When the time comes to sell an HVAC business, many contractor owners might not recognize the true value of their company or how to increase its worth.
It’s an issue many HVAC business owners can relate to. They’re so busy taking care of the day-to-day responsibilities of running a company they put off planning for the inevitable – the day when they realize it’s time to sell. And even when that light bulb finally hits, they might not recognize the true value of their company and/or how to increase its worth.
Ideally, the time to begin thinking of a sale or succession plan is three to five years beforehand. Or better yet, the day you open for business. The process, when done correctly, involves a solid team: a good financial planner, CPA, business intermediary and business attorney, all working in conjunction to develop a comprehensive strategy for the business owner’s best benefit.
The Worth of Your Company – A Good First Step
If you are lost in the woods and want to find a road, the first thing you must determine is where you are on the map before you can decide what direction to go. The same principal applies to company value. A valuation will not only tell you what you are worth today but should also provide you with the insight to know what changes may need to be made. It is a great education on the risks and strengths of your company and will provide a course to increase value for your business.
The Importance of Accurate (and Timely!) Monthly Financial Statements
At the top of the “must have” list are sound financial records. These days, that goal is easily attained by using an online format monthly, and keeping a close accounting of in-process job costing. As example, if there is a half-million-dollar job underway for which a significant amount of equipment has been purchased but not yet been billed, then the business’ cash basis is disingenuous. The imperative is to know exactly what is coming in and what is going out today, not tomorrow. Databases exist that can help manage this process. I am always surprised that high volume, successful HVAC companies do not have a strong grasp of their financial position (even though they may think they do). A buyer and a bank will be equally confused and will value your company accordingly.
Customer Concentration and Business Mix
Customer concentration has to do with the percentage of annual revenue you receive from a single customer. As a rule of thumb, it is best not to have a customer that represents more than 15% of your total revenue each year. While it can take years to change this, it is worth working on. The higher the “concentration” becomes, the higher the risk. A buyer will perceive this and it will affect value. As far as business mix is concerned, service is king at resale. I always hear that new install-and-replacement have higher margins. I get that, but service is “sticky revenue” which repeats each year, and will attract more buyers at a higher value. Fifty percent or more service is ideal for maximum value. An install-and-remodel-only company will take much longer to sell and bring a lower value than a company of the same revenue level that has a strong service component.
Segue to the issue of highly trained employees. A good business – and one that will sell quicker and for a higher price – is defined in large part by its employees. Prospective buyers want an established turnkey operation that includes a staff that has been provided advanced and consistent training. Cross-training employees also adds value, particularly for smaller HVAC businesses where a couple of sick days out for a technician could set the operation back substantially.
Consider licensing a major issue too. Make sure you are not the only person who processes the licenses necessary to operate the company. Ideally your company can be sold to someone without any industry experience. With a minimum of about $4 million in annual sales and key employees who have all the needed licenses to operate the company, this can happen. In general, our experience is that an outside-the-industry buyer will pay a higher value for a company than an in-industry (competitor) buyer. We have seen many examples of this over the years. Remember that these key employees become an asset of the company for the buyer, and will be viewed as important in the sale.
What must also be considered is the median age of a company’s current management team. If all or most are looking to retire soon after the company sells, the business might not be as valuable to a buyer. Training additional employees can solve the problem if this is the case at your firm.
Consider also, do company strengths lie in specific services? Taking on new hires for specialized divisions now might add to a company’s value down the road. For those HVAC businesses looking to expand prior to selling, plumbing and electrical divisions are trending upward. With the addition of just one technician in each division, revenue increases today, and creates a healthier financial bottom line when it comes time to sell.