Getting comfortable with business terms before selling your HVAC business takes some time. Some of us were raised with a wrench in our hand so this jargon doesn’t exactly come naturally. However, it’s important we understand the language of business so we can communicate with bankers, attorneys, and buyers of our businesses. We sat down with Patrick Lange, business broker with Business Modification Group to give us a crash course on some of the terms we’ll likely hear – especially when it’s time to sell our businesses.
Business Terms to Know Before Selling Your HVAC Business
Expenses the business has today, that if I owned the company it would not have to have. Adbacks come in many forms. There are what I classify as easily identifiable real addsbacks. Health insurance, personal car payments, interest payments, matching on retirement accounts, and overpaying rent to get income from the business. Then there are the grey areas, which are much harder to prove, and add much less value to a business; gas, cell phones, meals, shopping on credit cards, and home improvement projects.
Known in the HVAC industry as Preventative Maintenance Agreements, it’s the practice of performing maintenance on an HVAC unit at regular time intervals – for a fee. For the HVAC owner, it’s the best way to keep recurring revenue flowing in the lean spring and fall months. Lange adds that it’s among the most important components of your business. Buyers are attracted, (and pay more) for businesses that have strong PMA programs.
Frequently you see this term abbreviated as P.E. It refers to a group of investors that buy and sell companies. In 2019 PE firms had a strong interest in HVAC firms above 1 million in revenues. They are attracted to the recession-resistant nature of the service business. Lange expects interest in HVAC firms to be even stronger in 2020.
Also known as “topline sales,” it’s the total of all sale transactions for a specific period.
Non Disclosure Agreement
When you have an interested buyer of your business, your broker will have all parties sign a legal agreement that protects sensitive information from being passed to anyone but the stakeholders in the transaction. Often referred to in its abbreviated form (N.D.A.) and is mostly interchangeable with “Confidentiality Agreement.”
An acronym for “(Sales) Earnings Before Interest Taxes and Appreciation.” You will most likely see this term if you have buying interest from a P.E. firm. It’s the primary language they use to determine the financial health of an organization.
Letter of Intent
(LOI) Used primarily by PE firms, it’s a briefly stated, non-binding document that outlines the terms of a sale.
Refers to the part of the business buying process where the buyer takes a deeper look at the business to confirm what the buyer has represented. It includes examining customer lists, financials, internal documents, legal records, searches, and any other details that give insights into assets, liabilities, and future opportunities.
Debt to income ratio
Simply put, it’s all your monthly debt payments divided by your gross monthly income. It will come up when you are applying for a business loan. And its the primary calculation used by a bank to determine if you can repay the loan.
This means all the personal income and perks a business provides. It includes salary, company vehicle, meals, entertainment, and health insurance among others.
Seller’s discretionary earnings
Defined as EBITA plus owner’s benefit. Buyers of smaller companies will pay some multiple of this figure.
Given by a professional appraiser, this is an opinion of value after taking a deep dive into the financial records, evaluating assets, and determining fair market value. This may be necessary to satisfy bank loan requirements but is no needed on every business sale.
Opinion of Value
Less formal than a business appraisal, this is what the business is worth in the open market. The most accurate opinion of value is by a business broker familiar with the HVAC industry.
Haven’t heard of some of these business terms before selling your HVAC business?
“Don’t fret” says Lange. “Most of my clients are masters of the HVAC world and the business terms they know are learned over time and out of necessity.” As with any transaction, you should understand all of the details. Good business service providers will be patient and move only at a pace you are comfortable with. If they drop a term unfamiliar to you, just ask for a definition!
About Patrick Lange:
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.)