Recently, we were notified that a 30-year-old HVAC company with a fleet of eight vehicles and $2.1 million in revenue was for sale. The asking price was $270,000, which included all assets and inventory. How sad.
The company may not have been profitable, but assume it was, or could be. If the company could generate 15% pre-tax earnings, which is very doable in our industry, the owner would have another $315,000 and still own the company. So why sell?
Owners can reduce risk through the creation of a repetitive customer base (service agreements), through defined, written business procedures and processes, and through a strong local brand.
I know of a very similar situation a few years ago. An established, reputable, profitable HVAC company sold for less than 0.5% of earnings. Why take so little? There were no other offers. The owners could either take what was on the table, close the doors, or continue to operate. But they couldn’t continue to operate because they were tired, worn out, and ready to move on with their lives.
There are two types of business sales in the HVAC industry. One kind is “stress sales,” where businesses are practically given away because the owners never worried about an exit strategy until it was too late. The other is a premium sale where the business is sold based on assets plus three to five times pre-tax earnings. To receive a premium, the owner must begin working on his exit strategy years before he will need it.
Don't Become a 'Risky' Business
Riskier businesses are less attractive and fetch a lower price than less risky businesses. Owners can reduce risk through the creation of a repetitive customer base (i.e., service agreements), through defined, written business procedures and processes, and through a strong local brand.
To make your business more valuable, give your service agreement program a high priority. Stress it at every meeting.
My guess is the 30-year-old HVAC business that’s for sale had little or no service agreement customers. All of the company knowledge and experience is probably inside the owner’s head. He knows how everything is supposed to operate, but no one else does. His company brand was probably subordinated to the brands of the manufacturers he carried.
Sell Service Agreements!
To make your business more valuable, give your service agreement program a high priority. Stress it at every meeting. Track it and publicly chart progress inside the office for everyone to see. Reward people for service agreement sales and renewals.
Begin building a set of detailed business processes and procedures for every aspect of the business. Create processes around service calls, sales calls, installations, for the CSRs, for managers, and so on. Work on them during seasonal slowdowns. Itemize the steps and flowchart them. One of the positive outcomes of working on processes is you discover inefficiencies and improve how you do things.
Create an organization chart for your business and include a box for a general manager that you currently occupy. Your goal should be to work yourself out of a job. When you do and your business can run without your presence (which is not the same as operating without your monitoring it), you will have a truly salable business.
As industry consultant Brandon Jacob has noted, there are a lot of baby boomers heading towards retirement. Some of them own HVAC companies. This means there will be opportunities for savvy contractors to acquire competitors’ customer lists and technicians for pennies on the dollar due to a stress sale.
For the owners who work on their business, different outcomes are possible. There is currently more than $1 trillion of private equity sitting on the sidelines because of a lack of investment opportunities. Some of this “dry powder” will find homes in contracting companies. Because HVAC service cannot be off-shored and is considered a necessity, our industry is attractive to investors if they can find quality businesses to acquire. Your business could be one of them if you can build a service agreement program, implement processes and procedures, make yourself unnecessary, and grow to $5 million or larger. Good luck.
Even if you do not sell your company, preparing it for sale means it runs better, is more profitable, and is more enjoyable for you. This is just like getting your house ready for sale. When you’re done, you wonder why you didn’t do it years ago. For help getting your company on track, contact the Service Nation Alliance. Call 877.262.3341 and ask for a Business Advisor for your state.