What Is My HVAC Business Worth? 10 Things to Consider

If you’re going to sell your HVAC business, the number and quality of the offers you receive will be based on factors buyers look at closely. Here are the Top 10.

1. Gross Sales

Gross sales determine the size of your deal, and larger deals attract more buyers. A large company might also attract strategic buyers backed by private equity. Larger companies have more talent that comes with the deal, and they can offer buyers the opportunity to consolidate back-office operations or negotiate better pricing with vendors, creating economies of scale that can make a business more profitable quickly.

2. Net Income

Net income is, of course, your bottom line–your profitability. Never forget that offers and multiples will be based on SDE (Seller’s Discretionary Earnings). That’s the amount a new owner can reasonably expect to earn when they take over the business. Increasing profitability should be every owner’s priority during the life of the business. If you’ve been hiding income or profit, you may be limiting your buyer pool and reducing the offers you receive.

3. Location of the Business

The size and growth potential of the company’s market will be important to any buyer. A company in a rural area that already holds a 50 percent market share has limited potential for growth. Buyers look for companies where new customers are abundant, the area is growing, and where talent is easier to recruit.

4. Commercial Versus Residential

Right now, buyers are much more interested in companies that specialize in residential sales and service. There’s almost always more potential for growth, and less pressure to be on call 24/7/365. (If a commercial cooler filled with perishable food goes down at 2:00 a.m., the company must be able to respond; there’s no waiting until the next business day.) Residential repair talent is also easier to recruit, train, and replace.

5. New Construction Exposure

Buyers actually make lower offers on HVAC businesses that do a lot of business in new construction, which surprises some owners. Construction companies aren’t loyal. They make decisions based on keeping costs low. I’ve written about this before: they almost always order the bottom of the line, except for custom homes. There’s almost no repeat business, and new construction companies carry much higher accounts receivable. Especially with residential construction, payment for installations can take a long time to come in, making cash flow more challenging.

6. The Condition of Your Books and Records

A business owner usually takes a tax mitigation strategy. You might run as many expenses as you can through the company to reduce your profit and tax burden. But when it comes time to sell, a buyer will make an offer based on your profitability. You should clean up, organize, and modernize your recordkeeping so it’s easy for a buyer and a lender to see your bottom line. You can save 30 cents in taxes on every dollar you make now, or you can make 3X on every dollar of revenue when you sell. The math is pretty easy to do.

7. The Size of Your Staff and Their Tenure

A buyer is purchasing two things: your customer base and your employees. The more skilled and trained they are, the more valuable they become. Most buyers also want staff who don’t need constant input or oversight to do their jobs. Having a clear management structure in place with strong technical leads will make your business much more attractive to buyers.

8. How Long You Have Been in Business

Buyers are looking for a strong base of loyal customers who generate repeat business. Being in business for many years makes the case for deep, long-lasting relationships, excellent word-of-mouth referrals, and years of data on customers and market trends.

9. Owner Involvement in the Business

If you’re the best technician you have–if you don’t trust anyone else to do the work–you’re limiting your potential for growth and the amount someone will pay for your business. Many qualified buyers don’t have HVAC technical experience; they might be terrific owners, but the business has to run itself. They’re looking for opportunities to grow the company rather than run it day-to-day.

10. Mix of the Business (service, repair, replacement)

Buyers want to purchase long-term relationships, not new customers with warranties. Most units have a 10-12-year replacement window, so buyers look for companies that focus on repeat business and customer loyalty, and maintenance agreements are the surest way to generate recurring revenue. For a couple of hundred dollars a year, you become top of mind and the first call when something fails or they need a new unit. If you’re wondering how many service agreements you should aim for, a good rule of thumb is 500 for every million dollars of annual revenue you’re bringing in.

Whether you’re planning to sell next year or a decade from now, focusing on these 10 factors is the best way to improve your business, increase its value, and position yourself for a better payout when you’re ready to retire.