The Heating, Ventilation, and Air Conditioning (HVAC) industry is booming as modern constructions opt for tightly sealed environments. With the growing demand for good cooling and heating, the perfect time to invest in the HVAC business is now.
However, making informed decisions and having a definite plan to position the business for long-term growth is essential. This article will guide you on how to value a heating and air conditioning business and the legalities involved.
Why Buy an HVAC Business?
Construction has changed drastically. From building homes and offices, they are not only considering the structure of what they are building, but also finding safer ways to build around it; this is where the demand for HVAC services comes in.
More than warming and cooling spaces, the demand for HVAC services stems from the need to improve indoor air quality inside buildings, without breaking the bank and ruining the environment. HVAC services are no longer just a want, but they are becoming an essential for every household.
With that being said, HVAC businesses are surely in demand right now. They promise income that is surely recession-proof and an established clientele. If you’re looking to buy an HVAC business, it’s best to seek consistent small HVAC businesses, as they are the quickest route to gaining profit, rather than starting from square one.
How to Value an HVAC Business
In valuing an HVAC business, you must look at more than just the revenue. To see beyond the surface, here are some methods on how to value a heating and air conditioning business:
The Income Valuation
From the name itself, this is an overview of how much money your heating and air conditioning business is and will be making.
These are usually computed using the Earning Before Interests, Taxes, Depreciation, and Amortization (EBITDA) or Seller’s Discretionary Earnings (SDE).
If you are looking into buying an HVAC business from smaller companies, it is best to look into their SDE, as small businesses rely heavily on who owns the business and can limit valuation, focusing on how much you actually get to take home. Larger companies, on the other hand, have a steady revenue, so their EBITDA valuations are your best friend when looking at how much they can grow.
The Market Valuation
In order for you to make a wise decision on which HVAC business to buy, looking at recently sold HVAC businesses that are comparable can help you make up your mind. Consistent recurring but diverse customers, earnings, contracts, and systems are all part of looking into the market valuation approach when comparing HVAC companies.
In the real world, if you are vying for HVAC companies who are making the same profit, look into what they are selling and their reputation. HVAC businesses with periodic maintenance contracts are better than the ones who only have one-time installation customers. Also look into reviews of the HVAC companies that you are comparing, because while the presence of another company is strong online, it may not translate to the quality of service they are giving, provoking more problems for you, as a future HVAC business owner.
Asset Valuation
When buying an HVAC business, most of us will be lured into a company’s earnings and profit, but one aspect we should also consider is their assets.
While cash is still considered an asset, we should look into what the company owns. An HVAC company may be selling for a good price, but they do not have the vehicle for transporting their services, or they may lack equipment for installation of their products. HVAC businesses heavily depend on the service aspect, and if these key things are missing from their operations, it’s better to look into other options that will make your investment worth it.
What to Look for in the Business’s Operational Health
As said earlier, operations is the soul of an HVAC business. When considering buying an HVAC business, it’s best to look into how their everyday systems work.
Look into:
Are they customer-based or contract-based?
You may think that having new customers every now and then is a sign of healthy business operation, but for service-heavy related businesses like heating and air conditioning, those who have contract-based customers are the ones to look out for.
The huge chunk of revenue of HVAC businesses come from the customers who come back for annual maintenance agreements—it’s seen as greater revenue but less risk, and when you acquire a business with this type of base, the investment is deemed worth it.
Market Reach
This speaks for itself; this looks into how dominant the business is, given its nature and where it is strategically placed. If you’re looking into buying an HVAC business, search for businesses that are within the urban cities. The residential service contracts are larger in these areas—with the rise of business buildings and large condominiums, who are in need of inside heating and cooling services, and annual HVAC services.
Inventory and Equipment
Look into how an HVAC business tracks all parts and consumables. HVAC businesses who have a great inventory system, and use Field Management Service Operators like TillerStack are likely good HVAC businesses to look into.
How to Assess the Business’s Reputation and Brand
As good HVAC businesses rely on long-time commitment customers, their business reputation lies on their customer relationships. Word of mouth and review systems come into play with businesses like HVAC businesses.
People will look into these and see if the business is someone they can trust in. For HVAC small businesses, this is how they thrive. The presence of reputation is what keeps them afloat. If they serve their customers well then, the business will build a positive reputation as customers leave good reviews and spread the word to others who need heating and air conditioning services as well.
