Deciding to sell your HVAC or Plumbing business is no small decision as the industry has greatly evolved over the last years. But more importantly, this might be the business you’ve spent your life building! From understanding private equity firms to shifts in SBA financing, selling a service business today involves many considerations. As Josh says during the interview: “It’s better to know and not need it, than need it and not know it”.
Ultimately, many business owners exit by selling their company. Either to a third party, but more often than not to an employee or even a family member. In this episode of SBM podcast, we asked Patrick Lange, a seasoned broker with six years under his belt and a portfolio boasting 120 successful deals in the HVAC field, to join us and explain to us what are the main considerations and how to properly prepare if one wants to sell its business.
Whether you are getting close to retirement, are looking for a career pivot, or simply seeking to capitalize on market trends, this article is your roadmap for a successful and profitable exit.
The Challenges of Selling a Service Business (HVAC)
If you own a heating, ventilation, and air conditioning (HVAC) business, you know the landscape has shifted over the years. Whilst still vastly dominated by local “mom’s-and-pop’s” shops, the industry now attracts significant interest from private equity firms who are looking into profitable small businesses to be added to their portfolio, sometimes making for a nice addition to their existing home service businesses.
Who buys Service Businesses?
Traditionally, local business owners looking to expand their services have been the main buyers. However, private equity firms have increasingly entered the market, buying multiple companies yearly. They’re not the only options though; family members and long-term employees often become buyers, facilitated by advances in financing options.
The Impact of SBA Financing & Rules Changes
The Small Business Administration (SBA) has aided internal takeovers. Previously, you had to exit within 12 months if you sold your business. New SBA rules allow for a more gradual transition. These guidelines also reduce the down payment required and enable the seller to contribute.
Until two months ago, a seller couldn’t remain in the business post-sale or contribute to the down payment. But the SBA has loosened these restrictions.
Now, not only can the seller stay on, but they can also help with the down payment. This change is particularly beneficial for employees who haven’t had the time to save a substantial amount before buying the business. It is even more relevant in a period of high interest rates as we currently are in.
- Pay attention to the requirements and conditions to be met allowing such a process in selling a service business
Start with Educating yourself.
This can make a big difference if you are looking to sell a service business.
Knowing what buyers look at, how valuation works, or even what your level of involvement in the company must be in order to sell well will allow you to properly put in place the actions to do so.
Selling a business (at a good price) takes time, and preparation can take up to 12, 18 or even 24 months. So you better be knowing what you are doing.
How to Prepare Your Business for Sale – Selling a Service business
If you’re considering selling your HVAC business, you must not overlook some critical factors that could impact your company’s value.
Let’s first look at the reasons a business could be selling for less than its potentially (high) value.
Reasons Why Your Business is not Worth as Much as You Think:
- Outdated Methods: Many businesses are late to adopt new technologies and processes.
- Lacking digital customer databases or an effective CRM system can seriously hurt your business’ valuation as following up on estimates might already be a challenge for the sales team.
- Poor Accounting: It’s common to find businesses using Excel spreadsheets instead of accounting software like QuickBooks.
- Whether you like it or not, buyers look at Financial Statements, and will look at how your accounting is taken care of. More time required to find and consolidate financial information often means lack of efficiency and therefore an under-valuation.
- Neglected Marketing: Having a customer base is important. Nurturing and growing your customer base is critical if you want a good exit opportunity:
- Buyers won’t only look at how much money your business was making 3 years ago, they’ll look at what the perspectives for the future are. A well oiled marketing and sales machine means less friction in upsales, memberships, maintenance and cross-selling opportunities.
- Waiting Too Long: Aging owners may delay the sale, only to find that their business value has decreased significantly.
- This is a common mistake Patrick has seen over the years. Aging business men or women might lose the drive and flirt with contemplacy. Whilst preparing well is important, knowing when to exit also is critical if you want a good sales price.
