Value Drivers for an HVAC Company
The HVAC industry is expanding alongside the rapidly growing construction industry. This industry includes companies that primarily install and service heating, ventilation, air-condition (HVAC) and refrigeration equipment. Furthermore, this industry is extremely competitive with low barriers to entry. It is also highly fragmented, with no company having more than 5% market share. Here are a few things to note about the industry:
- Profit margins are expanding due to construction growth, allowing HVAC companies to increase prices
- Barriers to entry are low and include mostly licensing and training
- Low-interest rates encourage home purchases and improvements
- Energy tax credits provide incentives to refurbish and upgrade
- Intangible assets increase company value particularly licensing and human capital
- Technological changes increase the demand for energy-efficient equipment and automated systems
As a result of the above factors, HVAC companies are growing and expanding their workforce to meet increasing demand. Whether you are thinking of selling, buying, or growing an HVAC company, here are a few value drivers to be aware of. Focusing on these can help you maximize the value of your company. A valuation analyst will consider these factors when determining the value of an HVAC company.
The service offering of your HVAC company plays a large part in the value of the company. Businesses that provide a larger percentage of services to commercial customers rather than residential customers tend to sell at a higher SDE multiple. Commercial HVAC is more valuable than residential due to commercial contractual arrangements. As such, new construction tends to be more costly from a residential and commercial perspective, resulting in a potentially lower value. New construction jobs often require higher trained employees, and the work is typically non-recurring. Many potential buyers look for a company that primarily services and maintains commercial customers. This is due to lower costs and time requirements.
Through a business valuation, you can see where your business stands next to competitors and industry standards when it comes to products and services and market segmentation. Most HVAC companies make their money from installation, repairs, replacements, and maintenance. These jobs come from a variety of sources including residential, commercial, healthcare, and education.
Recurring revenue always increases the value of a company. HVAC companies who offer ongoing product maintenance agreements (PMA’s) or service contracts are less risky. These agreements lock in consistent revenue and repeat customers. Recurring revenue in general reduces the company-specific risk associated with the business.
Whether you are installing a new unit or doing maintenance or repairs on existing units, explain to your customers the value of entering a service agreement with you. Doing so can help prevent future problems and keep the unit in excellent condition. By servicing regularly, the customer can save money by avoiding major repair costs down the road. Many companies also offer incentives for signing service contracts.
Service contracts increase your revenue stream and customer base. It shows potential buyers the company is financially stable with established repeat customers. Keep in mind the valuation analyst will also consider customer concentration.
Buying a specialized service business such as an HVAC company often requires licensing. If you are the only person in your business with licensing, this will become a problem for you when trying to find a buyer.
The highest-level licenses for HVAC can take years to obtain. This will turn off prospective buyers who 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. Namely, get more of your employees licensed. The more licenses and certifications a company has the more valuable it becomes.
To do this, identify key members of your organization who demonstrate loyalty that you feel will stay with the company for years. These are the employees that are worth investing the time, money, and energy into licensing. 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. This will expand the potential buyer pool and the end buyer will not worry about obtaining the necessary licenses.
One of the most enticing traits of a good business is human capital. In other words, well-trained employees. Buyers will want to know they are walking into an established, well-run business. This includes employees who manage their own work and are accountable for the quality. To create this foundation, provide advanced and consistent training to your employees. Trained employees provide better work and decrease liability. They also show potential buyers your business is organized and reputable.
If you have not 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. This helps to ensure they learn the correct way to do things from the very beginning. In addition, have the employees cross-train one another. This helps in the event of scheduled vacation time or a sick day, the whole department does 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. If feasible, give them an opportunity to learn a new industry trade. While this will come with an expense, you will thank yourself in the long run when you see the quality of your employees’ work improve. Not to mention your company can sell for top dollar as it is no longer owner dependent.
HVAC companies with newer equipment and inventory require fewer repairs, maintenance, and future capital expenditure. Additionally, the equipment acts as collateral which also decreases company-specific risk. Outdated equipment and unusable inventory have minimal value.
Location & Expenses
Depending on where the HVAC company is located, insurance premiums and supplies expenses vary. Both are often the largest expenses for an HVAC business due to the nature of their work. These expenses impact profit margins. The lower the profit margin the lower the SDE multiple.
HVAC companies are one of the most sought-after businesses buyers are looking to invest in. HVAC businesses have tremendous growth opportunities. With high-dollar jobs and other attractive aspects like renewable service contracts, they are a low-risk, high reward investment for a buyer.
There are over 105,000 HVAC businesses in the United States. These companies range from independent contractors to multi-million-dollar enterprises. This gives sellers and buyers a lot of opportunities. Hundreds of HVAC companies sell every year. Whether you are looking to buy, sell, or grow an HVAC business, it is important to understand the value of your business and what drives that value.
Peak Business Valuation is a leading business appraiser in Utah. We provide business valuations for HVAC companies on a regular basis. For more information on valuing an HVAC company or HVAC valuation multiples, see Valuing an HVAC company or schedule your free consultation below.Schedule Your Free Consultation Today!