Cashing Out: How to Boost the Value of your HVAC Business
These tips can help you maximize the value of your HVAC business and secure the higher sales price.
As an entrepreneur, you understand the importance of planning for the future of your business. An entrepreneur’s business is usually the biggest asset they have on their personal financial statement and the constant care and keeping of that asset is essential to monetary stability and growth. The nature of an entrepreneur is to always try to stay one step ahead of the trends and cycles of their business, but with that being said, it is astounding how many business owners do not have an exit strategy for their business. While the decision on when to sell your business may be a few years down the road, it is still a good idea to begin taking steps now to secure a better price for when that time comes.
HVAC service businesses are one of the most sought-after businesses that buyers are looking to invest in. HVAC businesses have tremendous growth opportunities, high-dollar jobs and other attractive aspects such as annual renewable service contracts that make this type of business a low-risk and high reward investment for a buyer. According to the 2014 Business Reference Guide, there are over 83,000 HVAC businesses in the United States, all varying from independent contractors to multi-million dollar conglomerates. Middle market HVAC businesses have an average of 4.5 full time employees, all of which who bring in an estimated $163,300 dollars in revenue. After expenses (cost of goods, depreciation, payroll, etc), pretax profit margins are averaged at about 5%. Bid opportunities are plentiful and very secure; practically every residential and commercial building has heating or cooling needs.
HVAC businesses are a great investment for potential buyers; but how can you turn your business into a bigger payout for you? Hundreds of HVAC service businesses sell every year; in our personal experience, we have sold around 10 in the past 20 years, and almost always have an HVAC business listed for sale. Depending on the size, cash flow and revenue of your company, the average sales price for mid-sized HVAC business to be between $500,000 and $2,000,000. While several different formulas are used to calculate the final sales price of a business, here are some multiples you can use to better understand what it takes to value an HVAC business. Please note that only a professional can tell you the real value of your business and with many other factors considered.
- Pricing ranges from about 25-50% of annual sales + inventory.
- 3-4x Seller’s Discretionary Cashflow
- 2.5-4.5x EBITDA (Earnings Before Interest, Taxes, Depreciation & Amortization)
Now that you have clearer image of what goes in to valuing an HVAC business, there are several steps you can begin to take to ensure your business ranks on the higher end of that sales price average. But before we get into how you can maximize the value of your HVAC business, there are some key considerations you will need to make as a business owner and future seller.
Revenue Source Breakdown
In order to thrive, you may want to see where your business stacks up next to competitors and industry standards when it comes to product and services breakdown, as well as market segmentation. A standard HVAC company makes most of its money from installations, repairs, replacements and maintenance. These jobs can come from a variety of industries including residential, commercial, healthcare and education. Start by gathering data of your own to see exactly how much the products and services you offer are raking in and where the jobs are coming from; then, use the tables and data below to compare yourself to the industry and see where you may need to improve.
HVAC Products & Services: Revenue Breakdown (Business Reference Guide, 2014)
- New Construction/HVAC Installation: 59%
- HVAC Maintenance & Repairs: 28%
- Existing Structures/HVAC Replacements: 7.3%
- Refrigeration Systems, Maintenance & Repairs: 5.7%
HVAC Market Segmentation: Industry Breakdown (Business Reference Guide, 2014)
- Single Family Homes 28.9%
- Other 12.5%
- Healthcare & Institutional Buildings 13.3%
- Educational Buildings 12.6%
- Manufacturing & Industrial 10.5%
- Office Buildings 10.1%
- Apartment Buildings 6.1%
- Retail 6%
After comparing your own numbers to the statistics above, you should have a better idea of where you may need to improve, or where you are above average. Buyers will use industry statistics when looking at your business. At the very least, you will want to meet the standards, but to set yourself apart, you should begin striving to excel beyond them.
Specialized In-House Technicians
Another key consideration you’ll need to make when evaluating your HVAC business is where your in-house specialties lie. In other words, what is the breakdown of revenue per division? For example, residential vs. commercial, and other specific services such as electric, plumbing and general contracting. This consideration goes hand in hand with knowing your revenue source breakdown and it can also be used to help you excel where you may be lacking. If you have multiple divisions within your business, you probably have specially trained technicians in those divisions. If you do not, this might be something for you to consider. By having specialized in-house technicians in varying divisions, you have more control over quality and scheduling; increasing your ease of accessibility to jobs. Hiring new techs in specialized divisions may also be a thought for the future. If you would like to expand before you sell, current trends are showing an increase in plumbing and electrical services in HVAC companies. By hiring even just one additional tech in one of these divisions, you are opening your business up to a whole new array of revenue that not only increases your cash flow, but also shows buyers a better financial statement and the concept of growth opportunities.
