Achieving A 5x Valuation Multiple In An HVAC Business - National HVAC Brokers

Achieving A 5x Valuation Multiple In An HVAC Business

At a simple level, HVAC businesses sell for a multiple of owner benefit (the cash that flows through to the owner), plus a valuation of assets that the business has (real estate or vehicles).

Maximizing the valuation multiple is key to getting the highest exit price.

If you’re reading this article, you’re probably already familiar with the concept of valuation multiples and are looking to get the maximum multiple. The multiple which many HVAC business owner target is 5x.

Achieving a 5x valuation requires building a scalable business and is ‘beyond average’, when considering the comparables.

When it comes to analyzing valuation data of HVAC businesses, we look to Florida. Florida is one of only a couple states that has a business MLS system which aggregates the information, and Florida has a relatively active category of HVAC businesses.

The data reveals 2 key points…

#1) Among HVAC listings, more than 50% of the listings NEVER sell.

#2) Among the listings that do sell, the average multiple is 2.3.

While the average among all listings is quite low, we do find that with a little refinement following our Exit Method Framework and consulting services we can drive most HVAC businesses doing $1mm in revenue + to a marketable multiple close to 4x.

With that in mind, let’s take a look at what it takes to achieve a 5x multiple.

1) At least $5,000,000 in annual revenue. At a 5x multiple, the buyer pool is going to be savvy investors looking for a very ‘established’ operation with revenues to a support management team, adequately compensated staff, and at least 20 employees. This typically starts to come together around the $5,000,000/ yr in annual revenue mark.

2) At least 10% net income margin. Healthy margins are indicative of a business that will stand the test of time. A 10 – 15% margin, after fair owner/president salary, is reflective of a scalable HVAC business. Beyond 15% is not bad, but may throw a discerning view as it typical tends to indicate, a high owner involvement, under paid staff/management, or a market advantage that is not sustainable.

3) Management Team. If paying a 5x multiple a buyer is looking to fill the role of CEO; not operator or hands-on man. To operate as a CEO a management team with tenurship, needs to be in place. At the BARE MINIMUM, there should be 3 managers; a general manager, an operations manager, and a sales/office manager. Each of them should have at least 2 years in their currently role, and be compensated at market rates.

Side note: often we see ‘managers’ in place that were promoted from within and are under compensated. For valuation purposes, to reflect market rates, each of those roles would be expected to receive at least $80,000 in compensation. Managers with less compensation then that will not be viewed as sustainable in the long run as if they leave it is likely a replacement at those rates will not exist.

4) Documented Systems & Procedures. Scalable and highly valued HVAC businesses required documented systems and procedures. To achieve a 5x multiple EVERY operational activity needs to be on paper and all of the staff need to be full trained on the activities as it relates to their role. As a rule, when asked “how do you do that?”, everyone on staff should be able to point to the exact procedural document within 2 minutes.

If that cannot happen, the documentation and training needs improvement. This is one of the key things we work on in The Exit Method.

5) Internal Employee Promotion Plan. Finding, recruiting, and training employees is perhaps the biggest challenge facing HVAC business owners. In our experience as home service business owners, and agreed upon by most seasoned owners, the best method to fill the org chart is to promote from within. Having a documented internal employee promotion plan, gives buyers the assurance that there is a talent pool that will continue to fill the ranks and it also shows employees that there is a growth path and contributes to their increased tenurship.

6) Diversified Customer Base. Relying on a single customer for a large portion of revenue is risky business.

Potential buyers will wonder, “will this customer stick around if the current owner leaves?”

We recommend that no single customer account for more than 10% of revenue.

7) Stable Revenue / Profit. Often times HVAC owners will come to us in a time of ‘hyper-growth’, looking for a high multiple, as they are growing “faster than anyone”. Unfortunately, hyper growth is not rewarded. In the HVAC industry (and other contracting industries), businesses are valued on their cashflow and stability. There have been countless examples of high growth businesses that eventually go ‘bust’. Savvy buyers are aware of this and will not pay a premium.

Growth is good and ideal, but as a rule of thumb, should be capped at 15% year over year for the purpose of maximizing valuation.

8) In business at least 7 years (with the same brand name).

Length in business is highly valued. A brand name that has been around for decades has brand recognition that cannot be duplicated other than being active in the local market through time.

Following that, the brand name should exist consecutively. While rebranding could be good for business, a recent change in brand name is generally viewed as red flag to potential buyers.