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    Navigating the Maze of Business Succession, Part 1

    Nov. 23, 2022
    Selling your business may feel like the end of an era, but it can also introduce you to new beginnings.

    Selling your business may feel like the end of an era, but it can also introduce you to new beginnings. Exploring what’s next and what’s possible for your HVAC company may be exactly what you need to transition into your next chapter.

    Mergers and acquisitions (M&A) is a plausible way to grow your business while reaping the rewards of your many years of labor – whether enjoying retirement or aiming for bolder, greater goals.

    Here’s everything you need to know about M&A – including how it works for your industry and why now is the right time for you to sell:

    What is M&A?

    Mergers and acquisitions are financial transactions between companies involving:

    • The combination of two companies and then operating under one entity (merger)
    •  A company purchasing most or all of another’s assets, gaining control of the latter (acquisition)

    M&A is often used as a strategic move. The alliance of two companies or consolidation of assets allows the organization to grow. And contrary to common perception, it’s something that does not happen only among mega-corporations. It’s also a viable option for HVAC business owners looking to enhance their company’s value when developing an exit plan.

      The challenges of the HVAC industry today

    HVAC is a hyper-fragmented market, with thousands and thousands of businesses across the country. These smaller businesses have the opportunity to grow and scale, but they don’t have the capital to do so. Also, they don’t have the buying power with the equipment manufacturers to optimize their margins. 

    RELATED: How distributors can help contractors focus on succession planning

    How do M&As Benefit HVAC Companies? 

    The consolidation in the HVAC industry enables smaller companies to join forces to make one larger organization, reap the economies of scale, and expand beyond where they could take the business on their own. 

    As of this writing, private equity (PE) dollars continue to pour into the HVAC industry. More than ever, PE firms are becoming acutely aware of the importance of heating, ventilation, and air conditioning companies. These providers offer an essential home service, the demand for which has only risen as the work-from-home setup became permanent for many people. They also happen to be in an industry that proves to be recession-resistant.

    With this robust M&A activity comes the opportunity for HVAC businesses to grow exponentially. There are also benefits to selling your company, including:

     Potential to Scale

    When businesses consolidate or get acquired, the resulting organization is often more productive and efficient. The smaller company gains access to capital, gets better bargaining power, and reduces costs due to high-volume production.

    Access to New Markets

    Usually, the acquirer kicks off an expansion strategy that broadens its market base. On the one hand, you’re giving the buyer access to your loyal customers. On the other, being absorbed into its network allows you to tap new markets, which you will not otherwise have reached, given the time, money, and effort involved. 

    Enhance capabilities

    From lead generation to sales and marketing to disaster response, having a partner or acquirer can enhance your capabilities. It gives you access to training, knowledge, and best practices to improve your employee and customer retention.

    Reasons an M&A is Right for You

    While the opportunities sound amazing, there are also risks associated with M&A. For this reason, you must weigh the pros and cons before deciding to sell your company. Here are the crucial factors that can help you determine whether pursuing an M&A is right for you:

     You’ve been planning your retirement

    After creating and adding massive value to your business for many years, you’re now planning to retire and pass on the baton. Selling your company helps unlock that value. Use your retirement funding goals to evaluate if the market conditions can generate the outcome you expect from the exit transaction. 

    Potential for Expansion  

    We cannot emphasize enough how PE investors can provide smaller businesses with additional capital, enabling them to scale. The potential to grow your company into a larger enterprise is possible after being acquired by a buyer or consolidated with other entities. With the latter, the acquirer plans to generate greater value – in which you can participate by retaining a smaller percentage of your stock – and then sell the resulting company to another investor in the future. This approach is called taking a “second bite of the apple.”

     Favorable Market Conditions 

    Dealmaking in the HVAC industry remains robust. An average of more than 120 M&A transactions occur each year, compared to approximately 20 in 2011. The demand is high for strong assets. However, M&A experts highlight that the next cycle may not happen again for another decade. So if the factors align, they recommend taking advantage of the opportunity. Otherwise, it might be too late, and you’ll find yourself competing with larger entities with access to these deep pockets instead.

      Timing is Key

    With a high investor demand, HVAC companies must be proactive in determining the right opportunity. If the signs are pointing to a profitable deal, you might want to seize it before this cycle finishes running its course.  

    During this time, an experienced M&A advisor can give you the knowledge and insight to analyze investment trends and evaluate market demand. Look for an expert who can make your exit transaction as smooth as possible by offering custom, strategic solutions so that you can choose the right buyer and snag the highest possible valuation for the business you have built for years. 

    Dena Jalbert, MBA, CPA, is the Founder and CEO of Align Business Advisory Services, a top-rated mergers & acquisitions advisory firm for lower-middle-market businesses. Align is comprised of former business owners, operators, and executives who leverage their experience and extensive network to maximize the value of clients’ business.