What is an HVAC Business?
Heating, Ventilation, and Air Conditioning (HVAC) contractors install, maintain, and repair climate controlled systems (including vents and ductwork) which move hot or cold air throughout a building. In Florida, HVAC licensing requirements involves passing a rigorous test after a training and/or apprenticeship period. Non-licensed technicians in Florida may work under a licensed qualifier or supervisor. Some air conditioning businesses are owner-operated where the owner is the license holder and only technician. Others have multiple technicians where the owner has more of a passive role. If one or more company technicians is licensed and willing to serve as the qualifier, then when it comes time to sell the buyer will not need to obtain their own license or rely on the owner to remain as the qualifier after the sale.
Valuing HVAC Companies
As every South Floridian can attest, air conditioning or HVAC businesses are sorely relied upon to keep our homes, schools, and businesses cool and comfortable. The HVAC industry is expected to increase in size by 7.4% annually through 2030, and in South Florida, air conditioning is an absolute necessity during the sweltering heat of summer. An HVAC business generally receives a premium valuation because of this long term industry growth along with the recurring and predictable nature of its services. The average multiple of HVAC business sales in Florida is 3.02 x the annual owner benefit, compared to an average multiple of 2.4 x the annual owner benefit for other service-related industries.
Prepare HVAC Company for Sale
- Owners of HVAC companies may prepare their business for sale by hiring the right business broker experienced in selling HVAC companies, streamlining operations, reducing the level of owner-dependency, and obtaining an organized set of financial records.
- Once a set of financials are examined by a business broker, the adjusted owner benefit must be calculated.
- Owner benefit, or Seller’s Discretionary Earnings (SDE), is defined as the true economic profits derived by a working owner of the business.
- The Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) may be calculated from the most recent tax return or profit and loss statement.
- This is essentially the pre-tax profits of the business without expensing non-cash items (depreciation) or debt costs (interest and amortization) which are not applicable to the buyer.
- Then one must add-back the owner’s salary, personal expenses of the owner that flowed through the financial statement, and any other adjustments to reflect a normalized operating environment for the buyer.
- The result is the annual adjusted owner benefit.
- It is important to remember that the multiple applied to the annual adjusted owner benefit varies widely according to the quality of earnings for the HVAC business.
- An HVAC business with an owner who is not an active technician may sell for a much higher multiple than an HVAC business with an active owner who is the lead technician in the field.
- Buyers value the future cash flow of a HVAC business differently depending on whether they will need to replace (if possible) the labor, skills, personality, and referral leads generated by the owner.
- Further, an HVAC business with transparent financials that reflect the actual sales and profits of the business (especially in its tax returns) is more likely to qualify for SBA-backed external financing.
- Lastly, the current adjusted owner benefit used for valuation purposes must be viewed in the context of its historical growth rates.
- A well established HVAC business with a growing list of customers, strong online reviews, and reliable technicians invariably leads to sales and earnings growth which in turn leads to a higher valuation multiple.
Evaluate Physical Assets
The physical or tangible assets of air conditioning businesses plays an important role in its business valuation. Because HVAC companies are mobile, they do not normally carry a large amount of equipment in-house. Instead, the vehicles used by the technicians are the primary component of its physical assets. Most HVAC companies have logos on its vehicles, as well as assorted tools and parts within each truck. Vehicle debt (if any) is typically not assumed by the buyer, especially if the business valuation assumes that the business has no debt servicing costs. HVAC businesses with valuable and well maintained vehicles, tools, and inventory of parts will receive an enhanced valuation.
Evaluate Recurring Revenues
A key component of valuing HVAC businesses is the degree to which its revenue is recurring and will transfer to the buyer after the sale. An HVAC business with a high degree of recurring revenue in the form of maintenance service contracts (assuming they are transferable to the buyer) sells for a higher valuation than an HVAC business that is more dependent on large ‘one-time’ sales of new units. This is because buyers like predictability and will pay a premium to lessen the risk that future cash flow may be impaired by unseen factors. If an air conditioning company does not have maintenance service contracts, its revenue base may still be recurring to some degree by the regularity in which its stable base of repeat customers use its services.
Evaluate Operating Structure
When assigning a valuation to HVAC businesses, it is important to note the distinction between revenue and profit (or owner benefit). Imagine two A/C service businesses each with $1M in revenue located in Palm Beach County. The first has a 30% operating margin, which means it has $300K of pre-tax profits (not including debt service costs). The second has just a 15% operating margin. The first company clearly has a better business model and is run more efficiently. The first company has seamless scheduling, well trained and productive technicians who are properly incentivized, and vehicles equipped with tracking technology. Also, the first company does not need to spend much on advertising due to the loyalty of its customer base and outstanding reputation. Even though the two businesses have the same amount of revenue, the first company is far more valuable.
In South Florida, HVAC businesses are very much in demand because of its industry growth and the recurring nature of its revenues. By using a professional business broker with experience selling HVAC businesses, sellers should get ready to confidentially sell their business at the maximum purchase price.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.