Building a successful HVAC business

As the majority of veterans in the HVAC industry begin to reach retirement age, those who own their own businesses may be looking to cash in over the next few years. Coupled with the fact that private equity (PE) acquisitions are on the rise, there has never been a better time for contractors to prepare their companies for a major sale.

Patrick Lange, a business intermediary with Business Modification Group, speaking at the 2024 AHR Expo, said the key is to have people on your side who know the acquisition game. Otherwise, it is likely to end in heartbreak.

Throughout his career specializing in the sale and acquisition of heating and air companies, Mr. Lange has had far too many conversations at the kitchen table in which he told potential sellers that their company was worthless. He said he had to break the news.

“Ask the question now and find out what it’s worth, or what you need to do to increase its value, so that when you’re 65-70 We don’t need to have that conversation when it happens,” Lange said. “If I told someone I spent 30 years of my life building something worthless, it would tear my heart out. It’s horrible and I have to do it all the time – maybe 5 a month. We have conversations like that every now and then.”

Lange suggests working backwards and asking what contractors need from their businesses to support their families and retirement goals, and starting from there. While there are a lot of numbers and valuations being thrown around, at the end of the day, all that matters is the amount that ends up in your bank account after the sale is complete.

While it’s impossible to break down the highly complex process of selling a business, Lange said there are four things to focus on when building salable value for your business.

A business based on service and repair

According to Lange, there are a few things that always attract buyers. Stable income, deep customer relationships, sales of indoor air quality and other services (plumbing, electrical, etc.), long-tenured employees, and especially maintenance contracts.

Mr. Lange said that while buyers may prefer maintenance contracts, he views warranties as an undesirable liability.

“Look at it from a buyer’s perspective. Here’s the thing: We’ve never met a seller who says they have terrible insulation,” Lange said. “Everyone I meet has the best installations in the world, but no warranty work at all. Well, that buyer will assume they have to pay the entire deposit and have no money in the bank. I have no intention of assuming unlimited liability without having to deposit anything.”

get out of the van

Let’s take Bob as an example. Bob’s name is in the business, he’s been in commercials, and people mention his name in every positive review. He is a wonderful man that everyone loves and trusts. However, to the buyer, Bob will only become a major liability if he wants to retire and sells his business.

“If everything is about Bob, you’re going to lose money when you sell, because the buyer is worried that everyone will panic if Bob goes away,” Lange said. To tell. “Getting out of the van is really important in building systems and developing people, so you can be out of the business for long periods of time. Otherwise, you don’t have a business and you don’t have a business. , you have a well-paying job.”

In other words, the closer the owner is to the business, the more they will be paid. However, if the owner plays a significant role in overseeing other managers, that can be an attractive aspect to buyers.

It’s not your personal bank account

If your goal is to someday cash out, it’s best to avoid “creative accounting” because that means someone going through your company’s books with a fine-toothed comb.

“Sad news: You can’t steal and get double the reward,” Lange said. “If you’re stealing money from the federal government, if you’re sophisticated about your accounting, you can’t expect someone to write you a check. That’s not going to happen. You eliminate half the buyer pool because the banks aren’t going to lend.”

If a business owner is willing to risk jail time for cheating on taxes, buyers are unlikely to view the company as trustworthy, and Lange requires at least three years of financial records and a larger He said the transaction would probably take five years.

“At the end of the day, pay your taxes. That’s what it’s all about. It’s that simple,” Lange said.

Avoid new construction

Lange said he usually gets pushback when he offers this point, but he always does it anyway because it’s a common problem.

If you ask anyone in the industry, they’ll likely have had a bad experience with a general contractor (GC) at least once. Even if a GC is loyal to a particular contractor, he says, that doesn’t necessarily transfer to the purchaser, and they know it all too well.

Lange said from his experience that most financial institutions will not finance a transaction if more than 20% of the business is new construction.

“Is new construction work profitable?” Absolutely. There are a lot of people doing that, but all I can say is that in 2005 he had 80 people working and in 2009 he had 5 people because they weren’t getting paid. I met so many people. by the contractor,” Lange said.

Additionally, staff accustomed to new construction projects may not be able to focus on the service aspects that buyers are looking for. Also, things like retainers and service contracts can add unwanted complexity to the situation and potentially cause a buyer to walk away.

get someone in your corner

While an experienced contractor may know all the ins and outs of your business or industry, Lange says most contractors aren’t prepared to go head-to-head with a serious buyer.

“The reality is that for most of my clients, this is the biggest sale of their lives, and they’ve never sold a business and don’t know what they’re doing. And they’re professional He would get into a gunfight with the buyer with a pocket knife,” Lange said. “These are CPAs from Harvard who have more initials behind their names than I do.”

If you try to think alone and argue about values ​​based on articles you read or videos you watch, you probably won’t succeed.

“So my advice is, whether it’s me or someone else in the industry, or an accountant or lawyer who’s sold a lot of heating and air companies, get somebody in your corner.” Lange said. “If you’re going into the biggest sale of your life by yourself and not thinking about it, that’s not a good position to be in.”

your legacy

Entering into a sales contract is a lot like entering into a new marriage. You need to feel comfortable and confident with your new partner.

“At the end of the day, I think you need to feel safe no matter who you sell to, right? It’s your legacy that you’re passing on,” Lange said. “Most of my customers still live in the same town, attend the same church, and go to the same grocery store.”

Lange said no one wants to be known as the guy who sold everything and left his customers and employees to the wind. Regardless of who the contractor ends up contracting with, it should only be after sufficient time has been spent to make a final decision.