As a large segment of HVAC industry veterans begin to reach retirement age, those who own their own businesses will likely be looking to cash out in the coming years. Coupled with the fact that private equity (PE) buyouts are on the rise, there’s no better time than the present for a contractor to ready their company for the big sale.

Speaking at the 2024 AHR expo, Patrick Lange, business intermediary at Business Modification Group, said the key is to get someone who knows the business-buying game in your corner; otherwise, it’s likely to end in heartbreak.

Throughout his career specializing in the sale and acquisition of heating and air companies, Lange said he’s had far too many conversations at kitchen tables where he had to break the news to a prospective seller that their company just wasn’t worth anything.

“Ask the questions now so you know what it's worth, or what you need to do to build its worth, so we're not having that conversation when you're 65-70 years old,” Lange said. “It'll rip your heart out telling somebody they spent 30 years of their life building something that has zero value. It’s horrible and I have to do it all the time — I probably have five of those conversations a month.”

Lange suggests beginning by working backward, asking first what a contractor needs out of their business to support their family and retirement goals, and going from there. While a lot of numbers and valuations are going to be thrown around, at the end of the day, the only one that matters is the one that hits the bank account once the sale closes.

While the highly complex process of selling a business can’t be broken down into bite-sized pieces, Lange said there are four things to focus on when building sellable value for a business.

A Business Built on Service and Repair

According to Lange, there are a few things that buyers are seemingly always attracted to: consistency in income, deep relationships with customers, sales of indoor air quality and other services (plumbing, electrical, etc.), long-tenured employees, and especially, maintenance agreements.

While they may like maintenance agreements, Lange said buyers view warranties as an unwanted liability.

“Look at it from a buyer's perspective — here's the thing, I've never met with a seller that says we do horrible insulations,” Lange said. “Every person I meet with, they do the best installations in the world, they never have any warranty work. Well, that buyer is going to assume that all the warranties are going to need to be paid, and they're not going to take on an unlimited liability without needing money in the bank.”

Get Out of the Van

Take Bob as an example — Bob’s name is on the business, he’s in the commercials, people mention him by name in all the positive reviews, he’s a great guy that everybody loves and trusts. But for a buyer, if Bob is selling his business with the hopes of retiring, Bob has just become a huge liability.

“If everything about it is all about Bob, that's going to hurt you when it comes time to sell because that buyer's going to be nervous that when Bob leaves, everyone is going to panic,” Lange said. “Getting yourself out of the van is so important in building systems and building people — so that you can be out of the business for an extended period of time. If not, you don’t have a business, you have a high-paying job.”

In short, the bigger the separation between an owner and the business, the bigger the payout will be. But, if the owner is playing a pivotal role by supervising other managers, that is an attractive facet for buyers.

It’s Not Your Personal Bank Account

If the goal is to someday cash out, that means someone is going to be going through a business’ books with a fine-toothed comb, so it’s wise to cease any “creative accounting.”

“Here’s the sad news — you can’t get paid twice to steal,” Lange said. “If you're stealing from the federal government, which is what you're doing being creative in your accounting, you can't expect somebody to write you a check. It's not going to happen. And by doing that, you're eliminating half the buyer pool, because the bank's not going to finance it.”

If a business owner is willing to risk jail time by cheating on taxes, buyers likely won’t view them as trustworthy, and Lange said they are going to want at least three years of financials — and for bigger deals, likely five.

“At the end of the day, pay taxes. That's what I'm saying. It's so much easier,” Lange said.

Stay Away from New Construction

Lange said he typically gets blowback when he offers up this point, but it’s a common enough issue that he always does it anyway.

Ask anyone in the business and they’ve probably had a bad experience with a general contractor (GC) at some point. Even if a GC is loyal to a certain contractor, that doesn’t necessarily transfer to the buyer, and they are well aware of that.

Lange said from his experience, most lenders will not finance a transaction if a business is more than 20% new construction.

“Can you make money doing new construction? Absolutely. There's a lot of people who do it, but I can tell you, I have met with many, many, many, many, many people that in 2005 had 80 people working for them but by 2009 had five because they didn't get paid by the contractor,” Lange said.

A crew used to doing new construction also might not be able to pivot to the service side, which is what buyers are looking for. Things like retainers and service agreements also add an undesirable complexity to the situation that buyers are likely to just walk away from.

Get Someone In Your Corner

While a seasoned contractor may know every detail of your business and industry, Lange said most are woefully unprepared to go toe-to-toe with a serious buyer.

“The reality is for most of my clients, it's the biggest sale of their life and they've never sold a business — they don't know what they're doing. And they're going into a gunfight with a pocket knife with professional buyers,” Lange said. “These are Harvard CPAs, guys with more initials after their name than I have in my name.”

Going it alone and trying to make an argument about worth based on an article they’ve read or a video they watched will also probably fall flat.

“So, my advice, whether it's me or one of the other people in the industry, or if you've got an accountant or attorney who has sold a lot of heating and air companies, get somebody in your corner,” Lange said. “If it's the biggest sale of your life and you're walking into it blind, by yourself, it's not a good position to be in.”

Your Legacy

Entering into a purchase agreement is a lot like entering into a new marriage — you really need to be comfortable and confident in your new partner.

“At the end of the day, I think you need to feel comfortable with whoever you're selling it, right? It's your legacy that you're handing off,” Lange said. “Most of my clients still live in the same town, go to the same church, go to the same grocery store.”

Lange said no one wants to be known as the guy who sold everything off and left customers and employees twisting in the wind. No matter who a contractor ultimately decide to go with, it should only be after taking adequate time in making a final decision.