‘High Performance’ vs ‘Average Numbers’ in HVAC Businesses & Valuations
Occasionally we run across owners of HVAC businesses considering an exit, with ‘high performance’ numbers. Typically that is reflected in either rapid growth in revenue, or a high net income margin (net income / total revenue). We would consider a 20% margin high.
With numbers that are outperforming industry standards, owners are looking for an exit price that is subsequently higher then average.
But that isn’t always realistic.
High performance HVAC businesses can actually dissuade buyers, and when the demand decreases, so does its selling price.
Here’s why… buyers value stability and likelihood that the business will continue to produce the same numbers after acquisition. Let’s look into this further.
In the scenario of a business that is rapidly increasing in revenue, a buyer will think this rapid growth is unlikely to continue, and the local market may crash. Even with a marketing plan in place a buyer may feel the business that the plan is the brain-child of the current owner and they are unlikely to continue it.
Best solution: Anticipate a valuation at a slightly lower multiple, or ride out the growth path until you reach current operational capacity and then sell.
In the scenario of business that generates a high margin, buyers will see the high margin as unsustainable because…
A) Market competition is likely to increase (squeezing down margins).
B) Staff are underpaid.
C) The owner/spouse is handling multiple roles.
In most businesses we see with high margins, the margins are typically NOT the result of a competitive advantage, and should not be valued at a premium.
Best solution: Make sure all staff roles are properly documented and compensated sufficiently. Then document any competitive advantage that maintains that margin.