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1. Money is in Play

No one know more about the contracting acquisition game than Brandon Jacob of Contractors Financial Opportunity, LLC. According to Brandon, “Private equity, individual investor, strategic buyers, growing contractors, as well as former owners of businesses are all active in searching for service contracting businesses to acquire.”

Service contracting has been recognized by the money guys as a smart play. Sure, our industry may not be as sexy as some, but it offers stability that looks very attractive. After all, we may not be recession-proof, but we are recession-resistant. And HVAC was an essential business that never shut down during COVID-19. Contracting businesses offer solid returns that private equity managers believe can be improved with economies of scale, more professional management, and so on.

“Today’s acquisition activity does not appear to be a quick ‘here today and gone tomorrow’ trend,” Jacob said. “Investors have found that our industry is profitable, recession-proof, and has done well during the pandemic. It is likely there will be continued activity within the foreseeable future.”

2. Interest Is Not Limited to the Big Boys

A year or two ago, it would have been a challenge to get private equity to consider contractors smaller than the $7 million to $8 million range. No longer. They are looking at everything, and there is a fair number of them.

“What makes today’s activity dynamic is that service contracting businesses of all sizes are able to attract one or more buyers, where as just a few years ago, all of the activity focused around larger businesses,” Jacob said.

3. Contracting Will Not Get Easier

The average life of a unitary air conditioner or heat pump is around 15 years (maybe a little less for heat pumps). Well, 15 years ago, the industry saw its peak year in history, with 8.6 million unitary air conditioning and heat pump shipments, according to AHRI. All of those are due for replacement this year, or possibly next year due to the impact of COVID. While this promises a strong replacement market now, what about afterwards?

From 2005 to 2009, industry shipments dropped 40 percent. That means you should be prepared for four years of a dramatically shrinking replacement market before things turn around. It will be harder to get business between now and 2024, not easier.

Click chart to enlarge

LIFE CYCLE: A/C and heat pump shipments peaked 15 years ago, then declined. That means a strong replacement market now but a shrinking market to come.

While we have seen a reduction in business regulation in the age of Trump, what about afterwards? The default position of regulators is to find things and ways to regulate — whether or not it’s necessary. Expect a regulator rebound next year, or four years later.

Also, the supply of labor is not exactly growing. Yes, you can find people if you work at it, and right now is a particularly good time to recruit due to some contractors and businesses retrenching. And yes, you can always grow your own labor force. That said, the labor shortage is not going away.

As the world has evolved, so has contracting. You should be prepared to embrace new technology like connected home products, new diagnostic equipment, new software, and new business practices. You cannot survive the next decade as a 1990-type contractor.

How To Sell

Just about every business owner in the country gets multiple calls per year, inquiring about selling the business. By and large, selling your business should not be a DIY practice. Sure, you can do it, but you will probably leave money on the table — maybe a lot of it. You will also waste a lot of time figuring out who is a legitimate, serious buyer.

“Within today’s environment, there are more options for a service contractor to sell his business, but that does not mean that completing the process of finding the right buyer and managing through a successful transaction is easy,” said Brandon. “Business owners may be contacted by several prospective buyers but should consider professional help in weeding out those potential time wasters from those willing and capable of actually completing a transaction. A professional can also help in maximizing the value, not only in setting seller’s expectations with a proper valuation but negotiating a deal as well.”

Brandon is offering wise counsel. However, before you even begin to think about selling, you need to prepare the business. Get your processes documented and in place. Focus on growing your EBITDA because buyers pay on multiples of EBITDA, not revenue. Even though every buyer is going to want you to stick around for as long as possible, they do not want to buy a business that can only operate with you at the helm. Make sure your business can operate without you.

Frankly, the preparation is beyond the scope of most people who are selling a business for the first time. If you use an experienced consultant or join a best practices business alliance, you will certainly shorten the time needed, make fewer mistakes, and maximize the return. Few contractors sell a business more than once in their lifetimes. This is something you want to get right the first time.

“Service contracting businesses are valued on the ability to generate earnings,” Jacob noted. “If you have completed a valuation of your business but feel you have a few years to improve your bottom-line, consider joining the Service Nation Alliance to help boost your profits and business value.”