How To Value a Landscaping Business

Are you considering selling or buying a landscaping business? It’s important to have a clear understanding of its value. However, the landscaping business valuation process is complex. You have to compare various factors ranging from assets and liabilities to profitability and growth potential.

What is the best way to achieve the valuation? This blog post will look at the most practical options. We’ll also discuss the factors most likely to affect the evaluation of a landscaping business.

The Main Approaches for Landscaping Business Valuation

The main approaches for determining the value of a landscaping business include the following.

The Multiple of Earnings or Income Valuation Method

This formula calculates how much the landscaping business is worth by calculating its furniture earnings potential. You’ll have to calculate the expected cash flow and net profit using either SDE or EBITDA. Next, you’ll need to combine the results with the corresponding implied valuation multiples to get the business’s final valuation.

Seller’s Discretionary Earnings (SDE)

SDE is the total revenue a sole landscaping business owner expects to generate from their business. Some of the things that factor into the calculation include depreciation and expenses, earnings interest, and pre-tax profits.

The expenses shouldn’t just cover fixed recurring expenditures. You’ll need to include travel costs, salary, rent, utilities, and even personal and one-time expenses.

The sum of these will paint a picture of how much earnings the new owner of the business can expect. However, you should keep in mind that SDE only works for landscaping business valuation if the business is a sole proprietorship.

Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)

If you’re evaluating a larger business, you’ll need to use the EBITDA approach. It’s similar to SDE, but it measures medium-large landscaping businesses using:

• Taxes
• Amortization expense
• Net income
• Depreciation expense
• Interest expense

Landscaping businesses evaluated using EBITDA generally have revenues of $3 million and above. They also have everything you can expect from a large corporation, including a board of directors, shares, and more.

Understanding Implied EBITDA and SDE Multiples

Whether you choose SDE or EBITDA, you need to multiply the findings by the relevant multiples to come up with a value. Now, the multiples are not fixed. Valuators analyze various factors that can affect the future of the business to come up with the value.

Additionally, the future of the landscaping industry also influences the final multiple. Generally, the SDE multiples for landscaping businesses are usually between two and four. For EBITDA, the implied multiples typically fall between five and seven.

You should multiply the SDE or EBITDA by the various implied multiple ranges for each one to get the clearest picture.

The Adjusted Net Asset Method

This method of landscaping business valuation doesn’t measure finances. It also won’t give you any assumptions about future profits. Instead, it establishes the value of a business by looking at the combined cumulative market value of both tangible and intangible assets minus the total losses attached to its current liabilities.

Tangible assets in a landscaping company include physical items like trucks, office furniture, gardening equipment, properties, cash in the bank, and more.

Intangible assets are the opposite. They are valuable non-physical items such as customer lists, trade secrets, service contracts, and business websites.

Liabilities include commercial loans, any outstanding amounts in the accounts payable, and other piled-up expenses.

To properly complete the landscaping business valuation using the Adjusted Net Asset method, you must first list all the assets and liabilities and then review them individually in accordance with the current market rates.

Next, add the asset prices together and subtract the corresponding sum of the liabilities to get the value of your landscaping company.

Beyond the simplicity of the approach, potential buyers and sellers use the Adjusted Net Asset method because it is the most suitable option for working out how much they stand to gain if they have to close the business and sell the company’s assets.

However, like other methods of valuation, this approach is not without its downsides. It doesn’t allow you to find the value of the business in terms of the size of its current customer base, growth potential, and other such metrics.

Therefore, there’s a risk of misrepresenting the value of a landscaping business that’s not at risk of liquidation or collapse in the near future.

The Market Approach

Unlike the two methods above, which focus on internal parameters, the Market Approach focuses on external factors that influence the value of a business. The focus here is to value the business by matching it up against other landscaping businesses that have been sold recently.

It’s a good way to know what a landscaping business will command in the open market. For the best results, you should sample as many similar businesses as possible. A good tip is to take a look at around five to 10 similar businesses that have been sold in the area in recent times.

Several platforms hold an extensive database of small business sales in recent times, with records going back decades. Some of the top ones will allow you to compare sale prices for different subcategories of landscaping companies.

So, if the landscaping business you’re valuing focuses on residential services, you should focus on sales involving similar-sized residential landscaping companies.

However, you should keep in mind that there is no guarantee that the landscaping business you’re looking to value will command the same valuation as historically similar businesses.

Which Landscaping Business Valuation Option Is the Best?

There’s no one-size-fits-all approach when it comes to evaluating landscaping businesses because each one is different. However, it’s best to use the Market Approach in combination with either the Adjusted Net Asset or the Multiple of Earnings approach for a complete picture.

Remember, Multiples of Earnings is only practical for sole proprietorships.

Factors Influencing Landscaping Business Valuation

Various factors directly and indirectly influence the valuation of any landscaping business. We’ll look at some of them below, largely from the seller’s side of things.

