It’s not just for the big guys

You may associate the term “acquisition” with big business. One large company gobbling up another. But these types of business maneuvers aren’t reserved for big players. 

Your company can do the same thing and grow faster than organically getting one customer at a time over a long period. 

There are small HVAC companies near you whose owners are contemplating retirement, are burned out, or have a medical condition that is forcing them out of the business. They have to sell NOW. Since nobody outlives father time, this market condition is inevitable and constant. 

Generally speaking, those owners have two options. They can turn around and lock the door behind them for the last time and walk away, or they can sell their business and put some money in their pocket. It’s an easy choice because who doesn’t want to get one final payday for a business they spent years building? 

But if they’re too small, they won’t have a lot of potential buyers. Institutional investors want larger businesses that have achieved scale. While little buyer interest is bad for the seller, it’s a prime opportunity for nearby HVAC service businesses looking to grow. 

Let’s consider the math

Buying a business is easier than you think. Just because the purchase price might be a million dollars, it doesn’t mean you have to come up with that same figure in cash.  

SBA-backed financing is readily available. Banks will loan you the money and fund your acquisition. Typically they’ll ask for 10-20% down. Highly qualified buyers may be able to put as little as 5% down, but that is rare. 

1,000,000 loan amount

x    10% Money down

$100,000 cash due at closing

Using basic math, purchasing a million-dollar business will only cost you $100,000 at closing. Not a bad deal. But wait, it gets better.

 Since there is little buyer competition, you (and the bank) can ask the seller to hold a portion of the note too. 5% is reasonable, and in our example, that’s another $50,000 that you don’t have to come up with immediately. Now the deal looks even better.

1,000,000 loan amount

x     10% Money down

$100,000 cash out of pocket

-$50,000 seller held note

$50,000 cash from buyer due at closing

Now that million-dollar business looks pretty affordable. While there is always a risk, your banking partner will ensure that the numbers check out. They won’t grant the loan unless the business cash flows enough to pay the owner a reasonable salary, meet all of its existing debt obligations, and have enough left over to service the loan. 

This means you’re using the cash flow from the new business to pay the monthly loan amount.

 Using other people’s money can be an effective strategy to grow your small business into one that creates generational wealth. 

The human reasons

Growing a business is hard. Even if you’re doing all the right things, the limiting factor (especially in today’s labor market) can be technicians. They’re hard to find and there’s a good chance, you would be hiring another company’s cast-offs. That creates a painful hamster wheel of hiring and firing that can be difficult to escape from. Making a bad hire might cost months of their salary, plus create ill will with your customer base. Worse, a bad reputation can cost you your business. 

I’m working with companies that are making acquisitions for staff reasons alone. It can be a back door to getting top-tier talent that is already paying for themselves. 

How to get started

If you think you would be interested in acquiring another heating and air company, it’s important to consider geography. Choose an opportunity that allows you to expand your customer base, but is also close enough to you for you to manage and understand the market. Problems become much bigger when you have to get on a plane or drive for hours just to get to the location. A situation like that unnecessarily dials up the risk and makes things more difficult. 

Plus, if the location is close you might be able to realize some economies of scale. Operating out of one office rather than two (for example) might save you thousands and make the deal look even better. 

Consider the systems you use for your business. Is there a defined and scalable process to track appointments, accounting, and scheduling? If you struggle with these basic business functions now, you’re not ready to take on hundreds of more customers overnight. It would turn your small problems into bigger ones. If you already use an HVAC management software like Service Titan or Housecall Pro, those tools are ready to scale with you easily. 

Envision maximizing every service visit and giving customers a good experience. Can you handle 100 more calls?

Look for a company smaller than yours if you’re making your first acquisition. You’re already successful for a reason and you want to expand your culture and ways of doing business to the company you’re buying, not the other way around. If you have good people and systems, buying a smaller company will help you from getting overwhelmed. 

In any deal, I recommend requiring the previous owner to stay with the business for 30 days to ensure a smooth transition. I like having the flexibility of renewing this arrangement a month at a time for up to, (and no longer) than 3 months.

How to find deals

Hidden gems for information are HVAC supply houses. They are a wealth of knowledge and just need to be asked about what they know. Strike up a relationship with them and make it known you’re a willing buyer. Ask them to keep you in mind if they hear about a business ready to sell. I would go so far as to ask for introductions now of fellow owners you should know. Be patient. A seller may not be ready for 2-3 years, but when they are, they’ll remember you and you’ll get the first call before your competitors. 

For a more direct approach, consider contacting a business broker that specializes in the HVAC industry. If they’re like me, they will send out emails of businesses that come for sale near you.

Also, reach out to HVAC-specific lenders and let them know your eventual plans. They’ll coach you on what you need to do to prepare, plus, they’ll have connections with businesses that may not have hit the market yet. 

What does success look like?

It might sound counterintuitive, but define success at the status quo. If you make a strategic acquisition and can absorb operations, maintain margins and not lose any customers or key employees, it’s a huge win! You would have demonstrated you have what it takes to take on another company and now you are poised and experienced to do another. 

Growth coming from better processes, and selling of maintenance agreements is the upside. 

Buying companies isn’t just something the big conglomerates do. The same opportunities exist for the mom-and-pop shop that has ambitions to be something more. It’s the fastest path to growth when time is money. 

About Patrick Lange

 

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Patrick Lange is an experienced HVAC-specific business broker with Business Modification Group based in Horseshoe Beach, Florida. He has a unique background in financial planning and has even owned an HVAC business himself. This makes him well suited to working with some of the most successful HVAC business owners in the country. Specializing in companies with 1-10 million dollars in revenue, he maintains a network of buyers and sellers in the industry. He has sold more HVAC businesses than any other broker in the United States over the last 12 months and is currently the Vice President of the Business Brokers of Florida (North Florida District.)