Many articles and books have been written about maintenance agreements, and how they can build the value of your service business - and they are correct. Maintenance agreements can increase your business’ value through a provable customer base with recurring revenue. They also help level your seasonal cash flow ups and downs.
However, the real value of these services is not based on how many thousands of agreements you have, rather what you do with them. Most industry experts know maintenance agreements, by themselves, are a break-even proposition at best. They are meant to be a bridge to more business, and hopefully higher profits.
If you really want to increase your business’ worth, you must be able to demonstrate the connection between your recurring, less-profitable maintenance revenue and more profitable revenues and growth within your business.
The good news is the right approach to maintenance agreements can make this strong, profitable connection for your company. By adding measured performance to your agreements, you can make them the H.E.A.R.T. of a profitable HVAC business. High-Performance maintenance agreements that include measured performance generate:
• High-margin service work
• Equipment replacement
• Air distribution upgrades
• Referral business
• Total System Renovations.
Drive Your Business with High-Performance Agreements
Done correctly, high-performance maintenance agreements can result in ongoing work that accounts for 50% or more of your business’s total revenue at your highest net margins. How?
Let’s use an example of a company with 2,000 High-Performance maintenance agreements in a smaller market area. From those 2,000 agreements, the company generates roughly $500,000 per year in direct revenues at an average of $250/agreement. Let’s say that revenue covers overhead, and drops 2% net profit to the bottom line, or $10,000. By itself, not so great, right? But that’s reality.
Let’s say those maintenance agreements generate roughly 500 service calls a year at an average of $300/call. That’s $150,000 in revenue at a 20% net margin, or $30,000.
On average, the company generates roughly 100 replacement systems a year from its maintenance agreement customers at $10,000 per system for an additional $1 Million in annual revenue. Because that work has little or no competition, it drops 20% to the bottom line – or $200,000.
The contractor also generates roughly 200 Air Distribution Upgrades and Total System Renovations. About half are stand-alone and half are add-ons to the system replacements. Let’s say the renovation work which ranges from $1,500 for a simple Air Upgrade to $12,000 for a full renovation averages $3,000 per sale, times 200 for a total of $600,000 in renovation work. This work, which is priced at 60-70% gross margin drops 30% to the bottom line, or $180,000 in net profit.
Total revenues from maintenance agreement generated business would be $500,00+$150,000+$1 Million+$600,000 = $2.25 Million. The total net profit would be $10,000+$30,000+ $200,000+$180,000 = $420,000 at a margin of roughly 19% ($420,000/2,250,000).
Let’s say the business also generates an additional 1500 demand service calls a year outside of its maintenance agreement base at an average of $300/call for an additional $400,000 in revenue at a 20% net profit or $80,000. The company also sold $1 Million in replacement sales from leads generated by its marketing. Since more competitive, these sales drop only 10% to the bottom line, or $100,000.
Let’s look at the total picture now:
Total Revenues: $2,250,00 + $400,000 + $1 Million = $3,650,000
Total Net Profit: $420,000 + $80,000 + $100,000 = $600,000
Net Profit Margin: 600,000/3,650,000 = 16.5% - not bad!
That same company with no maintenance agreement base would have brought in only $1.4 Million in total sales, with a profit of just $180,000 – or 12.8%.
Which business would you rather own? Which business will be worth well over $2 Million if it were sold today?
Which business has bigger growth potential with 2,000 raving fans a year and multiplying?
Even if you already offer maintenance agreements, imagine what you could do if you upgraded to High-Performance Maintenance Agreements!
Dominick Guarino is CEO of National Comfort Institute (NCI), one of the nation’s premier Performance-BasedTM training, certification, and membership organizations, focused on helping contractors grow and become more profitable. His e-mail is [email protected] For more info on Performance-Based Contracting™ go to WhyPBC.com or call NCI at 800/633-7058.