What problem does the four-number screen solve?
Value discussions can mix several questions. The seller quotes SDE, the buyer assumes paid management, a multiple lacks support, and financing ignores old trucks. The parties may argue over price while valuing different operating plans. Separate those inputs first. That makes the disagreement clear before either side spends time negotiating a result based on inconsistent assumptions.
The Four-Number Plumbing Valuation Screen is The Plumbing Business Broker's original framework for locating those differences. The inputs are supported earnings, needed replacement labor, operating investment, and a pricing assumption. Define and support each. Their roles differ: a cost needed for cash planning is not necessarily deducted in the same way from the earnings basis used for valuation.
Start here, then develop the full analysis in the valuation hub. The screen is narrower than a valuation report. It leaves further work on concentration, licenses, liabilities, structure, and taxes. Use it to expose inconsistent inputs. A clear preliminary screen tells reviewers what still needs evidence rather than implying that four numbers decide every issue in an acquisition.
What belongs in the normalized earnings number?
Name the accounting measure and period. Use a full year or explain a different period. Do not annualize a strong month without support. Match sales and costs to ledger, taxes, and cash evidence. Explain cash or accrual accounting and its effect. Keep those choices consistent so a price ratio does not quietly compare different periods or earnings definitions.
List adjustments one by one. Owner pay, personal spending, one-time events, and related-party charges need different records. A personal payment may be removable under a stated plan. Recurring van maintenance or customer acquisition still costs money. The seller's hope that the buyer runs things differently does not show that the cost disappears or establish the amount of a supported adjustment.
The add-back guide develops the evidence schedule. Here, preserve reported profit, supported changes, and unresolved changes as three totals. Use the supported base and show disputed items as sensitivity. Keep the explanation beside each entry. Do not call the most optimistic sum established earnings when needed records or replacement assumptions remain open to review.
How do you calculate replacement labor without confusing SDE and EBITDA?
Write duties before estimating salary. Include supervision, field work, sales, dispatch, recruiting, books, and qualifying-license work. What can the buyer do, existing staff absorb, or new paid capacity cover? A title may miss important tasks. Match those tasks to realistic time and people so the model does not assume work vanishes simply because the owner plans to leave.
Estimate pay by role, place, hours, payroll burden, benefits, and recruiting needs. Show the buyer-working case apart from hired management. Labor pay differs from return on invested capital. Test what happens if the owner takes time away. The alternative helps show which part of the stated benefit relies on unpaid or personally performed work under the chosen acquisition plan.
Avoid charging management twice. EBITDA may already include market pay for a capable manager. Another charge needs a supported reason. Conversely, adding back all owner pay while assuming a passive buyer can overstate earnings. State the method. A matched price comparison needs an earnings base that uses the same convention and retains the labor required for the buyer's intended operation.
Which investments affect cash even when earnings look strong?
Schedule fleet replacement, equipment upkeep, software, essential training, and operating cash needs. Separate routine investment from unusual catch-up costs. A neglected jetter may need immediate work beyond annual replacements. Obtain maintenance records, inspection, and reasonable estimates. Explain timing and who funds the work so the cash plan includes the equipment needed to deliver the forecast jobs after closing.
Review monthly receivables, stock, deposits, and payables. Builder work can need more labor funding before collection than jobs paid on completion. The working-capital guide covers the negotiated closing delivery. This screen asks what cash sustains later operations. Those are related questions with different dates and purposes; one closing balance does not alone establish the buyer's future lowest cash point.
Investment is a cash-flow input, not an automatic EBITDA deduction. Some comparisons use earnings before capital spending; others use different cash measures. Preserve the chosen convention and show investment separately. Otherwise, the same truck may reduce both earnings and price twice. Similarly, a customer deposit may carry unfinished work rather than represent surplus cash freely available to fund the purchase.
Where should the pricing assumption come from?
Record source, period, earnings base, size, work mix, and deal definition for comparisons. Separate asking prices from closed sales. A listed home-services company's market value does not establish a local contractor's acquisition price. Undisclosed terms supply no calculable purchase multiple. Mark the missing inputs so a sensitivity assumption does not become a claimed observation just because it appears in the same table.
If matched evidence is unavailable, call the inputs scenarios. The screen can still show sensitivity without making a market claim. Read the quality-of-earnings guide before debating a multiple of unverified earnings. Document the base and the assumption separately. A calculation can be correct while the evidence is too weak to support its use as an estimate of actual market value.
Explain included assets and liabilities too. IRS business-sale guidance describes distinct assets in a transfer for tax purposes. It does not set market value. Use it to distinguish tax allocation from the price basis. Treat property, excess assets, equipment, and working capital consistently so the model describes the same package as the proposed offer and actual review.
How does the screen work with actual arithmetic?
Assume a hypothetical composite proposes $580,000 SDE. Records support $540,000; $40,000 is disputed. The managed case needs $125,000 of replacement labor, leaving $415,000 before other EBITDA adjustments. Assume $45,000 of replacement investment and $20,000 of growth-related working-capital cash. These teaching inputs define the example. They are not actual company results, local salary benchmarks, or a recommended financing structure.
| Screen input | Hypothetical amount | Use |
|---|---|---|
| Supported earnings base | $540,000 | Starting owner-benefit measure |
| Replacement labor | $125,000 | Converts the stated ownership case |
| Operating investment | $65,000 | Cash planning, with components shown |
| Pricing assumption | 4.8x | Illustrative multiplier of defined adjusted earnings |
At assumed 4.8x, $415,000 gives $1,992,000 of illustrative enterprise value. After the $65,000 investment schedule, $350,000 remains before acquisition debt payments, tax, and other cash movements. Assume debt payments of $245,000: the preliminary cushion is $105,000. This is arithmetic under stated inputs. It is neither a lender's coverage calculation nor evidence that a buyer can fund this price.
Change one input at a time. Another $25,000 of required management lowers modeled value $120,000 at 4.8x and reduces annual cash. A higher multiple raises price without adding operating cash. That explains why affordability can differ from the seller's value argument. Preserve the same other assumptions when testing the effect, so the change can be traced to the stated input.
How do you move from a screen to a transaction model?
- Reconcile the financial source records and resolve material normalization issues.
- Confirm operating roles and obtain support for replacement assumptions.
- Review equipment and working-capital needs against actual conditions.
- Match any pricing evidence to the selected earnings convention.
- Build sources and uses, financing, cash flow, and downside scenarios.
- Reconcile the offer to immediate and deferred seller proceeds.
Use the Plumbing Deal Proceeds Bridge for the final proceeds step. For covered asset deals, Form 8594 instructions address allocation and reporting. They do not set this screen's market pricing. Ask the CPA to connect agreed allocation with seller tax estimates. Keep that schedule distinct from the valuation denominator and the buyer's operating cash plan.
The SBA 7(a) program can support eligible ownership changes. Current policy and actual lender review decide financing. Keep that finding separate from teaching math. Record the reviewer and open issues for each assumption. The screen succeeds when it identifies the next needed evidence, rather than implying that a supported four-input discussion completes all diligence or approves the transaction.