10 Years After Consolidation: Where Are We Now?

July 1, 2007
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The other day an associate reminded me that it now has been 10 years since the start of the HVAC industry's consolidation period (this period is said to have lasted from late 1996 through 2000). For those of you who don't remember, the consolidation period was a time when several different groups (many publicly traded) attempted to build nationwide contracting businesses via aggressive acquisitions. There were many winners and just as many losers. While today several of our industry's largest businesses were born as consolidators, overall the effort could be labeled a failure. Why? The following are the top 11 causes that lead to consolidation failure.

• Failure to identify and focus on specific market segments and work mixes
• Failure to understand the difference between maintenance, service retrofit, and new construction.
• Employment contracts
• Lack of market focus
• Failure to integrate and expoit "tuck-in" acquisitions
• Failure to recognize brand awareness
• Inexperienced and unmotivated management
• Lack of operating synergies
• Unrealized internal growth
• Failure to train and hold service technicians accountable
• Due diligence.

For details on the each of these causes, go to In terms of future exit opportunities for contractors, the biggest loser was our industry. Let's face it, we lost what could have been a continual source of buyers, much like the funeral and trash hauling industries enjoyed for decades.

So when will consolidation return to our industry? A nationwide roll-up play where several publicly traded consolidators fight for acquisition targets is not likely to happen again. The poor track record of what occurred in our industry, as well as Wall Street's jaded view of roll-ups and consolidation plays, will likely prevent a ground swell from ever reaching the pitch of the late 1990s. In addition, following Enron's meltdown, publicly traded businesses must today meet higher auditing standards. These standards make it very difficult for the purchase of numerous small businesses with poor internal controls.

For those contractors who are looking to either sell their business as part of an exit strategy, or who are looking to buy a business as part of a growth strategy, there is hope! There are several groups today interested in purchasing businesses in certain markets and, with the availability of private capital, it is likely that more buyers will filter into our industry.

While a contractor's options to sell for a fair market price today are better today than just a few years ago, the facts remain that buyers have the advantage to be very selective.

If you're looking to buy a company, stay focused on the right work mixes, purchase only in select markets or regions, price shop, and conduct thorough due diligences.

Brandon Jacob, CPA, CVA, is the president of Contractors Financial Opportunity, Houston, TX. His 17-year career includes extensive experience in business valuation, mergers, acquisitions, finance, and accounting. Jacob was active in helping contractors sell their companies to consolidator buyers in the late 1990s. He has spoken at HVAC Comfortech and is a contributor to this magazine. He can be reached at [email protected].

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