When I speak to business owners, one of the ideas I hear often is that two companies with the same revenue should be worth the same to buyers. After all, isn’t that what “comps” are designed to do – compare apples to apples?
An experienced broker will tell you that while revenue is one way to measure the size and success of a business, there are other factors that will impact what a buyer is willing to offer for it. Here are three:
Location and demographics. It makes sense that you’ll sell more A/C units in Alabama than you will in Alaska, but weather is just one part of why location matters. Even a southern location that does not have a large population offers much less potential for growth. Regions that are not growing and expanding also limit a company’s potential for new customers. Regions that have more multi-family homes (apartment buildings) offer less opportunity and fewer potential customers than a region that has more single-family residences.
The reason Atlanta is such a desirable location for HVAC buyers is that the area is showing strong population and housing growth, with economists estimating that it’s adding 60,000-65,000 new residents every year. Atlanta’s demographics are also favorable for the business; many neighborhoods have residents with very large homes, some of which may have four or five separate A/C units. Any HVAC company that locates in Atlanta has the potential for enormous growth.
Specializing in commercial HVAC rather than residential. It surprises some owners to find that a residential HVAC company might be worth more than a commercial company with the same revenue. There are several good reasons for that. One is customer concentration; a commercial company will have fewer customers and fewer units sold (see apartment buildings above.) When a company receives 20 percent or more of its revenue from just a couple of large customers, it’s a red flag for buyers. Changes in company ownership or management could mean the loss of large contracts that might put the HVAC company’s future at risk.
Commercial HVAC companies also carry more Accounts Receivable than residential. 30/60/90-day payment plans mean that the vendor is carrying the cost of a job longer than a residential company, which usually receives payment at the time of service or installation.
Commercial HVAC technicians require specialized training and equipment and are harder to find and more expensive to retain than residential techs. Commercial customers also have different expectations than residential customers. If a cooling storage unit with hundreds of thousands of dollars of food inventory fails at 2:00 AM, a tech will need to go out to repair it at 2:00 AM.
Residential companies that prioritize maintenance agreements versus those that don’t. 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. That means you spend less on marketing and advertising to acquire new customers and experience less customer churn.
Maintenance agreements also 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 service. And maintenance agreement calls allow you to deploy newer, less experienced techs so you can reserve your top talent for repair calls.
For all these reasons, two companies with the same annual revenue might receive very different offers and multiples from buyers. When a buyer perceives more risk, they will alter the terms of the deal or the price they’re willing to pay to offset that risk. That’s why no two companies or two deals are ever exactly alike.
