Everyone grab that grunge flannel shirt from the back of your closet because the HVAC industry in going back to the 1990s. You remember that time period. Seinfeld was making us laugh on Thursday nights, Pearl Jam was fighting Ticketmaster, and we heard a weird noise from AOL every time we got online.
And, of course, there was a consolidation craze in the HVAC industry. Contractors from around the country were selling their businesses to large, publicly traded companies. Names like Service Experts and Blue Dot should come to mind.
While it may have looked good on paper, it did not work out for numerous reasons. Each case had its own reason. In fact, many contractors ended up buying back their businesses, as the consolidators realized that sometimes the owner is the business.
Fast forward to 2021, and there is a different type of consolidation going on in the HVAC industry. This time, it is coming from private equity (PE) professionals. However, these sharp individuals seem to have learned from the past and are trying not to repeat mistakes. They are investing in companies that have a strong upper management teams in place, and they are hoping to have that team continue to flourish.
It is rare that a week goes by when I do not receive a press release or two from a contractor being purchased.
I bring this up because it is going to affect all HVAC contractors. For contractors that are nearing the finish line, now might be the time to cash in your chips. For contractors that are in the early or mid-years of your career, you are going to need to find a way to combat these bigger contractors.
Let us talk about the old-school contractors first. We recently had Morgan Stanley financial advisor Mike Smith on our NEWSmakers podcast. He was quick to point out that when contractors are thinking about selling, they need to give some real thought to what their retirement life will look like and how much money they need to fund that lifestyle. Are you going to be OK staying local in your retirement and playing with the grandkids, or do you plan to travel the world? That puts your retirement finances in two vastly different positions.
Also, keep in mind that 2021 might be the best time to sell for a few reasons. One reason is what your last year looked like. I have talked with numerous contractors who have had record sales over the past 12 months. This would be the definition of selling high.
In addition, owners might be paying a lot more in capital gains in the near future. The current occupant in the White House has proposed a top federal tax rate of 39.6% on long-term capital gains. Currently, that tax rate sits at 20%. That is a lot of money you are mailing to Uncle Sam if you wait and sell at the wrong time. When thinking about that 39.6%, do not forget that some states have their own capital gains tax. For sure, consult with a professional.
For the younger contractors that are going to be competing against this big boys — play to your strengths. At least that is the advice of Service Roundtable CEO Matt Michel.
“I don’t think a large contracting organization will ever be able to compete effectively with a nimble, local business that is run professionally,” Michel said. “This is still a neighborhood and community business. The contractor can become an integral part of the community in which he operates. That is something a corporation can’t do.”
Of course, the real nightmare scenario would be for the private equity firms to assemble these contracting companies into larger companies that they will eventually flip to a big box store or maybe an internet retailer who could not assemble it themselves but can certainly buy it from someone else. Then there would be a new competitive threat that would have a built-in advantage.
But that story is probably for another day. For now, HVAC contractors should decide if/when they should sell and/or how they should compete.
