Exit strategies for privately held HVAC businesses

As an owner of a privately held business, are your strategic goals to increase shareholder value or have a lifestyle company? A lifestyle company means ensuring employment for family members and having a readily available ATM. However, if you’re building long-term wealth, consider that the only strategy may be preparing the company to be sold someday in the future. As Thomas William Deans says in his book, Every Family’s Business, consider making “every decision with the end in mind, with its sale in mind.”

The first step toward that goal may be an annual valuation opinion to assess whether the shareholder value is indeed increasing. Further, most successful businesses will at some point receive unsolicited offers to buy the company. Having a regularly updated valuation will help determine if the offer has any merit. Many shareholder agreements contain buy-sell provisions that are typically tied to third-party determinations of “fair market value.” Lastly, if there is Key Man insurance in place, the company needs to ensure that the amount of insurance is consistent with fluctuations in the value of shareholder equity.

There are various exit strategies available to business owners seeking to turn net worth into cash. Among these are sale to a third party, sale to management or a recapitalization of the company balance sheet. Third-party buyers are typically strategic buyers (competitors, vendors, customers), or financial buyers (Private Equity Groups). While strategic buyers are most likely to pay the highest price, they can do so because of potential synergies — meaning, they will look to cut costs as they don’t need two presidents, two CFOs, etc. So, if a family member working in the business wants continued employment, a financial buyer might be the better route. The financial buyer brings capital and banking contacts to the deal but will typically look to existing management to continue to operate the business.

Over the past several years, there has been an increase in acquisitions of HVAC-related companies. Several factors driving this activity are 1) the repair and maintenance sector is generally recession proof, growing at double the rate of GDP, and 2) this is a highly fragmented industry creating the ideal environment for consolidation. See recent examples of acquisitions of Illinois-based HVAC companies in the chart below.

If legacy is important, a management buyout might be a good option. In this case, the buyer is existing management, which may include other family members. The purchase price is usually paid through a combination of new equity from management, bank debt and seller financing. So, the risk in selling to the management team is that the business continues its growth so that the seller can be repaid from future profits. Finally, a recapitalization can also provide the owner with a partial harvesting of equity. Think of this strategy as similar to a home equity loan. Assuming there is no long-term debt, the owner borrows from a commercial bank and repays the loan from annual cash flow.

Once the decision has been made to sell the business, there are some basic value-enhancing opportunities. If your business is in a cyclical industry, market the business at the beginning of the up cycle, not the peak. A buyer will pay more if there is an expectation of continued growth. Make sure the business has accurate and understandable financial statements. That may require the services of a third-party accounting firm to at least provide compiled statements, preferably reviewed statements. Remove any assets that may be sold at a higher price separately than if included as a company asset, such as real estate. And identify non-operating costs that can be eliminated, such as family members on the payroll who do not provide any value.

In summary, if your business is more than a “lifestyle” business, consider making all decisions with the end in mind: selling the company. Consider outside advisors for your Board of Directors. And finally, arrange for an annual third-party valuation opinion to answer the question, “Am I increasing the value of my business?”

RECENT ILLINOIS-BASED HVAC COMPANY ACQUISITIONS

JAN 2021 | Service Logic acquired Climatemp Service Group

APR 2021 | Wind Point Partners acquired Zone Mechanical

APR 2021 | Orion Company acquired Air Comfort

JUL 2021 | First Capital Partners acquired Jensen Heating and Plumbing

OCT 2021 | MechAir Holdings acquired State Mechanical