For many HVAC owners, it’s never too late to sell a business, which is the case in the current sellers’ market. But selling a business is a process. The sale can wrap up quickly or require the original owner to work for the new owners for an extended period.

Often, the timeline becomes a problem when an owner is ready to retire, but realizes that it’s difficult to sell their business without a multi-year transition plan. For an owner whose heart is set on retiring in a year, the requirement of a multi-year transition plan can be disheartening, but is the most likely way to maximize valuation. An extended transition period can happen for smaller businesses or even larger companies where the owner is still heavily involved. These owner’s wind up kicking themselves, wishing they’d sold their business a year or two sooner. That way, they could have built the transition time into their exit and retirement plan.

Transition Time Matters

From a buyer’s perspective, appropriate transition time is critical to ensuring the value of what they have purchased is protected. Owners often have significant influence on customer relationships, employee retention, key sales efforts, and may other aspects of a business. Buyers require substantial amounts of time to fully understand the owner’s role and responsibilities and ensure every area of influence is properly transitioned.

The importance of a necessary transition time needs to be understood within the overall context of the business sale process. A lot goes into selling a business and some of the factors that make a business attractive to buyers are hard to control.

A few of the key factors are:

• Overall revenue
• Profitability (gross and net)
• Headquarters geography (large versus small market)
• Work type: maintenance/service/replacement, design-build projects, or plan and spec projects
• End customer type (general contractor versus owner)
• Management team capabilities
• Owner transition availability

All of these factors impact the marketability of the business, but owner transition availability is the only bullet on the list that is simply a decision on the timing of the business sale. The other factors can take years of hard work to change significantly enough to meaningfully impact valuation and buyers’ interest.

Since the necessary ownership transition time can vary greatly for different owners, the following four different company examples in Table 1 can help illustrate the ideal transition time for each.

Company Example Timeframes

Company A: This business is the gold star example of the four. The owner can plan to walk away within a few weeks to three months of closing. The business has proven that it can run on its own and the profitability, service size, and owner relationships mean the owner will receive several strong offers.

Company B: This project-focused business is potentially difficult to sell for a strong valuation. The size of the company, management team capabilities, and owner relationships do make this an attractive business for some buyers, but it’s not necessarily going to be a fit for many buyers. To make the business more attractive and generate the type of interest that can lead to a higher valuation, this owner needs to plan for a two-to-three-year transition period.

Company C: The small market, owner involvement, and GC customers mean that this business will be difficult to sell. The size and profitability of the business could attract some interest, but the buyer will likely see a need to make some improvements to the work mix and management team. Seeing as those changes can take some time, this owner should plan for three to five years to transition this business to new ownership.

Company D: This is the hardest one to predict, because it really can vary between a six month to a five-year transition. This company’s service focus and profitability make it quite attractive but whoever buys this company is going to need to have local leadership to run the business if the owner wants to leave sooner rather than later. That can be difficult to find in a medium sized market and can be particularly difficult to find multiple options to provide for leverage in price negotiations. Therefore, a conservative recommendation for this owner is to plan for three to five years of transition time.

Plan Conservatively

The timeframes provided in the examples are conservative because building enough transition time into your exit plan has a lot of upside with one manageable downside. The big upside is that the business is more attractive for sale, which means more offers. More offers give owners more negotiating leverage and more choices in terms of the best fit for their employees and customers.

The potential downside is the prospect of working for someone else for three or more years. That can be daunting for some owners and a valid concern. Some HVAC owners have independent personalities and working for someone else could be challenging. When assessing this obstacle, owners need to consider whether working for someone else through a transition period is worth a potential higher valuation for the business. The alternative could easily be waiting too late only to realize that if the business sells, the owner is likely to have limited options and a low valuation.

The moral of the story — don’t wait until it’s too late.