Private equity buyouts of HVAC companies are on the rise, and the already competitive market is getting even tighter.

With new major players in their backyards, smaller, independent contractors need to be prepared to navigate the coming shifts to their perspective markets.

But while it may seem like an uphill battle, it is a winnable fight.

Why HVAC?

As it relates to the HVAC industry, private equity is basically a conglomerate of investment groups looking to capitalize on fragmented marketplaces, where they can acquire, manage, and restructure a company in order to capture a large percentage of the business that’s occurring in said marketplace.

To do this, private equity focuses on streamlining operations, marketing, and pricing at their newly acquired company, or companies. Depending on the operation, with a proven business structure in place, they can continue to keep buying and bringing in other HVAC businesses under their umbrella, which only increases their share of HVAC operations being done within a certain market.

As for why this is happening in the HVAC industry, there are almost as many reasons as there are private equity firms.

“Well-run residential services businesses have historically been growing and profitable businesses. We built an entire membership, dating back 32 years, to serve this segment and have been fortunate to grow alongside the industry, so I can understand why investors are attracted,” said Julian Scadden, president and CEO of Nexstar Network. “I could see this trend being a standard part of the industry as it relates to being investment-backed.”

Martin Hoover, co-owner of Empire Heating & Air Conditioning in Atlanta, Georgia, and the new chair of ACCA’s board of directors, believes part of the uptick is due to the waves of retirements that are occurring all over the country. A well-funded, interested private equity firm can provide a great exit option for someone looking to sell the small business they’ve built and retire.

“On another thought, it seems like there is a race to see who can develop a full national footprint. I could see that would have lots of benefits from a marketing standpoint, as well as working with other national companies like insurance providers to have a standard platform across the country,” Hoover added.

As for Jason Noel, director of advisement for CEO Warrior, he believes private equity is pouring resources into the HVAC industry because it’s lucrative and offers plenty of growth and value-creation opportunities.

“The combination of stable demand, regulatory pressures, technological advancements, market fragmentation, attractive financial returns, heightened health concerns post-COVID-19, geographic expansion opportunities, and favorable market conditions collectively drive the uptick in private equity acquisitions within the HVAC industry,” Noel said.

So with these well-funded, expertly managed firms finding their way into different markets across the country, how can a small, independent HVAC contractor stay competitive?

Opportunities, Challenges, and Keeping Heads above the Water

Market ecosystems are fragile, complex, and already highly competitive, so when there’s a new big dog in town, things are going to change.

One of the first things that’s going to be impacted is pricing.

“Typically, we see huge price increases when a local company is purchased by a private equity group,” Hoover said. “There are lots of new and different procedures, processes, and pay structures they offer to employees. Some of these are pretty attractive to those employees, and some of them they find very restrictive.”

But, Hoover added, this can present an opportunity for locally-owned companies, as many seasoned technicians in the field are not interested in working in some of these companies.

On the flip side, Hoover said that given these PE companies have streamlined processes in spades, they are scooping up all the new and inexperienced workers, training them, and getting them up to speed in short order.

“This is actually creating somewhat of a shortage for locally-owned companies to find entry-level help,” Hoover said. “While it is nice that we seem to have more experienced people available, we also have to fill our pipeline with entry-level people in order to be able to compete in the future. We are all working on new and interesting ways to interest the young workforce to choose the trades.”

Scadden also sees the potential for a technician vacuum, where a small contractor might start bleeding employees who think they’ve caught sight of greener grass.

“For example, these investors have resources to acquire talent, invest in marketing, and leverage volume purchasing; a smaller business would not be able to invest in the same ways,” Scadden said.

With the influx of increased competition, price pressure, and the need for significant investments to stay competitive, Noel sees a potential silver lining — such as becoming acquisition targets, forming partnerships, and accessing better resources and capital.

“To thrive in this evolving landscape, smaller contractors need to adapt by improving efficiencies, investing in technology and training, and finding niche markets or unique value propositions that set them apart from larger, PE-backed competitors,” Noel said.

Once a PE company gains a foothold, they aren’t likely to go anywhere, meaning their competitors need to adapt to both the PE company’s business strategy and find ways to make themselves more viable.

