Valuing An HVACR Business, Post-Consolidation - Part 1
In late 1996, American Residential Services (ARS) brought to Wall Street the contracting trades, launching what is now known as the “Consolidation Period.” The plan was to acquire enough contractors to build a publicly traded and nationwide contracting business (HVAC, plumbing, electrical, and appliance). With competing forces including Service Experts, Group Maintenance America Corp., and Comfort Systems USA, for the first time in the history of the trades, there existed willing buyers and an established range of business value that would readily be paid to owners.
From the beginning of the Consolidation Period until late 1999, a universal way to calculate the value of a contracting business was in terms of a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). As an example, one might say that an owner was paid four times EBITDA for his business. Assuming that the business was producing $200,000 in EBITDA, the valuation would be $1,000,000 less the debt within the company and an adjustment to compensate for any deficiencies in working capital.