Another thing to consider in building an HVAC business’ brand and reputation are the workers, technicians, and staff they hire for their services. Hiring qualified technicians can become an HVAC business’ assets, as they carry the business when they work. The best HVAC businesses to acquire are those with a pool of talented technicians that will surely keep your business afloat.
Legal Considerations When Buying an HVAC Business
In running an HVAC business, you need to take into account that it is service-based. This entails a series of licenses, permits, and certification so that the business can run smoothly, and clients are assured that they are getting the best of the best quality service. For example, for HVAC businesses to run their service, their technicians need to be licensed. If not, there is a high possibility of losing trust with their customers or clientele.
Other than employee license, when looking into buying and running an HVAC business, make sure that you are acquiring an HVAC contractor that has the license and permit to operate in the area that you are trying to buy from.
It’s also not only the seller who needs to have a permit, you, as an HVAC business buyer, need to have the required permits. If you are an individual buyer, the seller will make sure that you are permitted to make a business acquisition. If you are looking into buying an HVAC business, consider getting needed permits first.
Financial Considerations and Due Diligence
When buying an HVAC business, you do not want to carry the burden of past obligations of an HVAC business you’re trying to acquire. There is a need to understand and analyse the financial statements, taxes, and other liabilities associated with businesses.
Both sides need to be proactive in fulfilling their due diligence, as this will help in tackling problems in the process, and ensure that everything is properly streamlined in the transaction.
In valuing HVAC businesses, there are financial obligations or due diligences to be considered. Each is individualized to the transactions to be made. Here are the types of financial due diligences to be considered:
1. Buy-Side Due Diligence
This is for potential buyers who are looking into the financial status of the business they are trying to acquire. This process requires the history of financial statements—cash flow, liabilities and obligations, and financial forecasts—so a buyer could discern if buying this particular HVAC business is right for them.
2. Sell-Side Due Diligence
Since there are financial statements the buyer wants to acquire, it is now the job of the seller to prepare all the needed reports. This is to build trust and value transparency so the potential buyer will not flake out and delay the transactions about to be made.
How Field Service Management Software Can Help Post-Purchase
Now that you have obtained the business, optimizing operations is now the top priority in your list. In these types of scenarios, Field Service Management Software, like TillerStack, take the spotlight.
Field Service Management (FSM) can schedule dispatchment of operations efficiently. There is also no need to worry about tracking inventory. You do not have to ask, “do I track all parts and consumables in the HVAC business?”, as software like TillerStack come in handy, as they know where every part and consumable is.
Instead of relying on hard-to-navigate software like spreadsheets, FSM-focused software makes the streamlining of your official documents like service contracts, maintenance agreements, and contract renewals make your business operation easier. FSM software can let you send reminders for when you need to visit a client and keep track of their invoices. These FSM software centralizes your everyday HVAC business operation needs, giving you the peace of mind for future transactions.
Conclusion
Buying HVAC businesses are not just investments; they are also a sure recession-resistant income generation that is slowly penetrating the business world. It is not a staple in modern construction, as it increases environmental awareness and it is easier to navigate, legally and financially.
With the right tools, like Field Service Management software, you can become a trusted household name in the heating are air conditioning industry—providing indoor comfort and good air quality.
FAQs About Buying an HVAC Business
How do I value an HVAC business?
Valuing an HVAC business includes analysing their income (from EBITDA or SDE). comparing markets and assets. Also, it is needed to look beyond revenue. Look into contracts, reputation, and recurring customers.
What should I look for in an HVAC quote?
When buying a HVAC business, the quotation should include the labour costs and service timeline. Transparency is key.
How much profit should an HVAC business make?
In HVAC businesses, the usual net margins are between 10%-20%. It will depend on the business’ customer system.
How much do you charge for HVAC repairs?
It will depend on the contract an HVAC business will give to you.
How Do I Maintain Confidentiality When Selling My HVAC Business?
There are non-disclosure agreements (NDAs) involved.
How do I assess the reputation of an HVAC business before buying?
In buying an HVAC business, you need to assess the online reviews, customer retention, and repeat clients.
How can FSM software help me manage a newly acquired HVAC business?
Tools like TillerStack will help in managing and streamlining scheduling, inventory, and other operational needs of HVAC small businesses.
What are the legal requirements when purchasing an HVAC business?
There should be a valid operating license for the business and technician certifications for the employees.