• Contractingbusiness 1764 13328grow0100gi00000006383

    Your Biggest Decisions? Grow or Go?

    Feb. 1, 2006
    img src="/images/archive/13328grow0100gi_00000006383.gif" width="200" height="168" align="right"A question that faces many HVAC contractors is whether
    A question that faces many HVAC contractors is whether to expand their business through company acquisition, or to leave the business and sell their company for a profit. This isn't an easy question to answer without knowing what you're getting into, but at any time you may be faced with the decision to either grow by acquiring your competition, or to go via a sound exit strategy.

    To help guide you in your journey, whether it's further into or out of the HVAC world, I have compiled a list of several questions and answers designed to give you a better understanding of what it takes to buy or sell a business.

    Why should I buy an existing HVAC business? One reason is to add growth to your revenues by obtaining new markets and/or new services. It is also possible to use this action to eliminate competition, though this is more applicable in smaller markets. It is wise to be cautious about buying a business because of its assets, inventory, or administrative and service employees.

    What characteristics should I look for in a company? First and foremost, you should examine the company's revenue base. You want to understand fully the business's customer geography and the market services provided. Be aware of the business's longevity, and of its active customer base. Its current pricing systems and levels, as well as the service agreement base, are important factors that as a prospective buyer you will want to fully educate yourself about. Is the revenue base growing? If not, why? Know exactly where the business is and how they market their services. Make sure that you and the seller are using the same definitions for an "active customer." Learn their pricing system and understand how and why they use it. How many service agreements are currently active? What type of service agreements do they sell? What is the renewal rate for each type? These are very important questions that you cannot afford to breeze over. Be sure you understand how they account for the deferred agreement revenues.

    Am I really ready for this? Now it's time for some self-evaluation. Ask yourself a few simple questions: Is my business effective and profitable? Can it bail out a bad purchase in the event that things don't go as planned? Can my team and business make the hard decisions and handle the certain disruptions? There will be disruptions. Change is challenging, at best. You want to make sure that you have your house in order before you go looking to acquire a second one.

    What should I expect when trying to buy a business? There are many things that can happen in the process of attempting to acquire a business. You may encounter an indifferent seller. You may lose employees, no matter how benevolent the changeover seems. You will certainly have to deal with employees' expectations. Finally, you may lose customers. While unpleasant, a certain level of this is unavoidable. It's best to be prepared for it, and understand that it's a normal part of what happens when a business changes owners. If you prepare your employees for this ahead of time, you will do much to help morale.

    What are the steps in buying a business? The first step is discovering the business you wish to buy. The initial discussion with the seller will follow. After these two initial steps, the real heart of the process begins. This will involve valuation of the business, negotiation/letter of intent, due diligence, closing, and finally the transition. The timeline for all this can vary, but it's safe to assume that it will take longer than you think possible. Procrastinations, interruptions, and delays are the rules, not the exceptions.

    During the discovery portion of this process, you'll want to contact friendly competitors, trade associations, bankers, business brokers, and industry specialists to help you build up your picture of the company. Expect to get a wide range of responses. Be prepared to sign a confidentiality agreement before any detailed data is provided. You'll need at least three years of sound financial data to make a proper evaluation. Some key areas to look at: the size of the business, its profitability, the owner's intentions, the age of the fleet, the existing workforce culture, pricing, existing inventory, existing debt, and the momentum of the business.

    The letter of intent will outline your intent as the buyer, the purchase structure, price, and the assets and liabilities being purchased. It will also outline the future employment of the seller, the transaction timeline, and a request that the seller stop "shopping the deal around town." Due diligence is simply your chance to look at what you are buying and to see if what the seller has represented to you is accurate. Areas such as accounts payable, inventory value, wellness of the service agreement base, employee strengths and weaknesses, and the accuracy of the customer database are just a few important things to look at. The closing process will be handled between both party's attorneys. Purchase Agreements will spell out the full details of the agreement. Representations and Warranties will protect you from issues that would otherwise be impossible to detect in the due diligence.

    What if I decide to "go" and I want to sell my HVAC business? Today you are selling in a buyer's market. So you must have a plan and be well prepared when a buyer expresses interest. This plan should include the answers to the following questions: Why do I want to sell; who do I want to sell to; what time frame is acceptable for the sale and what preparations are needed to make it happen; what is my price expectation; who can help me accomplish this; how will I be paid; and finally, what will I do after the sale? Strap yourself in, because this can be a wild ride.

    What can I do to make my business appealing to a buyer? Your business is a huge part of who and what you are. Prepare to be frustrated, nervous, insulted, prodded, investigated and questioned. You want your business to shine under this scrutiny and there are things you can do to make that happen. Foremost is to have good financials for the past three years. Increase your profits. Increase your revenues. Decrease your expenses. Organize and clean up the business. Clear out questionable inventory and clean up the accounts receivable. Reduce your debt. Settle any lawsuits, tax issues and employee disputes. Remember, no one wants to buy someone else's dirty laundry.

    The valuation establishes a benchmark value for the present. It helps you set goals and it points out areas that are in need of improvement. An independent consultant usually performs this. As a seller, you want the buyer to use what's called the "Income Approach" for purchase, because it rewards you for having a profitable business. You should show a sincere desire to stay and help the buyer through the sometimesbumpy transition period. Start with an all cash arrangement and be willing to finance a portion, if needed.

    How should I set the price? Consider capital gains, advisory fees, brokers' fees, accounts payable not assumed by the buyer and your personal requirements. Your attorney, a CPA, Financial and Estate Planners, and industry consultants can help you with all the details.

    Once I sell my business, what should I do with the loot? Get a financial planner with five to 10 years experience creating financial and estate plans. Some of their credentials are CFP, ChFC, and RFP.

    Finally, in putting it all together, you must keep the following things in mind: understand the market, prepare a written plan now, identify the reason for selling, and identify the buyers. If you have a partner, you'll want to develop a buy/sell agreement. Set realistic time frames to sell and prepare the business for sale (make it shine). Establish a benchmark valuation now. Establish your team. And lastly, enjoy the fruits of your labor.

    John Garofalo is a General Partner in Callahan/Roach and Garofalo, Inc. (CRG), a national training and consulting firm focused primarily on the contracting industry. For more information on the Go/Grow aspect, or any other area of managing a successful contracting business, call CRG at 800/462-8217, e-mail [email protected].

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    "Expect success" Commercial Contracting Roundtable

    This article is based on the presentation, Grow or Go, which John Garofalo gave at the 2005 Commercial Contracting Roundtable, held in Scottsdale, AZ, Oct. 25-26.

    The Commercial Contracting Roundtable, which also incorporates the Design/Build Seminar, is co-sponsored by the Air-Conditioning Contractors of America (ACCA) and Contracting Business magazine. In 2005, the Roundtable presented 16 business management and technical sessions specifically tailored for commercial HVAC and Design/Build contractors.

    For more information about the 2006 Commercial Contracting Roundtable, contact Richard Ware at ACCA, 703/824-8843, or watch www.acca.org or www.contractingbusiness.com for details.