How to Value an HVAC Company
Despite poor economic conditions throughout the past several years, the HVAC industry has retained steady demand. This has led to growth in the HVAC industry, generating over $123 billion dollars in revenue. According to IBIS World, we can expect slight fluctuations in industry growth. As such, it may be a good time to buy, expand, or sell an HVAC company. However, competition in the HVAC industry is intense and increasing. Additionally, some HVAC companies struggle to increase or retain profits. To succeed in the HVAC industry, operators must understand the value of an HVAC company. You can start by learning how to value an HVAC company.
To learn how to value an HVAC company, it is best to obtain a business appraisal. During a business appraisal, a valuation analyst assesses the value of an HVAC company you are buying, growing, or selling. Additionally, the expert can help you understand how to increase the value of an HVAC company. Peak Business Valuation is a reputable business appraiser that works with many HVAC companies across the country. We are happy to provide you with a business appraisal for an HVAC company. Additionally, we welcome any questions about the value of an HVAC company. Schedule your free consultation with Peak Business Valuation below!
See also Valuing an HVAC Company, Valuation Multiples for HVAC Companies, and Value Drivers for HVAC Companies.
How to Value an HVAC Company
As part of the valuation process, business appraisers often use the market approach and/or the income approach to value an HVAC company. At Peak Business Valuation, our appraisers receive extensive training. They will use their expertise to determine which method is suitable for your HVAC company. This can include using a combination of valuation approaches.
Valuing an HVAC Company Using the Market Approach
The market approach is common when determining the value of an HVAC company. This valuation approach is similar to the approach real estate appraisers use to value a house. They look at similar homes that recently sold on the market to determine a fair market value. When using the market approach to value an HVAC company, business appraisers look at comparable companies that recently sold. If the company is a private business, the appraiser refers to private transaction databases.
Multiples for an HVAC Company
As part of the market approach, valuation experts work with valuation multiples for an HVAC company. These are ratios that compare the HVAC company to a financial metric like cash flow, earnings, or sales. To find the valuation multiples for an HVAC company, the analyst uses the proper NAICS or SIC code. Below, we highlight the basic valuation multiples for an HVAC company.
SDE (Seller’s Discretionary Earnings) Multiples for an HVAC Company
- The SDE multiple is popular when valuing an HVAC company. Valuation experts assess a company’s cash flow by multiplying its seller’s discretionary earnings with the SDE multiple. This allows them to determine the fair market value of an HVAC company.
EBITDA Multiples for HVAC Companies
- Business appraisers use EBITDA multiples to measure the return on investment an HVAC company can expect.
REVENUE or SALES Multiples for an HVAC Company
- The REV multiple helps a business appraiser determine an HVAC company’s value based on the amount of revenue it generates.
Valuing an HVAC Company Using the Income Approach
Another common method when learning about how to value an HVAC company is the income approach. This valuation approach assesses the risks of the HVAC company. Below, we list a few common risks associated with buying or selling an HVAC company. A valuation analyst analyzes these risks as part of the valuation process.
- Financial Strength: Many HVAC companies struggle to increase or retain profitability. It is important for HVAC companies to develop financial strength through planning and budgeting.
- Regulatory Compliance: HVAC regulations can vary from state to state. It is crucial to be aware of the regulations and maintain proper licenses and certifications to operate.
- Supplier Relationships: Establishing a strong relationship with suppliers can ensure a steady supply of equipment at discounted prices. This can help increase profitability.
- Location: It is vital for HVAC companies to establish a strong presence in high-demand areas. This ensures steady cash flow and growing profit margins.
Methods to Value an HVAC Company Using the Income Approach
There are two methods under the income approach that business appraisers may use to value an HVAC company. They are the capitalization of cash flow method and the discounted cash flow method. We discuss these valuation methods for valuing an HVAC company below.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is generally used for HVAC companies that have long and stable histories. Here, the valuation expert determines a reasonable measure of economic income for one time period. This period before or after the valuation date is then divided by a capitalization rate. The capitalization rate represents an appropriate rate of return a buyer can expect. In addition, it assesses the risks a buyer may be exposed to, some of which are listed above.
Discounted Cash Flow Method
- The discounted cash flow method is ideal for HVAC companies with strong financial histories. It is also beneficial for companies that have built reliable forecasts. This method uses 3-5 years of projections to determine the value of future cash flows. The business appraiser then discounts future cash flows using a discount rate instead of a capitalization rate. This helps them determine the value of an HVAC company. Keep in mind, the discounted cash flow method is less common since it relies on future cash flows which can be inaccurate.
Summary
To determine the value of an HVAC company, business appraisers may use the market approach and/or the income approach. Each method is used for different purposes. When valuing an HVAC company, the valuation expert will determine which method is best for the business. Then, they can give an accurate estimate of the value of an HVAC company. With this information, you can begin to improve and maximize the value of an HVAC company. As such, receiving a business valuation is beneficial whether you are buying, growing, or selling an HVAC company.
As a business appraiser, Peak Business Valuation values HVAC companies on a regular basis. We are proficient in valuing HVAC companies using the income approach and the market approach. As such, Peak is happy to provide you with a business valuation for an HVAC company. In addition, we can answer any questions you have on how to value an HVAC company. Start today by scheduling a free consultation with Peak Business Valuation!
