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Buying a plumbing business can be an incredibly wise investment – their services are in high demand and largely recession-resilient.
This is likely to accelerate as the U.S. sees a scarcity of skilled laborers.
Instead of starting from scratch through the long process of creating a business, hiring workers, finding clients, you can buy an existing profitable business.
Let’s look at the things you need to know before buying a plumbing business.
Factors to consider before plumbing business
1. Market Analysis
You’ll want to conduct a thorough market analysis of the demand for plumbing services in your area. Is there a lot of new construction? Is it mainly residential services like unclogging toilets? Is there a high demand for commercial services?
Look at the other plumbing companies in your area to understand what your competition will look like. Are there any existing ones for sale? For example, if you live in Canada, you can search for plumbing businesses for sale in Calgary or any other major city through specialized online marketplaces. You can also analyze if there is one big player or a collection of small- to medium-sized operations all competing.
2. Financial Analysis
Once you’ve looked at the market, think about what sort of revenue and profit margins you’d like to see.
Basic residential services like unclogging toilets and fixing faucets have a gross profit margin of around 50% and each truck you have will bring in about $200,000 in annual revenue.
Intermediate residential services like installing or repairing water heaters and/or gas work have a similar profit margin, but each truck brings in about $300,000 in annual revenue.
Underground plumbing work on sewer lines and water mains – whether residential or commercial – has a gross profit margin of 60 to 65 percent and each truck can bring in up to $400,000 each.
3. Legal Analysis
Plumbing is a highly regulated profession across the U.S., so you’ll want to make sure that you are aware of all the rules and regulations necessary to operate in your area.
You can find a state-by-state breakdown here.
4. Operational Analysis
You’ll also want to make sure that you are buying a business that has all the necessary tools and equipment to undertake the type of plumbing work you want to do.
Buying the business likely means you’re getting all its existing employees as well. Make sure that they have the relevant experience.
Due Diligence Checklist
One of the most important steps in buying a plumbing business is to complete a comprehensive due diligence check. You basically want to scrutinize all aspects of the operation to make sure it is profitable and fits your investment criteria.
- Preliminary due diligence: This is an initial review of the company’s data and documents to determine if it is a good match financially, culturally, and strategically. You’ll want to look at over 3-5 years of financial data, employee salary information, customer lists, etc.
- Operational due diligence: This process is much more future focused as you determine the sustainability of the business in the future. You basically want to ask yourself, “What am I going to do with this once it is mine?”
- Legal due diligence: You’ll also want to review any legal risks associated with the business including property ownership, loans, securities, employment, or customer disputes. Is there any pending litigation?
Financing Options for Buying a Plumbing Business
Let’s look at some of the financing options for buying a plumbing business.
- Self-funding: This is basically using your own money to fund the purchase, either using personal assets or perhaps the assets of a business that you already own.
- Bank loans: You go to a lending institution like a bank or a credit union and ask for a loan. You’ll have to provide collateral and agree on a term length as well as a rate and payment schedule.
- Small Business Administration loan: The SBA is a federal agency tasked with, among other things, connecting would-be small business owners with the capital they need. The SBA doesn’t give you the money but guarantees a large portion. You basically get a loan from a bank that is insured by the SBA.
- Seller financing: It’s very common for the seller of a small business to provide some of the money in the form of seller financing, basically a private loan between you and the current owner. Much like the bank loan, you’ll have to negotiate terms. Ten percent is standard but it’s ultimately up to you to negotiate.
To gather the necessary capital to purchase a plumbing business, you’ll probably end up using a variety of the sources listed below.
A typical deal might look like this: You get approved for an SBA loan where you provide 10 percent of your own money, 10 percent seller financing and the rest from the loan.
Negotiating The Purchase Price
Once you are sure that the business is a profitable one that withstands the due diligence process, you’re going to get into the negotiation phase.
Make sure you have a good understanding of how much similar sized or small businesses in your area have sold for.
Determine a fair price that works for you and the owner. You’ll also want to work out the payment terms, whether there is seller financing, for example.
You’ll also want to ensure the transfer of necessary licenses and permits.
Finally, you’ll have to work out how the transition will happen and whether you want to negotiate with the current owner to have them help in any formal way over the short to medium term.
Conclusion
Buying a plumbing business can be a great move if you’re looking to own a company that is profitable and always in demand.
Very few people have the technical skills to fix plumbing issues. It’s also not the sort of expense people can just put off. If their toilet is clogged, they’re going to get it fixed.
You’ll want to do a lot of planning to determine what the market needs are in your area and what type of work you want to specialize in.
You should also conduct a very thorough due diligence check of the business before you set down to negotiate a final price.
These are just some of the things that you need to consider before you buy an existing business. If you need more information, it’s best to hire a business acquisition consultant so they can guide you through the process