Valuing HVAC Companies
HVAC companies are amongst the most sought-after businesses in the country. Reason being, HVAC businesses since 2015 have witnessed an increase in business activity and consumer spending. As of 2018, the annualized growth rate over the past five years has been 2.8% and is projected to be 2.3% over the next five years. Depending on the location, the growth rate varies due in part to the expansion of nonresidential and commercial buildings. Understanding that every residential and commercial building requires heating and cooling indicates that HVAC companies are always in demand.
HVAC companies are a great investment for a potential buyer because there are several factors that one could implement to expand an HVAC company. However, if you currently own an HVAC company, you must be wondering how you could maximize your payout? Over the past year, I have worked with a company in Utah that is looking to sell their business. There are dozens of businesses that transact every year. Depending on the size, cash flow, and revenue of the company, the average selling price for a small HVAC business is between 685,000 and 1,250,000.
If you have been thinking about selling your HVAC company, the first step is to understand the value of your business.
Market Multiples for HVAC:
- 37.0 – 60.0% of annual sales, includes inventory
- 2.4– 3.4x Sellers Discretionary Earnings, includes inventory
- 3.4 – 7.8x EBITDA
For more information, see what average multiples for HVAC companies looked like over the last 4 years.
Factors Impacting the Value of HVAC Companies
There are countless factors to take into consideration, but this will provide you with the basis of what your company is worth. If you are searching for a more extensive valuation, reach out to a valuation professional like myself.
With a clearer understanding of what your business is worth, you can begin taking steps to increase the value of your HVAC business. I will touch on 4 ways in which you can increase the value of your business.
1. Market and Services Segmentation
How does your business stack up next to the industry in terms of revenue breakdown? The primary revenue sources for HVAC companies are installation, repairs, replacements, and maintenance. Observe the percentage breakdown of your revenue to see how each product and service you offer compares to that of the industry. In addition, identify the source of each product or service purchased. Below is data derived from IBISWorld. If you are interested in more industry research, feel free to contact me.
HVAC Products & Services:
- New Construction HVAC Installations – 50.8%
- HVAC Maintenance and Repairs – 32.5%
- Existing Structure HVAC Installations – 10.8%
- Refrigeration System Installations – 5.9%
In addition, you can compare your revenue against the reported HVAC market segmentation as described below.
HVAC Market Segmentation
- Single-Family Homes – 25.6%
- Manufacturing and Industrial Buildings – 12.7%
- Office Buildings – 11.6%
- Retail and Storage Space – 11.6%
- Healthcare and Public Safety Buildings – 10.4%
- Educational Buildings – 9.2%
- Apartment Buildings – 6.4%
- Other – 12.5%
After comparing your own numerical figures to the statistics above, you will be able to identify areas of weakness and strength.
2. Annual Service Agreements
Service agreements produce consistent revenues and repeat customers. One of the most difficult aspects of renewable service agreements is explaining the benefit to the customer. The strongest selling point is preventative maintenance. A preventive maintenance plan ensures the effectiveness and efficiency of products sold. By servicing HVAC systems on a regular basis, customers forego higher repair costs. If this does not convenience the customer, other options include offering better pricing or a customer loyalty program. There are countless incentives to test with customers. Train your technicians and salespeople on these different benefits to pitch to customers. Ultimately, the goal is to increase customer loyalty and topline revenue.
3. Business Plan
I have spoken with several individuals within the HVAC space that have not prepared a business plan. One HVAC owner in particular simply stated that if they have the capability to fulfill, they will look into other products or services. This pattern of thinking distracts you from identifying ways to grow your company. If you are able to assess your company and identify ways to increase revenue and profits, buyers will want to buy your company.
You, as the owner, have the best understanding of your business. It is in your best interest to create a business plan and then take action. If you need assistance, you can use this business plan template. By documenting your plans, a potential buyer can further understand the business model and growth of the company.
4. Experienced Technicians
Experienced technicians may be hard to come by. With the surge in residential and commercial constructions across the state of Utah and in many areas of the country, HVAC technicians are in great demand. It is important to find ways to maintain such individuals on your team. One way to do this is to have each of those individuals specialize in one of the market segments identified above. This will increase your accessibility to jobs. Another way may be to hire new technicians. This may add to your overhead, but new technicians can help your business expand prior to a potential sale.
Understanding the value of your HVAC business is important, regardless of any near future transactions. By implementing some of the points discussed above, you can increase the value of your business.Schedule Your Free Consultation Today!