How much is my HVAC business worth?
The brutal truth is often nowhere near what you think it should be.
It's like being told that your baby is ugly, but this is something that Patrick Lange of The Business Modification Group has to tell people most days.
Patrick has shared his expert wisdom and in depth knowledge of the current market for buying and selling HVAC businesses across the US.
From a business brokerage point of view, there are three big things that a buyer is looking for in a business that drives the sales price up, and three things that may impact the value of your business in a negative way.
1) Maintenance Agreements
Buyers want to see real relationships with your customers that generate recurring revenue. They simply pay more for a business that is focused on service.
2) Clean Books
If you have not been banking the cash, using your business account like your personal checking account, and for want of a better expression creatively accounting for taking cash out of your business - then all of this will be affecting the provable net profit you can show on your P&L
So, if you want to sell your business for top dollar, be sure to put this right today. Banks and buyers usually go back three years to see the trend on income and expenditure, so if you are thinking about selling in the future, start accurately accounting for everything from now.
You can't fiddle your accounts to pay less taxes and then expect to get a good sale price for a business that looks less profitable than it really is.
3) Minimum Owner Involvement
Get yourself off the tools and out of the truck, and remove yourself as much as you can from the day to day operations of your business.
A buyer is not going to pay for a job they have to do, they are looking for a business they can run.
The more people you have reflects the maturity of the business and suggests that there are already systems and processes in place that means less headaches from the start.
The three killers that put buyers off investing in a business are....
1) New construction - buyers struggle to see value here and it is normal for any numbers generated through new construction to be discounted out of the business value calculation.
2) Being the cheapest - if you have built your business based around price, and have a reputation for being the cheapest in town, then this leaves no room for an investor to grow.
They will have additional overhead to you, so if your hourly rate or gross margins have been designed to simply put food on your table each week, then you will have difficulty selling your business to anyone.
3) Family members involvement - this can also be a deal breaker if the majority of your employees are family. This may be hard news for you if this is the case in your business. However, there will still be value in there if you are looking to sell it to your family.
OK Nick I get it, but how much is my business worth?
Well, Patrick says as a very broad rule of thumb - and I mean very broad - you can usually aim to get valued at 2 times the seller's discretionary earnings up to around $500,000. In a well run HVAC business this is around 15% to 20% of Sales.
So what this means is that if your net profit shows $400,000 for the year, then you can expect to be in the ball park of $800,000 - depending upon the above criteria (and others) being met.
It can be slightly less, or slightly more.
For the companies generating between $500K and $1M net profit, you could be looking at a multiple of 2.5 to 3 times - but this would be for a turn key business with people and processes in place.
The bigger the business the bigger the multiple. Over $1M net profit can, if everything lines up, be valued and sold at anything between 4 times and 8 times the bottom line profit.
The HVAC market is extremely buoyant right now, with well run business being sold for their asking price all across the US.
Watch the interview with Patrick for more detail.
If you are looking to find out more about getting your business listed, or finding a business to buy, then reach out to Patrick through his website https://businessmodificationgroup.com/
If you would like any help to get the things discussed in this interview in place quickly in your business, then reach out to us here at High Growth Coach, as this is exactly what we do.