Best Practices If Your Goal is Selling a Service Business:
- Update Your Systems: As Josh says “Just do it”. Transitions to digital databases and CRM systems for customer relations are non-negotiables in today’s business world. You need proper processes, follow ups and sales funnel to grow your business and make it attractive to buyers.
- Optimize Accounting: Now is the time: shift to specialized software to manage your finances. Not only will that help your buyers see that finances are handled correctly, it will also help you see clear and understand what to expect / what actions to put in place to raise the value of your business.
- Reignite Marketing: Understand what works, don’t overcomplicate it. Define a service, sell it, and market it. Too often we see business owners putting in place membership systems with VIP and Ultra VIP tiers, whilst selling none. Simplicity works, and it is much easier to sell and train your teams on.
- Timely Sale: When you start preparing for a sale, define a clear objective and timeline, and stick to it. If you are leaning towards the end of your career, seek advice on what are the immediate a mid-term actions you can take to prepare your exit, and execute.
Sales vs. Profits
This one is a classic, yet many people still get it wrong. Too many times we see business owners not aligning their prices with inflation, or not taking into account the (gigantic) raise in commodity prices. This is critical when you are looking at selling a service business.
Your top line may grow, but your bottom line could suffer if you don’t adapt to the increasing labor, equipment, gas, overhead costs and so on…
Is it the right thing to do, or even the right time to sell?
If you are reading this, you are very likely a business owner, or close to becoming one. When owning a business, trying to minimize your taxes is common… and tempting. But this is a very-short term vision!
If Your Goal is to Sell, (Start) Paying your taxes
Contrary to popular belief, short-term tax-saving maneuvers often bring less financial rewards than long-term strategic investments in the business. Concentrating your effort on scalable growth rather than on penny-pinching can increase your sales price dramatically. Three reasons to this:
- Whilst you focus on paying less taxes, you don’t focus on growing your business
- Paying Taxes brings trust to the buyer, and everybody else
- Save a few dozens of thousands dollars a year, or earn high 6 to 7 figures when selling
Don’t spend you energy in low-value tax optimization
All the energy spent in thinking about what you can expense or “how to pay for your girlfriend’s condo in Florida” to reduce your margin is energy and time you don’t spend in growing your business and building trust.
Show that you are Trustworthy
Transparent tax records simplify the buyer’s due diligence and warrant a better asking price. Being able to show tax returns demonstrates that the company is profitable. This is one of the cases where “The more taxes you pay, the more you earn”.
Buyers are cautious, and a well-documented tax history eliminates their need to dig deeper into your financials, speeding up the sale process.
Focus on winning big
Think about it this way:
- If you make 100,000$ a year, you may save 37,000$ in taxes by optimizing your expenses
- Whilst by focusing on growing your business and by paying your taxes, you might be able to sell your business for much more money when you decide to!
- If the standard valuation of your business is x3 or x4 the profits, we are looking at 400,000$!
- This can’t be done if you are not paying your taxes
- Yet this is more than 10 times the 37,000$ you save yearly!
What do do if you have too many Add-backs – Or “Creative Accounting”, when the objective is selling a service business?
Add-backs or Creative Accounting is the art of expending stuff that is not business related. Sometimes, it is still possible to prove that your business is (very) profitable. But depending on the industry and type of expense, this might be harder to justify.
While minor add-backs like personal expenses are easily explainable, larger items related to the core business can raise red flags. The more transparent and straightforward your accounts, the better your chances of securing a high premium during a sale.
What’s the Real Value of Fast-Growing and Maintenance-Driven HVAC Businesses?
Are you wondering if a quick-to-grow HVAC business is more valuable than a long-standing one?
Often, rapid growth occurs due to heavy marketing investments. Turn off the advertising machine, and the revenue dries up. These companies rarely focus on maintenance agreements, which offer long-term value. So, despite making the same $5 million, they are less valuable than businesses operational for a more extended period.