“Another interesting aspect is that as PEs buy up more locally-owned companies, they continue to run those companies under the same name in many cases,” Hoover said. “In some markets, it's actually possible for a consumer to get three quotes and actually be getting three quotes from the same corporately-owned company. It's a pretty interesting way they go to market, and I can see the benefit of keeping the name to a certain point, but I would assume at some point they'll roll it all together under the big corporate umbrella.”

Rethinking Strategy

It’s not too controversial to say that bigger corporations are going to have certain advantages, like economies of scale as well as the broader operations being able to create a standard onboarding and training experience across all their locations. But it’s not all doom and gloom for the little guys. Hoover said there are still a lot of benefits to being a small, independent contractor.

“For one, we can offer our employees a different set of benefits and, in some cases, much better pay than the corporations are willing to provide,” Hoover said. “We also continue to market ourselves as locally owned and operated — and specifically, not part of the corporate umbrella. We provide very personable service and, in our case, we've been here for decades, so people know us for being that kind of company.”

And there are examples of the underdog flourishing against bigger companies in other industries — take Ace and True Value hardware stores, which have found a way to capture their share of the market while operating in the shadows of companies like Lowe’s and Home Depot.

“Granted, they're no longer selling 2x4s and plywood, but they're selling what consumers want, they're doing it from a smaller footprint, they're able to be profitable, provide a great customer experience, and it doesn't take as long to get in and out,” Hoover said. “I don't think it'll be any different for those of us that want to remain independent companies. We will just have to learn and play to our advantages to provide our customers with what they want. I think there will always be some consumers, and perhaps the majority of consumers, that would rather do business with the locally-owned and -operated company.”

Noel also said small contractors need to focus on their strengths, such as personalized service, local market knowledge, and flexibility.

“By adopting new technologies, improving operational efficiencies, investing in employee development, and leveraging strategic marketing and partnerships, smaller contractors can create a sustainable competitive advantage and thrive despite the challenges posed by larger, PE-backed firms,” Noel said.

With all this in mind, smaller businesses need to get the fact that they are independently run and distinct from the larger corporate structure to the forefront of their marketing efforts.

PE’s Lasting Impact

While private equity buyouts are making an enormous impact on the industry and forcing a lot of change, it remains to be seen what this trend holds for the industry in the long run.

“I don't know if it's so much good or bad as it is inevitable that such a fragmented industry as ours will be consolidated to some extent. It's happened in other industries over and over, and I think it'll continue to happen,” Hoover said. “The sad part is that as you commoditize any industry, you limit the choices that are available to consumers, because it has to be able to fit into a box that fits into the corporate structure.”

Hoover again hammered on the need for these small businesses to humanize themselves to their customers.

“In the home services industry, we're not just selling a box, we're selling a service — and that service includes how you make the customers feel and how well you address their needs. I don't think, from the examples I've seen so far, that the corporations give that issue as much credit as it's due,” Hoover said. “In the ‘90s, we had the consolidators and we all thought the sky was falling. What we learned from that experience, as they failed one after the other, is that it wasn't as easy as they thought it was to get into and thrive in the home services industry. I'm sure this group of private equity will do better than that group did, and it is yet to be told how successful they will be.”

In the end, the only thing that never changes is that everything changes.

“While it has brought pain to some and unexpected windfalls to others, the one thing that is constant is change,” Scadden said. “For the contractors that focus on leading their employees, and serving their communities, while growing through leading business practices, no external factor should be over vilified or glorified.”

Noel said PE is not going away, so contractors need to accept that as a fact and get measures in place to succeed sooner rather than later.

“Owners should always build your business to sell, even if that is not something they are interested in,” Noel said. “This will help owners compete with the larger PE firms in the market.”

Hoover said these circumstances have highlighted the importance for companies to not sure sit on the sidelines while all this is happening, but to get involved and stay informed. The best way to do this, he said, is to join an organization, like ACCA, as there is power in numbers, which is what the little guys need right now.

“Our industry is in a time of transition and legislation will play a major effect in how successful any and all of us can be moving forward,” Hoover said. “We're still going to need best practices, we're still going to need people in Washington looking after our interest, we're still going to need training and we're all going to have to make investments in what the future of home services will be. There is no better place for all of us to be than in an organization like ACCA, where we can pull together to make the industry as a whole better and not think of it as us-versus-them.”