Valuing HVAC Companies

South Floridians can attest, air conditioning or HVAC businesses are sorely relied upon to keep our homes, schools, and businesses cool and comfortable. The HVAC industry is expected to increase in size by 7.4% annually through 2030, and in South Florida, air conditioning is an absolute necessity during the sweltering heat of summer. An HVAC business generally receives a higher valuation because of this long term industry growth, along with the recurring and predictable nature of its services. The average multiple of HVAC business sales in Florida is 3.02 x the annual owner benefit, compared to an average multiple of 2.4 x the annual owner benefit for other service-related industries.

Determine Adjusted Owner Benefit

  • The first step in valuing and air conditioning business in South Florida is determining the annual adjusted owner benefits from its most recent financial statement.
  • Owner benefit, or Sellers Discretionary Earnings (SDE), is the profits derived by a working owner of the business.
  • First, the Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) may be calculated from the most recent tax return or profit and loss statement.
  • This is the pre-tax profits of the business without expensing non-cash items (depreciation) or debt costs (interest and amortization), which are not applicable to the buyer.
  • Then, one must add-back the owner’s salary, personal expenses of the owner from the financial statement, and any other adjustments to reflect a normalized operating environment for the buyer.
  • The result is the annual adjusted owner benefit.
  • It is important to remember that the multiple applied to the annual adjusted owner benefit varies widely according to the quality of earnings for the HVAC business.
  • If the owner is not an active technician, the business may sell for a higher multiple than a business with an active owner who is the lead technician.
  • Buyers are looking for the future cash flow of the business, they will value differently depending on whether they will need to replace (if possible) the labor, skills, personality, and referral leads generated by the owner.
  • An HVAC business with transparent financials that reflect the actual sales and profits of the business (especially in its tax returns) is more likely to qualify for SBA lending.
  • A well-established HVAC business with a growing list of customers, strong online reviews, and reliable technicians invariably leads to sales and earnings growth, which in turn leads to a higher valuation multiple.

A business valuation is an estimate of the fair market value of a business. There are a number of ways to calculate the value of a business. For small businesses, the most common method is to use a multiple on earnings. The earnings definition used for “Main Street” businesses (i.e., businesses worth less than $10M) is called seller discretionary earnings. It’s commonly abbreviated as SDE, and we’ll get into calculating in the next section. While the seller’s discretionary earnings are specific to a business, the multiple is often determined by the market.

On larger deals a valuation can be a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Multiples for HVAC businesses are currently hovering between 5x to 8x EBITDA. However, these figures can fluctuate.

Physical Assets Impacts Valuation of HVAC Businesses

The physical assets of the businesses play a role in its business valuation. Because HVAC companies are mobile, they do not normally carry a large amount of equipment in-house. Instead, the vehicles used by the technicians are the primary component of its physical assets. Most HVAC companies have logos on its vehicles, as well as assorted tools and parts within each truck. Vehicle and Equipment debt is not typically assumed by the buyer. Well maintained vehicles, tools, and inventor will help enhance valuation.

Recurring Revenues Impacts Valuation of HVAC Businesses

Recurring revenue that will transfer to the buyer after the sale ask is key. An HVAC business with a recurring revenue from maintenance service contracts ( need to be transferable) sell for higher valuations.

If an air conditioning company does not have maintenance service contracts, its revenue base may still be recurring to some degree by the regularity in which its stable base of repeat customers use of its services.

Operating Structure Impacts Valuation of HVAC Businesses

When determining valuation there is a difference between revenues and profit. If one company has a 30% operating margin, and it compares to another company with the same revenue which has a 15% operating margin. Even though the two businesses have the same amount of revenue, the first company is far more valuable.

In Florida, HVAC licensing requirements involve passing a rigorous test after a training and/or apprenticeship period. Non-licensed technicians in Florida may work under a licensed qualifier or supervisor. Some air conditioning businesses are owner-operated, where the owner is the license holder and only technician. Others have multiple technicians where the owner has more of a passive role. If one or more company technicians is licensed and willing to serve as the qualifier, then, when time comes to sell, the buyer will not need to obtain their own license or rely on the owner to remain as the qualifier after the sale.

Give John at KW Reserve Business Brokerage at (844) 456-4647 for a FREE evaluation of your business.