Service-Oriented vs. Replacement-Oriented Businesses
Many HVAC and other Home Service companies generate large revenues but employ just one service technician, focusing mainly on replacements. These businesses may seem profitable but don’t offer much value to potential buyers. That’s because buyers seek long-term customer relationships, not a list of people who’ve recently had their units replaced. When every customer owns a new unit, future service calls are more likely to be complaint-driven, undermining the company’s value.
- Replacement might be seen as the higher value, but long term client relationships are the real deal!
The Importance of Maintenance Agreements
Having maintenance agreements significantly adds to a business’s value. Such contracts contribute not just to recurring revenue but also to customer and employee retention. These factors collectively improve your net margin. Moreover, a robust maintenance program often leads to lower marketing costs. You’ve built a valuable business if maintenance customers make up 80–90% of your revenue.
Last but not least, 2 visits a year (or more) often means strong client relationships, higher upsell tickets and cross selling opportunities.
What Buyers Want to Know
Buyers look at your maintenance plans. They want to know:
- How long customers have been on the plan
- The attrition rate
- Whether the plan was paid or complimentary
Customers on paid, long-term maintenance agreements add more value than those added through one-off installations.
- The value is in maintenance contracts!
Cross-Selling Opportunities
Companies with a strong customer base can easily introduce new services. Whether it’s plumbing, electrical, or pest control, a loyal customer list opens the door for instant business expansion. These are the companies private equity firms target, because they might themselves be in a very good position to cross sell between their different activities!
Let’s talk Technology, and the value of it
Chances are, you’ve heard about the rise of software as a Service (SaaS) companies. These firms thrive due to their recurring revenue models. Guess what? Your HVAC business can achieve similar success. How? By integrating smart technologies, such as SmartAC, to offer premium services and maximize profits.
Recurring Revenue Models
Like SaaS companies, your HVAC business can generate monthly or annual recurring revenue. One way to do this is by offering smart monitoring of HVAC systems. You’re not just providing a one-time service; you’re signing up customers for continual maintenance and monitoring. This model not only brings consistent income but also enhances the value of your business for future sales.
Build Strong Customer Relationships
You get to “own” the customer when you utilize smart systems or similar processes. Instead of searching Google or Facebook for services, customers receive timely alerts from your system about potential issues. This level of personalized service not only retains customers but also increases your opportunities for upselling and additional revenue.
Predictive Maintenance
Imagine calling a customer to tell them about a problem with their air conditioner before they even realize it’s malfunctioning. Patrick makes the fun analogy of “Chick-fil-A service.” It’s top-of-the-line customer care and is especially popular in areas with vacation homes. Owners appreciate the proactive service, and guess what? They’re willing to pay for it.
Value in the Trades
Don’t underestimate the evergreen nature of the Trades. Unlike other markets that fluctuate or become obsolete, HVAC services are essential. In hot climates like Florida, no husband would dare tell his wife he’s not fixing the air conditioner. The same goes for cold climates and heating systems. The point is there will always be a market for these services.
- Moreover, lots of industries have experienced a decline during COVID, whilst people were forced to stay home. Guess what? People have put more money in taking care of their home and this is here to last.
Conclusion:
In conclusion, selling a service business like an HVAC enterprise involves multiple layers of consideration, from understanding the type of buyers, to properly educating and preparing yourself, through leveraging financing options like SBA loans. You can no longer rely solely on traditional approaches; integrating smart technologies and focusing on long-term customer relationships can increase your business value exponentially.
Therefore, an informed, forward-looking approach is your best asset in successfully navigating this complex transaction.
Resources And People Mentioned:
Connect With Patrick Lange on LinkedIn Here!
This episode is kindly sponsored by:
– Sera (visit their website)
– UpFrog (visit their website)
– CompanyCam (visit their website) Visit www.companycam.com/SBM and use code SBM for a free 2-week trial, 1:1 training and account setup, and 50% off your first two months!
– Interplay Learning (visit their website)
– Join the Service Business Mastery Facebook group
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– Castmagic – https://get.castmagic.io/SBM
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