He began his career with the Trane Co. in 1968, and in 1984 he founded his own HVAC company, Automated Air Inc. Over the next 14 years, Cassel acquired seven HVAC companies in five states and managed them at high rates of growth and profitability.

In 1997, Cassel sold three of his companies to Service Experts, the first publicly traded HVAC company founded by Jim Abrams and John Young.

Today, with over 34 years of technical expertise and management know-how, Cassel is the president of Wealth Now Inc., a company devoted to helping HVAC and plumbing contractors value their businesses, acquire other companies, or sell their own companies.

So, what does this acquisition master look for when he sets his sights on acquiring an HVAC/ plumbing company? How does he solve the mystery of placing a value on a business? How much should you sell for? How much should you buy for?

“In my opinion, there are two concepts to think about when valuing an HVAC or plumbing company. One is the reality of the business, where an accountant or a business valuation expert would look first. The other concept is the opportunity, which is where I would look first,” stated Cassel.

THE REALITY

“Most buyers will have their accountant look at the financials, and they’ll value the business based on a multiple of EBITDA after adding in any non-reoccurring expenses, giving you a value based on a multiple of recast earnings,” said Cassel.

It may sound like a complex formula, but let’s take a simpler look at it through the example of “Charlie’s Heating and Air,” a hypothetical business based on a company Cassel actually purchased.

Charlie’s was generating $300,000 a year in residential service and replacement at a 2% profit — a profit of $6,000 before taxes.

That $6,000 represents Charlie’s EBITDA. Next, an accountant would add in the non-reoccurring expenses. For example, if Charlie’s life insurance were paid by the company at $50 a month, you would add the expense back into profit because once you buy the business, you won’t continue paying this expense. So, you’re adding $600 ($50 x 12 months = $600) back into profit, so, on paper, Charlie’s is producing $6,600 a year in profit.

“Once you know that value, accountants will typically multiply that amount 3 to 5 times to determine a value for the business,” said Cassel. “In Charlie’s case, the value of his business would be between $19,000 and $33,000, with the market value of the assets taken into consideration.”

With a value in mind, the hardest part of the process begins — finding a buyer. “Ultimately, the price a buyer is willing to pay for your business boils down to the return on investment, or ROI, they are seeking,” stated Cassel. “Each buyer will have a different requirement for their ROI.”

In the typical business world, buyers buy profits because profits bring returns.

THE OPPORTUNITY

When Lon Cassel analyzes the value of an HVAC/plumbing business, his focus falls on the opportunity he sees in the company. “I’m not that concerned what the profit of the company is. I don’t care what assets they have except what the market value is if I wanted to sell them. The liabilities, like Yellow Pages, leases, etc., may affect my decision as far as the price the client is looking to receive, but what I’m really looking at is one thing — how often the phone rings for residential service,” said Cassel.

“The opportunity is how many calls are coming into that business and what I could do with them. A business running four repair service calls a day and underperforming is where my opportunity arises. It comes down to the value of four service calls a day, or eight, or twelve, and so on,” noted Cassel.

This is the opportunity Cassel saw in Charlie’s company. Charlie’s 2% would not be worth much in reality, and most accountants would determine a value of $18,000 to $30,000.

Cassel saw a greater opportunity. “When I looked at this business, they were running well over four service calls a day. I knew from experience, if I had just four calls a day, I could generate $337,500 in residential replacement and $200,000 in service repair per year with total revenue of $537,500 and no less than $80,000 in net profit (15%), not including the general manager’s salary,” explained Cassel.

Cassel’s opportunity was actually much greater. Twelve months after purchasing the business, it was producing $970,000 a year in revenue with $213,000 in net profit (22%). Fifteen months after purchasing Charlie’s, Cassel sold it to Service Experts for $1,278,000.

“The sad part was that he (Charlie) had worked all of his life and, at 62, had very little to show for it. When he wanted to exit his business, he couldn’t find a buyer for the $132,000 he wanted. I bought his company for $80,000 in assets at market value and $52,000 for what I call the intangible assets, his customer list, company name, and, most importantly, the phone number, which had been the same since 1955. I then turned it into a profit making machine by implementing a simple system,” stated Cassel.

The system Cassel is referring to is the one he learned from Abrams and Young, founders of AirTime 500™ and Plumbers’ Success International™, membership organizations with turnkey success programs for independent HVAC and plumbing business people. This is the system that helped Cassel create $970,000 in revenue with a 22% profit after only 12 months.

“After Charlie saw how well the business was doing, he said he wished he’d known the system. He told me if he had, he’d be a wealthy man today,” said Cassel.

The important thing to bear in mind when placing a value on your business is what your reality value is and what the opportunity value is. With the right system in place, the opportunity value of the service calls could end up far exceeding the reality value of the business. Keep both concepts in mind when valuing your business, but always remember what your business is really worth.

THE HARD PART

Once you’ve put a value on your business that you’re willing to accept, the hard part is finding someone to pay your price. Where do you turn? Cassel explained his list of potential buyers a contractor could look to when selling their business.