How to build value

March 27, 2000
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ALBUQUERQUE, NM — No one has to tell hvac contractors that their competition is getting tougher and stronger. With increased competition from consolidators, utilities, and manufacturers, it is important to keep a service business in lean, mean shape.

That was the point of a recent seminar given by Jay Tiedeberg at the ACCA Annual Conference 2000 in Albuquerque. Tiedeberg is a divisional manager for Thomas Pierce and Co., where he works in the commercial-industrial division specializing in succession planning and business transfers in the hvac, plumbing, and electrical industries.

Tiedeberg opened his seminar by talking about the many changes in the hvac trade today, including mergers and acquisitions. He warmed up the audience to the points he was trying to make:

  • Competition for customers is going to get tougher.
  • Price-sensitive customers are the first to go to the Wal-Marts of hvacr.
  • Others will follow.
  • And national accounts will be shut out.

“There is a lot of consolidation going on and a lot of turf wars,” he added, referring to the Wall Street consolidators, utility companies, and manufacturers who are acquiring formerly independent contractors.

Tiedeberg noted some of the recent transactions in the hvacr trade, such as Lennox’s purchase of Service Experts and many of their own independent dealers, Service-Master’s purchase of ARS, the Building One and GroupMac merger, etc.

He listed some of the reasons why consolidators are so active:

  • The urge to make money by offering more purchasing power, better insurance rates, and economies of scale;
  • Manufacturers trying to protect their market share; and
  • Utilities looking for “sticky” customers.

Tiedeberg said all of the activity in the hvacr trade will make it tougher for contractors to find and keep competent technicians because many will be looking for stable career paths that the larger, national companies have been offering.

He added that many of the “blue ribbon” contractors are being purchased, satisfying the “appetites” of the consolidators who may decide to make fewer acquisitions in the future and at lower purchase prices.

Time to sell?

What does all of this mean to the average independent contractor? It means that the pressures to remain competitive are stronger than ever, and the time to consider selling could be right around the corner.

If owners are considering the sale of their businesses because of the factors mentioned in this article, Tiedeberg said there are several things to consider before putting out the “For Sale” sign, including conflicting goals between buyers and sellers.

These goals are highlighted by:

  • Buyers who do not want to pay any more than absolutely necessary and sellers who want as much as for the business as possible, sometimes more than it’s worth; and
  • Buyers who report to stockholders, looking for profits, and sellers who want to minimize taxes and show as little profit as possible.

Knowing some of the ways acquisition companies determine the purchase price is also very important to business owners, according to Tiedeberg. Some of these factors are:

  • Sales volume;
  • Mix of business;
  • Age and condition of fleet;
  • Reputation;
  • Quantity and experience of technicians;
  • Condition of facilities and equipment;
  • Initial working capital needs;
  • Adding up all capital requirements;
  • Adding the cost of acquisition to get the total capital required; and
  • Looking at the adjusted net cash flow and calculating a return on investment.
  • Tiedeberg said that buyers will look more closely at a business if the owners have taken the time to build value into it. Building value has a direct relationship to a higher purchase price. However, if the owner talks about “potential” for business, he may not get the price he’d like.

    What builds value?

    He said that buyers will pay more for a company is there if a strategic plan in place, if there is a budget and monitoring in place, and if the buyers can pay for the business plan.

    Here is a list of the vital areas that must be explored when preparing to sell a business, according to Tiedeberg:

    • Gross margin;
    • Revenues and invoices listed by department;
    • Contribution to overhead and the net profit;
    • Revenue per technician; and
    • Tax planning.

    In conclusion, Tiedeberg said, “The hvacr activity is hot. Set personal and corporate goals, create and implement a strategic plan, check and see if it’s working, and if it’s not, get help before it’s too late.”

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