Everyone wants big, profitable repeat customers in their HVAC business, but if they represent too much of your overall revenue, it can be a bad thing.
HVAC service business owners that are doing the right things, by doing good work for a fair price, usually don’t have a problem earning new clients. Many times, it may be from home builders, property management companies, or large chain franchises. While that’s a good thing for operations and profitability, it may work against you when it comes time to sell your company.
I’m talking about customer concentration. If you’re not familiar with that term, it is referring to how much of your business comes from any single customer or relationship.
If you have a customer representing more than 10% of your overall sales, it could be problematic.
The reason is that buyers are looking for customer diversification. This means if any single customer leaves the business for any reason, it won’t be catastrophic and cause a major disruption. It doesn’t matter how good of a relationship you think you have with the customer.
From the buyer’s perspective, they view this as dangerous and will be very cautious about moving forward.
For business owners, it’s a bit of a catch 22 because the overall revenue is the primary driver of business value. I’m certainly not suggesting you fire a good customer. Just know that you are putting yourself in a difficult position and should work hard to grow the overall revenue pie to mitigate the situation.
My best advice to HVAC owners is to be careful of new construction exposure. The best revenue you can earn is through PMA’s. Buyers love the recurring revenue stream because it is among the most secure and consistent in the industry.
The heating and air companies that consistently bring the highest sales offers are well diversified and are well-positioned to weather any economic downturn. This includes acts of God or also a key customer taking their business elsewhere.
Keep closing those big customers. In the long term, they will add enormous value to your business. However, if you plan to sell your company soon, just know it’s something that’s going to come up in buyer discussions.
About the author:
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.)