Every industry poses its own unique set of considerations for business appraisers. This variety is part of what makes business valuation work so interesting and rewarding, but it can also present a challenge for practitioners working in an unfamiliar industry. For appraisers preparing to value a heating, ventilation, and air-conditioning (HVAC) company, there is a range of industry-specific factors to navigate. Let’s explore some of the special considerations for valuing an HVAC company, as identified in BVR’s special report, What It’s Worth: Valuing HVAC Companies.
What are the key factors that impact the value of an HVAC company?
As a service industry, HVAC businesses are not capital-intensive, and a great deal of company value is intangible. The industry is highly competitive, with low barriers to entry (barriers are mostly licensing and training), and is impacted by technological changes. In recent years, industry profit margins have expanded due to construction growth, allowing for an increase in prices. Low interest rates have encouraged home purchases and improvements, and recovery in per-capita disposable income has encouraged upgrades. Energy tax credits have provided incentives to refurbish or upgrade, and there are significant technological changes due to energy-efficient equipment and automated systems. As a result of this growth, companies have expanded their workforce and continue to hire new workers as demand increases.
When valuing an HVAC company, a number of special factors should be considered:
- In-house specialties and certifications (commercial and residential)—most companies have four people, so the chances that somebody has multiple certifications or experience is probably low. Most HVAC workers focus on one area, which is a risk factor when that person leaves the company.
- Recurring revenue from renewable service agreements—larger companies (those with more than $1 million in revenue) may have a competitive advantage since they have “critical mass.”
- Multiple licenses—the more licenses and certifications a company has, the better.
- Training (installation and repair)—HVAC companies should have employees who can train new workers on installation and repair. The nuances of installation are different from those of repair; some companies don’t have one person who can train in both areas.
- Value of inventory—Used equipment has minimal value. The value of inventory often is whatever number fits in with a company’s tax planning. Be wary of overvalued or undervalued inventory.
- Collectability of receivables—crucial to the health of an HVAC company is trying to maintain a particular balance sheet to meet bonding requirements.
- Expansion to include plumbing could help a company diversify and grow business.
- Project management software adds to the value of a company.
- Demand can vary sharply based on geography—companies that respond to this are more nimble.
- Fluctuating commodity prices—the price of aluminum, copper, etc. can have an effect on company value.
These are just a few of the unique industry factors that can play into the value of an HVAC company. You can find more guidance on HVAC valuation considerations, along with valuation multiples, tips for boosting the value of an HVAC company, and more in BVR’s special report, What It’s Worth: Valuing HVAC Companies.
Looking for guidance on valuation in other industries? BVR offers a wealth of resources for valuation in key industry sectors, including: