As an entrepreneur and business owner, you understand the importance of planning for the future of your business; and even more so in an economic climate like the one we’re currently navigating. Thankfully, the nature of an entrepreneur is to remain one step ahead of the trends and cycles of the business. This forward-thinking mindset is a valuable trait. It also makes it that much harder to believe how many business owners do not have an exit strategy for their business.
An entrepreneur’s business is usually the biggest asset on their personal financial statement. Thus, constantly caring for and tending to that asset is essential to the owner’s financial stability and growth. While the decision about when to sell your HVAC business may not be immediate, it is still wise to take steps now to help you secure a better price when that time comes. To do that effectively, it helps to understand how to value an HVAC business.
HVAC businesses are among the most sought-after in the country. Nearly every residential and commercial building needs heating or cooling, so HVAC companies are always in demand. Tremendous growth opportunities, high-dollar jobs, and other attractive features make this type of business a low-risk, high-reward investment for a buyer.
So, we know 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.
Do you to know what your business is worth so you can know your options? Learn more at www.vikingmergers.com/hvac-companies
Please note that only a professional can tell you the real value of your business, and they will consider even more factors than these.
There are three primary Market Multiples that can play into valuing a business. Here are the numbers when looking at how to value an HVAC business:
Revenue Multiple for HVAC
- Revenue = Annual Sales + Inventory
- Revenue X Multiple = HVAC Business Value
- HVAC company valuations range from 37-60% of annual sales plus inventory. In 2019, HVAC companies transacted at an average revenue multiple of 0.46x.
- While this calculation is extremely straightforward, most HVAC companies do not transact based on a revenue multiple because it does not account for the cost of business operations. While you can use this multiple to gain a very simple picture of value, be sure to incorporate additional multiples for a more accurate view.
SDE Multiple for HVAC
- SDE = Seller’s Discretionary Earnings + Inventory
- SDE X Multiple = HVAC Business Value
- HVAC companies generally see an implied value of 2.4-3.4x seller’s discretionary earnings plus inventory. In 2019, the average SDE multiple for HVAC companies was 2.6x.
- SDE is a cash flow multiple commonly used in the sale of small businesses with sales less than $3M. The number is calculated by starting with your business’s EBITDA (see below) and then adding back in expenses that a new owner would likely not incur (such as non-recurring items, consulting, etc).
EBITDA Multiple for HVAC
- EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization
- EBITDA X Multiple = HVAC Business Value
- In past years, HVAC companies have seen an implied value of 2.5-4.5x EBITDA. In 2019, the average EBITDA multiple for HVAC companies was 2.81x.
- EBITDA is a multiple that measures a company’s return on investment or approximate operating profit. This is generally the most preferred multiple because it is normalized for differences in fixed assets, capital structure, and taxation.
Key Considerations in HVAC Business Value
As a business owner and future seller, there are important steps you can take now to ensure your business is valued at the higher end of those averages when you’re ready to sell. First and foremost, consider these two keys to identifying how your HVAC business currently stacks up and where you can set yourself apart.
How does your business stack up next to competitors and industry standards when it comes to products and services? How about market segmentation? A standard HVAC company makes most of its money from installations, replacements, maintenance, and repairs. These jobs come from a variety of industries including residential, commercial, healthcare, and education. Gather your company’s data to identify exactly how much the products and services you offer bring in and where those jobs come from. Then, use the data below to compare yourself to the reported HVAC industry average.
HVAC Products & Services: Revenue Breakdown (Business Reference Guide, 2018)
- New Construction HVAC Installations: 50.8%
- HVAC Maintenance & Repairs: 32.5%
- Existing Structure HVAC Installations/Replacements: 10.8%
- Refrigeration System Installations: 5.9%
HVAC Market Segmentation: Industry Breakdown (Business Reference Guide, 2018)
- Single Family Homes 25.6%
- Manufacturing & Industrial Buildings 12.7%
- Office Buildings 11.6%
- Retail & Storage Space 11.6%
- Healthcare & Public Safety Buildings 10.4%
- Educational Buildings 9.2%
- Apartment Buildings 6.4%
- Other 12.5%
After comparing your own numbers to those above, you’ll have a clearer picture of where you may need to improve or where you may already excel. HVAC company buyers will consider industry statistics when they look at your business. At a minimum, aim to keep up with the averages; to set yourself apart, strive to surpass them.
Specialized In-House Technicians
Where are your in-house specialties found? In other words, what is the breakdown of revenue per division? This consideration goes hand in hand with identifying your revenue source breakdown, and it can also help you excel where you may be lacking. If you have multiple divisions within your business such as electrical, plumbing, or general contracting, you probably have specially trained technicians in those divisions. If you don’t, this might be something to consider.
By having specialized in-house technicians in varying divisions, you have more control over quality and scheduling, thereby increasing your accessibility to jobs. Moreover, if you decide you want to expand before you sell, industry trends show an increase in plumbing and electrical services within HVAC companies. By hiring even one additional tech in one of these divisions, you open your business up to a whole new channel of revenue, increasing cash flow and illustrating additional growth opportunities to potential buyers.
Want to learn more? Check out these tips for maximizing your HVAC business valuation . But remember, only a professional can tell you the real value of your business. Be sure to contact us for a free, confidential business valuation. Thinking of selling your HVAC business sooner than later?
Learn how Viking can help you secure your future with an upfront liquidity event, long term income and benefits, and growth opportunities.