Level of the Owners’ Involvement

Landscaping companies where the owners are integral to the revenue generation process are less valuable than those where the owner’s involvement is minimal.

As a business owner, this doesn’t mean you have to remove yourself completely from day-to-day operations. However, you have to reduce how much the business depends on to keep running. Will the business continue to run if you have to step away for a few weeks or months?

Ability To Prove Earnings

Experienced buyers typically will not buy a landscaping business that can’t prove a significant portion of its earnings. Therefore, prospective sellers need to limit taking cash out of their business to the barest minimum.

Landscaping business valuation experts will tell you that you lose $2-$3 from your landscaping business’s valuation for every $1 in earnings that you can’t prove. Therefore, it’s important to maintain your records.

Balance of Customer Concentration

Many potential customers want to know where the money is coming from while appraising landscaping service companies.

Do a few customers make up a large percentage of your landscaping company’s revenues? Many buyers will consider the business high-risk. Thus, the overall valuation will be lower compared to another business where the revenue is not too concentrated in the hands of a few people.

Size of Credit Extensions

How long does it take you to get paid? A potential buyer will want to confirm that they have enough money to pay employees and keep up with recurring expenses before revenue starts to come in.

Therefore, you need to confirm that your business doesn’t have too many customers with credit extended beyond 30 days. If your accounts receivable don’t require much cleaning up, buyers will look upon your business more favorably, increasing your chances of selling at or above fair market value (FMV).

Overall Business Size

Lenders will not support the purchase of a business if the sale price is less than $350,000. Buyers avoid landscaping businesses with valuations below this mark because they can’t get financing from the U.S. Small Business Administration (SBA) or other sources.

If your landscaping business appraisal puts the value of your business below this threshold, you should focus on growing the business a few more years before putting it on the market again.

Number of Long-Term Service Contracts

This is one of the biggest factors affecting the valuation of landscaping companies.

Most potential buyers love long-term contracts. This is because they protect the business from volatility, ensuring predictability with revenues. Additionally, it also allows them to see which routes hold the most customers at a glance, ensuring easier route planning.

Spread of Clientele

Landscaping companies with a strong list of commercial clients will command more during valuations compared to those focusing strictly or heavily on residential customers.

Various studies show that the demand for residential landscaping ebbs and flows in line with the economic reality.

So, businesses with a largely residential clientele may experience significant revenue drop-offs during economic recessions. On the other hand, those with a healthy list of commercial clients will have a less volatile revenue stream.

Existing Reputation

Potential buyers want to know that the landscaping company they are thinking about buying has a long list of happy customers. Existing reviews can also influence future revenues as many people will check them before choosing to go ahead with a company on a service or not.

Therefore, potential sellers need to ensure they are collecting service reviews on Google and across other review sites, including Yelp, Angie’s List, the Better Business Bureau, and more.

Digital Presence

Today, nine out of 10 potential customers research companies online before choosing to go with them. Therefore, a landscaping business with a strong digital presence is more valuable than one without.

Therefore, you can’t afford to ignore your digital footprint as a potential seller. Start with ensuring you have a responsive, modern website.

Next, improve your search engine optimization (SEO) and establish your brand as an industry authority with carefully targeted content marketing. Don’t forget social media.

As younger people become homeowners, a significant portion of your potential clients will start their search for a landscaping company online. They may also want to look for recommendations from their social media circle.

A landscaping company with a strong online presence has a better shot at a stable future where these clients will become the majority.

It’s also important to blend your online and offline marketing strategies. Things like adding your website and social media pages to shirts or vehicle branding can help boost your brand’s visibility and potential valuation.

Employee Reliability

Landscaping businesses are constantly hiring to meet labor needs. A company with an established or trustworthy crew is more valuable. Savvy businesses know to maintain a steady process for hiring new employees to limit the impact of turnovers.

Similarly, it’s important to avoid having undocumented immigrant workers on your books. The penalties can be as high as $3,000 for every undocumented immigrant, and there’s a risk of imprisonment. Potential buyers will be less reluctant to take that risk.

Therefore, it’s important that you carefully evaluate potential employees during the hiring process.

The Balance of New Installation vs. Maintenance Contracts

Landscaping businesses focusing mainly on new landscape installations are inherently riskier than those holding more maintenance contracts. The idea behind this is simple. The market for maintenance work is less volatile than the one for installations.

Get Professional Help With Your Landscaping Business Worth Assessment

Working out the value of your landscaping business is a complex process with many moving parts. It’s not a job for the average business owner. It’s best to work with a company with extensive experience in completing valuations for businesses in the industry.

That’s what we offer here at Murphy Business Brokers.

Do you need further guidance on landscaping business valuation? Do you need to learn more about the different ways you can improve your brand’s valuation? Call the Murphy Business Brokers team or fill out the contact form.