Short answer
Most buyers value a profitable water hygiene, water treatment or fire safety business as a multiple of its adjusted annual profit. The multiple depends mainly on how much income is recurring, how long customers stay, how spread out the customer base is, the business's accreditations, the strength of the team and how much it depends on you. What you actually receive also depends on how the price is structured and on cash, debt and working capital at completion.
1. Start with adjusted profit
Buyers usually begin with EBITDA: earnings before interest, tax, depreciation and amortisation. They then adjust it to show what the business would earn under a new owner. Common adjustments include:
- replacing the owner's own pay and dividends with the cost of a manager to do the owner's job;
- removing one-off costs, such as a legal dispute or a one-time project;
- removing personal costs that run through the business;
- adjusting rent if the business uses property the owner owns.
Keeping three years of clean accounts, with personal costs kept separate, makes these adjustments easy to agree.
2. What moves the multiple up or down
- Recurring income: planned maintenance, monitoring and testing contracts are worth more to a buyer than one-off remedial or installation work.
- Customer retention: how long customers typically stay, and how often contracts renew.
- Customer spread: a business where no single customer is a large share of turnover carries less risk.
- Accreditations: current LCA registration for water work, or BAFE, FIRAS or NSI certification for fire work, held by the company and in good order.
- Team: experienced, stable engineers and an office team that runs well without you.
- Reliance on the owner: the less the business depends on you personally, the lower the risk to a buyer.
- Records and systems: complete site records, scheduling and reporting systems that a buyer can rely on.
- Margins and trend: steady or growing profit over several years.
3. From headline value to what you receive
The figure in an offer is often an "enterprise value", agreed on a cash-free, debt-free basis. At completion it is usually adjusted:
- plus surplus cash left in the business;
- minus debt, such as loans and finance agreements;
- plus or minus any difference between the working capital at completion and an agreed normal level.
Then there is timing. Part of the price may be paid at completion and part later, as fixed deferred payments or an earn-out. Read our guide to deferred payments and earn-outs before comparing offers.
4. Getting a realistic view
Your accountant can prepare adjusted profit figures and a valuation range. Corporate finance advisers and brokers can tell you how the market values similar businesses. When you talk to buyers, ask each to explain in writing how they reached their figure, what adjustments they made, and how and when it will be paid.
Richmonds sets out its offers in writing, including value, structure and what happens to your team. See how it works.
Questions owners ask
How much is a water hygiene business worth?
It depends on adjusted profit and on the quality of that profit: how much is recurring, how long customers stay, the spread of customers, accreditation and the team. Most buyers apply a multiple to adjusted profit, so ask your accountant for adjusted figures and a range.
Why do buyers value recurring contracts so highly?
Planned maintenance contracts produce predictable income that tends to renew, because duty holders have to keep up with their obligations. One-off work has to be won again each time.
Is the offer price what I will receive?
Not always. Offers are often made on a cash-free, debt-free basis and adjusted at completion for cash, debt and working capital, and part of the price may be paid later.
Sanjeev Desour is the founder of Richmonds, which buys UK water hygiene, water treatment and fire safety businesses from owners who want to retire. He founded IGNITE Academy in 2014 and runs the IGNITE Group of companies. LinkedIn
Sources
This guide is general information, not legal, tax or financial advice, and it is not an offer to buy any business. It reflects the rules and announcements known on the "last reviewed" date above. Tax rules and rates change, and announced changes may be altered before they become law, so take advice from your own accountant and solicitor before you act. Richmonds accepts no liability for decisions made on the basis of this guide. See our website terms.