Redwood Services is an investor in the HVAC contracting space. They currently have 15 business partners.

What makes them a bit different in the mergers and acquisitions field is they are aiming for a true partnership while providing coaching to the HVAC businesses they acquire.

What have they found that makes the most sense for their HVAC businesses? Adding plumbing and electrical.

Question 1: Why is it important to add these other services to an HVAC business?

Hardick: One of the things I'm focused on for our business is trying to make it as resilient as possible, both seasonally and cyclically. We try to make sure our 15 partners are offering all three essential services. So that's electrical, plumbing/sewer, and HVAC.

In regards to plumbing, that business is usually higher margin and is certainly less seasonal. There is a more consistent level of work that will help HVAC contractors in the shoulder season.

One of the things we have found is that the relationship contractors have with the homeowner is incredibly valuable. Any essential service you can provide to the same customer when you are in the home is certainly a positive. Our goal is to be the go-to service provider for any essential service for the home. Owning the relationship with the homeowner is critical. That is the market we are in.

Question 2: Should I acquire a plumbing or electrical company or try to build one from scratch?

Hardick: For us, it has been the most efficient to find somebody who has built their own expertise in their own business and acquiring them via tuck in. We like folding them into a robust management team where the former owner doesn't have to do all the other stuff that goes along with being an entrepreneur, like payroll, accounting, etc.

They can go back to just managing the trade that they know and love. And we can provide all the resources and cross sell to the list of customers. That generally provides a lot of revenue and cost synergies that are helpful to everybody.

Question 3: That sounds like quite an investment. Where should my financials be before I make a purchase?

Hardick: That’s a great question. In general, I think there needs to be a level of management depth specifically for the owner and operator themselves to be able to take on something like this. I would say that it's probably around $10 million in revenue, or maybe a little bit less, is where you should start thinking about something like this.

Question 4: What are the different profit margins for the three areas?

Hardick: Plumbing is generally going to be higher than HVAC. If you are doing it right, it can be 6-7% more profitable than HVAC. And, again, that is consistent work. The average ticket is going to be lower, so you don't have to use financing and you're relying less on sales. And it's going to be less seasonal, in general. Electrical should have similar margins to plumbing but you need to be a little careful about how much of your business is electrical. It’s more discretionary, so there tends to be a bigger drawdown in a recession which can make it hard to manage.

Question 5: Do you market these three trades the same or are they different?

Hardick: As long as you're branding yourself as a full-service home services business and not just an HVAC business, homeowners will realize they can call you for different items. There is a little bit of an investment upfront to make sure you are branded that way, but other than that, there is not much you have to do differently.

Question 6: What about SEO? Does that change at all?

Hardick: As long as the website is set up appropriately and you have all the keywords tagged, then you should be good. You need all the keywords that folks are looking for. It’s definitely something you need to make sure it is set up well, because that's how you're going be driving most of your leads. You will still need to make the appropriate digital marketing investment similar to HVAC.

Question 7: Plumbing and electrical are different businesses. I know HVAC but not the other two. How do I manage these other businesses?

Hardick: As with anything, there's a learning curve, and especially if you don't know the trade specifically. I would highly encourage somebody to find a manager who has that expertise. Ideally, it’s the person who was managing the business before, just to make sure you have somebody with the technical aptitude to lean back on.

Like there is with learning any business, you just need to understand what the KPIs are and how to track them. The customer service side is relatively similar to HVAC. So that's pretty consistent. But on the technical and service offering side, it's going to take time to learn, and you need somebody who has expertise in that.

Question 8: Should I add plumbing or electrical first?

Hardick: We highly encourage plumbing first. As the end game, we are striving to have 55% HVAC, 35% plumbing, and the rest electrical.

Question 9: I am getting crazy high offers for my HVAC business. If I am buying a plumbing business now, does that also mean I am purchasing when the market is inflated?

Hardick: It depends on your market. The businesses we are talking about tend to be relatively smaller. It might be an owner and a couple of trucks. It can be fairly small. I don’t have a real concern for the prices for those types of businesses being inflated; that side of the market is more reasonable. You can generally buy or partner with those types of businesses for somewhere between two and three times their earnings. Which, don't get me wrong, that's always a lot of money. But it's way less than the 8 or 9 plus times that scaled HVAC contractors command.