in and learn about the industry and each business we work with because even within an industry no two privately held businesses are the same.

Cap Valuation Group Madison Transferability Whenever we get a question like yours, we always start with the basic question of  “would this business be attractive to a potential buyer”, or using valuation terms, is it transferable?

To get the answer to that, we have two specific questions we ask to see if your business would be attractive to a potential buyer, or if it would be classified as more of a successful career you’ve built using the tools of the trade. Said differently, is an educated buyer willing to pay more for your business than just the value of your assets?

Here are the two questions we need to consider:

  • Are there profits available to you as a business owner to provide you with a return on investment? As a business owner you are both an employee and an investor.  Not all business owners pay themselves market compensation. Market compensation is the salary you could earn doing what you do as an employee of another company.  To get an accurate view of your cash flows, you will need to adjust your profits to account for market compensation. After doing this, is your business profitable?
  • Is the business too dependent on you? If you become sick, injured or die, would the business’ operations continue and survive long term?

If the business has positive cash flows after adjusting for market compensation so you as the owner can earn a return on your investment AND the business is able to continue if you are no longer able to work, the business is considered to be transferable and we would advise you to proceed with a business valuation.

If you answered NO to Question 1, or YES to Question 2, unfortunately you business is likely not transferable. Based on what you’ve shared I think your business would be considered not transferable since you are the only licensed plumber. Therefore, the business is 100% dependent on you being able to serve the customers.  But there is good news! You can always liquidate your assets if there is a market for them. Better yet, create a transferable business by hiring additional licensed plumbers or apprentice a young person so the business is not solely dependent on you. With time and investment there are ways to increase the value of your business. I have some ideas based on your specific situation that I’d be happy to share.

Kind Regards,

Cathy Durham

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