When private equity (PE) professionals look at HVAC contractors, they see a field ripe for consolidation. There are thousands of independent firms operating across the nation — strong companies that PE professionals believe would benefit from the resources of a regional or even national presence. They also see a business segment valued at around $20 billion that is fairly recession resistant. As a result, there are several HVAC firms growing today by acquiring established HVAC contractors using money from private equity firms.

Alpine Investors, a middle-market private equity firm, recently launched a new platform for HVAC contractors called Apex Service Partners. The goal is to partner with service providers to build a national platform. Alpine Principal Daniel Cohen said the platform matches the contractors’ established performance with Alpine’s access to capital.

“Even during an economic downturn, heating and a/c are crucial for homeowners,” Cohen said. “However, many businesses lack the capital and resources to grow and scale their businesses. Partnering with a good PE firm that understands the industry can help them better manage back-end operations, allowing these companies to expand and flourish.”

Alpine executives plan to invest at least $100 million of equity capital in founder-owned companies over the next five years to build Apex. The firm will follow the strategy it used to build the Wrench Group, an HVAC and plumbing services platform serving the Atlanta, Dallas, Houston, and Phoenix markets, which grew to over $150 million in revenues and was subsequently sold to Investcorp in 2016.

BEYOND MASSIVE OPPORTUNITY

PE firms tend to operate with the goal of selling or spinning off a firm at some point. This could be through a public offering, a sale to a large business in the field, or even a sale to another PE firm. CoolSys is an HVAC contractor owned by PE firm Ares Management. Ares bought CoolSys from Audex, another PE firm, earlier this year. Audex had owned CoolSys for three years before that.

Reedy Industries is an HVAC contractor backed by PE money that has acquired four other firms this year alone. CEO Joe Kirmser described the opportunity for expansion as “beyond massive.” The average HVAC firm employs 10 to 15 people. Reedy employs more than 500. This gives the company considerable leverage.

Reedy looks for contractors that are established leaders in their markets with a staff of experienced field technicians and a loyal customer base, Kirmser said. Ken Goodrich, CEO of Goettl, another acquirer, said any firm with a large customer base comes with considerable talent.

Goettl is a growing HVAC contractor with a very old name. The firm started in Phoenix in 1939 and produced air conditioners for high-temperature clients for decades, until the mandate for high-efficiency units forced Goettl to end production. The contracting side of the business continued under several owners. Goodrich’s father was a Goettl dealer in Las Vegas, so when the opportunity came to buy what was left of the firm in 2013, he took it.

Goodrich partnered with Baum Capital Partners, a PE firm that focuses on the lower middle market, last year to expand his acquisitions. Goettl operates several locations in the West and recently entered the Texas market via a 2019 acquisition.

“I go where it’s hot,” Goodrich said.

LEVERAGING SIZE

Anthony Perera, president of Air Pros, a Florida-based HVAC contractor, recently added an operation in the Dallas market. Perera said he is open to acquisitions in any climate. He made three in 2019 and plans on doubling that amount in 2020. The operations ranged in size from $2 million in sales to $20 million.

“It all depends on the opportunity and how it presents itself and if we feel it will fit with our company’s culture,” Perera said.

Air Pros is a little different because Perera funds his acquisitions from the company’s cash flow rather than working with a PE firm. He said the selling firms have come from a variety of sources, including business brokers, financial planners, and owners who heard about him through word of mouth. Perera said one advantage of being bigger is the ability to leverage the company’s size to get the best prices on everything from insurance to vehicles.

The ability to add related services is one advantage of being a roll-up firm. Last year, Goettl acquired Dutton Plumbing in California to expand its offerings. Pueblo Mechanical, an Arizona-based consolidator funded by Huron Capital, recently added Niemeyer Brothers Plumbing Inc. Huron invests in numerous fields, ranging from automotive services to fire safety, and it takes a methodical approach before entering a business. Additionally, Pueblo is an example of Huron Capital’s ExecFactor® strategy, where it identifies a specific sector and partners with an experienced CEO to execute a buy-and-build thesis.

Huron acquired Pueblo in 2017 and brought in Dan Bueschel as CEO through the ExecFactor® program. Bueschel brings a deep background in HVAC services, having worked at Sodexho and JCI.

Scott Hauncher, a partner at Huron Capital, said Pueblo looks for more than just additional revenue or scale when it makes acquisitions – it looks for companies that can expand Pueblo’s client base or provide a new line of services. For example, prior to the Niemeyer acquisition, Pueblo performed limited plumbing work for select customers. With this acquisition, Pueblo expanded its capabilities, enabling an enhanced value proposition for a broader set of clients.

This acquisition of Niemeyer was the sixth since Huron Capital became involved in 2017.

“We’ve created a business that is much larger and much more diversified than the Pueblo business was when we first acquired it,” Hauncher said. “Our plan is to grow this company regionally. The next phase is to continue to grow in Arizona but start to expand regionally.”

STAYING ON

For any contractor, HVAC or otherwise, these firms provide opportunities they can’t achieve on their own. Most owners stay with the larger firms after acquisition. In some cases, the acquisition provides a way for the seller to retire and make sure employees are taken care of. For the most part, the acquiring companies want the owner to stay. Reedy prefers the owners stay on and reinvest a portion of their equity from the sale back into the company, although this isn’t a requirement.

“We offer them an opportunity to partner so we can jointly take the combined business to the next level,” Kirmser said.

Most of the original names stay in place as well, although Coolsys plans on adopting this name for most of its operations in the near future, said Mike Ochoa, vice president of sales and marketing at Coolsys.

The acquiring firms also provide a wider perspective than a local company can achieve. For instance, Apex recently rolled out operating software and accounting systems to standardize technology, KPIs, and financial insights across the group. The acquiring companies can bring in some top executives who add a level of professionalism the companies might have been lacking.

“Along with significant capital investment to fuel and expedite organic growth, we have experts in team management, equipment, and facilities that help our partners implement industry-leading practices,” Alpine’s Cohen said.

Apex provides group-wide treasury solutions, insurance and benefits plans, and background checks. Companies want to maintain experienced owners because they bring local knowledge and contacts.

“There’s that balance of being big and being able to invest in systems and data and to provide the best customer service in the market, but still execute small in the market with local knowledge,” Ochoa said. “That’s our challenge.”

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