If you’ve read this far, you are probably seriously thinking about selling your HVAC business and are wondering how to get the maximum sales price. We have narrowed down 5 things that business owners can do to help increase the price of their HVAC company even if you don’t plan on selling for a few years.
Annual Renewable Service Agreements
Recurring service agreements are not a new concept to most service companies. They are a great tool to lock in consistent revenues and repeat customers. If you are not already placing a priority on increasing your recurring service agreements, now is the time to do so. For every HVAC unit you sell, replace or install, explain to the customer the value of entering a service agreement with you. Most agreements come with a preventative maintenance plan that helps keep the unit in tip-top shape and that is a great selling point for customers. By servicing the unit on a regular basis, the customer actually saves money by avoiding a major repair down the road. Customers who sign service contracts are also granted better pricing and sometimes incentives, such as purchasing 5 preventative repairs and then receiving 1 free one. They are many ways to sell a service contract to a customer, and your technicians and sales people can pitch these benefits to clients. By locking in additional service agreements, you will increase your upfront revenue stream and customer base; showing buyers financial stability and establishing repeat customers.
Most business owners can see where a need lies in their market and if they have the capabilities to fill it. Long before you are ready to sell your business, you should begin thinking of ways to grow your company. Always remember: higher profits = higher value. If you can show a steady increase in profits as well as a business model to show future growth, buyers will want to buy your business. This is a good time to sit down and brainstorm growth strategies; do you have a marketing plan? If so, can you increase your presence and reach? Are there any additional products or services you can offer? Can you increase your service radius to encompass a larger area? As an owner, no one knows your business better than you do; think about how you can grow your business and start taking action steps to make it happen. Getting your plans on paper will also help when you begin meeting with potential buyers, as this serves as evidence to your growth plans and a business model for them when they take over.
When buying a specialized service business such as an HVAC company, oftentimes, licenses are required. If you are the only person in your business that is licensed, this will become a problem for you when trying to find a buyer. The highest level licenses for HVAC work can take years to obtain and will surely turn off any prospective buyers if they do not already hold the license. This is where you can take steps to increase the value of your business and the ease of finding a buyer – get your employees licensed. Identify key members of your organization that you feel will stay with the company for years and may have already demonstrated that loyalty; these are the employees that are worth investing the time, money and energy of licensing into. The more licensed employees in your business, the better. This not only allows the employees to practice a higher level of HVAC work, but when you decide to sell, they can replace you as the main license holder and your buyer will not need to worry about how they can obtain the license. For a general overview of what types of basic and advanced licenses your employees will need, where they can take the classes and what is required, visit the website below.
As mentioned before, these licenses can take years to obtain. Don’t limit your buyer pool or be caught unprepared when you are ready to sell; get your employees licensed.
One of the most enticing traits of a good business is well-trained employees. Buyers will want to know they are walking into an established, well-run business where the employees manager their own work and are accountable for the quality. In order to create this foundation, provide advanced and consistent training to your employees. Trained employees not only provide better work and decrease your liability, but they show buyers that your business is organized and reputable. If you haven’t established a consistent employee training program, it is never too late to start. With the help of your current employees, create training manuals for any new or replacement employees to ensure they learn the correct way to do things from the very beginning. Also, have the employees cross train one another so that in the event of scheduled vacation time or a sick day, the whole department will not fall apart. Finally, consider hiring a third party or creating your own annual training program for technicians. Implement an annual refresher course for all technicians as well as an opportunity for them to learn a new industry trade, if feasible. While this will come with expenses, you will thank yourself in the long run when you see the quality of your employees’ work improve and when you can show off the program to a buyer.
First-Rate Accounting Software
Investing in good accounting software will probably help you more than a buyer, but we promise, you will not regret it. In our experience in helping sellers get their finances organized, we have come across an excellent program called SuccessWare21. SuccessWare was specifically designed for the service industry and will help you manage every deal, from cradle to grave and then organize all of your accounting. SuccessWare is an all-encompassing database that will help you manage service jobs, customer files, inventory control, general ledger accounting, lead tracking and report building. An investment like this can help your entire business stay organized and produce required seller documents, such as balance sheets, and financial statements to potential buyers with greater ease.
Knowing how your business stacks up to competitors is important, even if you aren’t thinking of selling for a few years. Taking these steps to increase the value of your company will not only set you up for a higher sales price when you are ready to sell, but will also help you in other financial situations. Should you need to take out a loan or if you just want to get an idea of how to better run your business and increase revenue, these tips can help you. Knowing what your business is worth is a crucial part of growing and expanding and at Viking Mergers, we can tell you. The professionals at Viking have appraised HVAC businesses, just like yours, for 20 years and for no charge, we can value your business and advise you on when the best time to sell is. Prepare yourself for the future; take these steps to increase the value of your business so that when it comes time to sell, your years of hard work will all be worth it.