The short answer to the above statement is that buyers typically make lower offers on HVAC businesses that generate a significant portion of their revenue from new construction. That’s news to some of the owners I’ve spoken to, who argue that their business is thriving, they’re making a lot of money, and surely, buyers would be attracted to that kind of operation.
But buyers consider new construction to present more risk than a traditional installation and repair company. Here’s why.
There is no repeat business. Once a development is built out, the HVAC company’s work is finished. As each unit sells, the owners will make a decision about maintenance contracts or repairs (see the paragraph above) based on their own research; they are unlikely to know the name of the company that installed their original equipment. Companies that focus on repairs and service will have a portfolio of customers who keep them top of mind. They’ll also have testimonials and referrals from satisfied customers that homeowners won’t be able to deliver for the new construction installers.
Customer concentration is an issue for buyers. Smart buyers know that a company with 20% or more of its business concentrated in one or two customers, regardless of the size of the accounts, presents a risk. The relationship a builder or general contractor has is with the current owner, and once the owner sells, they don’t necessarily feel obligated to keep doing business with the company. Twenty or thirty years of trust and solving problems together simply goes away, and the new owner will have to win the business all over again.
New construction companies carry much more in Accounts Receivable. Especially if the company works primarily with residential builders, payment for installations can take a considerable amount of time to arrive. The business owner is financing the purchase of equipment and salaries until the payment milestones are met. During negotiations for the sale of the business, there’s almost always wrangling about the issue of working capital. The seller will insist that the receivables belong to him because he did the work, but the buyer argues that those funds are necessary for them to continue operating. It’s never an easy or pleasant discussion.
Because new construction business presents a higher risk, buyers often tie their offer to seller financing, earnouts, employee retention, and other clauses that make it harder for the seller to receive full value for the business when they sell.
It’s obvious that some HVAC companies are doing do very well working in new construction – I don’t want anyone to think differently. But if you’re relying on new construction for most of your revenue, the sale of your company might provide less for your retirement than you’d planned.
If I can help you understand the value of your business in the current market, I would be happy to give a complimentary and confidential opinion of value.
