For years, I’ve been advising owners to build maintenance agreements into their growth strategy. Maintenance agreements offer opportunities to upsell your existing customers and keep in touch with them over time. They allow you to identify possible repair or replacement issues before a system breaks down. And you’ll remain top of mind when it comes time to buy and install a new unit.
Maintenance agreements help keep your techs fully employed even during off-peak months. They provide the opportunity to earn more if you pay commission on every agreement sold. They keep the team’s skills sharp and help them build rapport and trust with the customers they serve.
What could be wrong with that?
Nothing, if you’re selling annual agreements and accounting for them appropriately. But I’ve seen companies run specials on multi-year agreements, which also sounds like a good thing. They sign customers up for three- or even five-year agreements at a couple of hundred dollars a year. Those sold, but not-yet-delivered services become a liability when you’re getting ready to sell your business.
The first problem with multi-year agreements is that you have agreed to lock in the cost of the service for several years. But the cost of labor, vehicle maintenance, fuel, and back-office scheduling operations don’t stay the same. You may be breaking even or even losing money on each call if inflation drives your costs up. I recommend a yearly pricing analysis for your business, and if you’ve committed to multi-year service agreements, you can’t raise pricing there. You’ll have to figure out ways to adjust pricing in other areas to cover the actual cost of the service.
When you are ready to sell your business, maintenance agreements can complicate the deal. Most HVAC business owners don’t use accrual accounting; they keep their books on a cash basis. Accrual accounting is the most effective way to manage funds you’ve received for future services; you put them in a separate account and draw down the money when you’ve completed the service.
If you’re doing cash accounting, you’re likely adding in three or five years’ worth of revenue (times dozens, even hundreds of customers) to your bottom line all at once. This skews your cash flow and revenue data, since there’s no expense connected to the income.
It’s often a last-minute inquiry from first-time buyers, but finding out a seller has tens of thousands, even hundreds of thousands of dollars that are designated for future service is bound to change the offer. For the buyer, those agreements are a liability; they represent service the new owner has to provide without receiving any revenue. The buyer will certainly want to discount the price he’s offering by the amount the agreements represent.
Now, instead of receiving a 4X multiple on that revenue, the seller is receiving a much lower price for his company. It feels like a 2-way hit, and it is.
I advise owners to draw down the funds from the account as the service is performed, so your cash flow estimates and records will always be up to date. The seller will still define those funds as working capital, the difference between the company’s current assets and current liabilities at the time of the sale. You’ll be discounting the sale price to cover the cost of future obligations, but the numbers won’t come as a surprise to you or the buyer.
Keep selling those maintenance agreements because they give your company tremendous value. Just make sure you account for them correctly so you’re not surprised when it’s time to sell your company.
