Selling a Remodeling Business
The residential home remodeling and renovation industry has experienced strong historical growth in South Florida due to urbanization trends, an aging housing stock, and lifestyle upgrades. Home remodeling businesses typically renovate residential kitchens and bathrooms with a focus on flooring, cabinetry, and countertops. Many remodeling businesses have a showroom where customers may view and select their preferred home decor. Key steps to sell a remodeling business include obtaining an accurate set of historical financial records, reducing the level of owner-dependency to maximize value, addressing licensing requirements, showcasing the specialized and unique value proposition, and hiring a business broker experienced in confidentially marketing remodeling and home renovation businesses to strategic buyers in the South Florida market.
Valuing Remodeling Businesses
Home remodeling businesses are primarily valued as a function of its transferable intangible assets. The customer goodwill, reputation, repeat business from referrals, and relationships with employees are all key intangible assets of remodeling businesses. The intangible assets are measured by the annual adjusted owner benefit (or true economic profit derived by the owner) of the business, and a remodeling business is generally valued as a multiple of 2-3 x its annual adjusted owner benefit. Physical assets such as vehicles and a showroom will also impact the valuation. Inventory, accounts receivable, and Work in Progress (WIP) must also be accounted for and play an important role in the sale of home remodeling businesses..
Factors Impacting Valuation of Home Remodeling Businesses
- For many smaller home remodeling companies, the owner (or a husband/wife team of owners) serves as the main salesperson, designer, and/or installer.
- In such instances, the owner may be personally responsible for the company’s referrals (often from interior decorators or General Contractors (GCs) personally known by the owner).
- This creates risk that the customer goodwill and referrals may not transfer to the buyer after the sale.
- Generally, the valuation of a remodeling business increases when the owner is more absentee and not involved in the day to day operations of the business.
- While it may be unrealistic to entirely remove oneself from operating a remodeling business, owners may slowly de-emphasize and reduce their own role in the business.
- This will help prepare their business for sale, and give the buyer peace of mind that the business will maintain its sales and earnings after the sale.
- In addition to the role of the owner, the growth rate of the remodeling business is a major determinant of its valuation.
- A remodeling business with growing sales and earnings (while maintaining or increasing its margins) demonstrates that the business is providing value to its customers and benefitting from referrals and a positive reputation of quality service.
- The growth should be for at least two to three years to prove its sustainability.
- Lastly, a remodeling business with a comprehensive business model whereby the installation is done ‘in-house’ will generally receive a higher valuation than a remodeling business which subcontracts out installation.
- When installation is done ‘in-house’ the quality control often improves and a buyer is assured that the relationships with the installers are transferable after the sale.
- In the current age where skilled labor is hard to find, the transferability of the installers after the sale is especially important.
Inventory of Home Remodeling Businesses
Inventory refers to goods available for sale as well as the raw material used to produce the goods. Home remodeling and renovation companies generally carry little or no inventory. That is because goods and materials (such as appliances, cabinets, and countertops) are only ordered for current jobs (typically after the customer places a deposit). These goods are not considered inventory because they are not ‘available’ for sale. A remodeling company’s showroom usually consists of samples which have tangible value but also are not considered inventory. If a remodeling company has inventory then it is usually included in the sale.
Work in Progress (WIP) of Home Remodeling Businesses
At any given time, a remodeling company will have jobs in progress whereby the customer has signed a contract (often with a deposit) but the job is not yet completed. This is called Work in Progress (WIP) and is often a major component in the sale of a home remodeling or renovation business. Many remodeling companies have dozens of jobs in progress, with the completion of work often waiting for the delivery of necessary materials. When it comes time to sell, a remodeling company’s WIP is transferred to the buyer as of the date of sale. The customer deposits (held in the balance sheet as current assets) are included in the transfer, minus any material and labor costs that the seller already incurred in furtherance of completing the job.
Accounts Receivable of Home Remodeling Businesses
The Accounts Receivable (A/R) of a home remodeling company represents money owed to the business by a customer for services previously rendered. Most remodeling businesses collect partial payment up front, with the balance of payments coming in stages as the job nears final completion. A well run remodeling company will be sure to minimize their A/R with little or no collection problems. A remodeling company with a high amount of A/R requires a high amount of working capital which results in a lower overall valuation. The A/R is typically not included in the sale of a remodeling business, but is always subject to negotiation between the buyer and seller.
A home remodeling or renovation business with a transferable customer base and staff of salespeople, designers, and installers may make an excellent business investment in South Florida. A buyer with the correct knowledge and skill-sets should consult with a professional business broker and take advantage of this growing industry.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a FREE evaluation of your business.