Do you know what your business is worth right now? Or are you just crossing your fingers and hoping that someday a buyer will appear out of nowhere with an amazing offer?

According to industry experts, it’s all too common for contractors to make the mistake of waiting until they’re desperate to sell before properly assessing their company’s value and working to make it attractive to potential buyers.

“It’s important to know the value of your business and how assets and liabilities impact its bottom-line valuation,” said Fred Silberstein, president of SF&P Advisors, which specializes in serving the HVAC industry. “Most contractors are focused on their day-to-day operations and don’t have a clear view of this very important piece of the puzzle.”

Silberstein said there are currently many buyers interested in the HVAC market. But, he cautioned, there are also many factors that can affect the worth of a contracting business.


First and foremost, it’s vital for contractors to get their financial houses in order, said Silberstein. He encourages contractors to hire a certified public accountant (CPA) who specializes in Generally Accepted Accounting Principles (GAAP) to review their books.

To put it another way, “It’s really important to run your company professionally if you ever dream of being acquired,” said Greg Crumpton, vice president, mission-critical environments, Service Logic, Charlotte, North Carolina.

Crumpton knows a thing or two about HVAC business valuations. He sold his contracting business in November 2014 and is now working for the folks who bought his company. He currently functions in a dual role, still supporting equipment replacement at AirTight FaciliTech while also working at Service Logic. As part of his new responsibilities, Crumpton is scoping out other businesses to potentially acquire.

Crumpton said part of his company’s appeal to Service Logic was the professional way he ran the books. He paid top dollar to be professionally audited, which he said helped make AirTight a very well-run company.

“The CPA would come into our office, close our books monthly, reconcile monthly, have a quarterly review, and audit us yearly,” Crumpton explained.

As he scouts out other businesses for potential acquisition, he said that instead of clean books, he frequently finds a file cabinet full of out-of-date, miscoded records. This can especially lead to problems in the event of a sudden sale, which often occurs when an owner becomes ill and incapable of running the business.

To avoid this, Crumpton said, “Run it clean on the front end. If you do stuff right to begin with, you don’t have to go back and redo it.”


When a business attempts to determine its worth in anticipation of a sale, Silberstein said he always recommends starting with a formal valuation.

“It’s important in my line of work to have sellers that have realistic price expectations, and that’s why I think going through and having a formal valuation is a nice step in the process [because it] sets appropriate expectations,” he said.

After a valuation, he continued, both parties to the sale typically negotiate and sign a nonbinding letter of intent. Then, he said, the due diligence really begins.

“The numbers are very important,” he said. “An accounting firm will really look for quality of earnings and make sure everything that’s been represented is true.”

The most important metric for measuring a company’s value is EBITDA, or Earnings Before Interest, Taxes, Depreciation, and Amortization. According to Silberstein, EBITDA is essentially a way to estimate a company’s cash flow.

When determining a purchase price, Silberstein said, “For the typical contractor, you’re probably looking at a multiple of three to six times EBITDA, which is a pretty wide range.”

He noted that many factors affect the multiple, including the strength of the management team, the market being served, and especially how employees and customers are treated.

According to Silberstein, mergers and acquisitions (M&A) in the HVAC market have heated up in the last five years. Because of the buying activity, Silberstein said, “We’re not seeing an explosion in multiples, but we are seeing multiples creeping up a bit.”

In addition to consolidators like ARS/Rescue Rooter and Service Experts, private equity firms are also acquiring HVAC companies.

“We are in an active buying cycle,” Silberstein said. “What’s been really interesting is we’ve seen private equity take a liking to this space.”

In order to be attractive to a private equity buyer, Silberstein said contractors must be focused on size.

“The one thing that matters most to private equity and the big boys is size,” he said, adding that they are looking for companies with a proven growth record and a plan to achieve more growth.

“If you have a business that’s valued five times EBITDA, to the investor or buyer, if it performs at the same level, that’s a 20 percent return,” Silberstein explained. “I think the reason why the HVAC and plumbing space has become more in vogue is that there’s not too many investments out there that offer 20 percent returns.”

However, he cautioned, “While we’re in an active buying cycle today, I tell clients all the time there’s no guarantee next year, or in three years, there will be the amount of buyers we’re seeing now or paying the multiples we’re seeing now.”


For those seeking more insight into their business valuation, it can be helpful to view it from the perspective of a buyer.

“When you believe it is time to sell your business, you will need to think about what it has of value to the purchaser,” said Richard Biava, vice president and co-owner of GAC Services in Gaithersburg, Maryland. Biava has an extensive background in mergers and acquisitions. Before he and his partners took over at GAC, he worked for a large Fortune 500 energy company.

“At that time, large utilities and consolidators were acquiring heating and cooling companies,” he said. “Looking back, it was a great time for me to learn strategy, marketing, customer service, sales, finance, M&A, and the due-diligence process that comes with it.”

As a result of his experience, Biava has been instrumental in completing four acquisitions so far at GAC Services.

“In any acquisition, you want to understand the financials of the company and get an idea of the people and processes you are investing in,” he said.

Biava cautioned that buyers are looking for value and said some business owners don’t realize what they need to do to make their business valuable to a buyer.

“If you haven’t built the processes, procedures, computer systems, and infrastructure, there isn’t much there to put a dollar value on,” he warned. “If you are the one who sells, installs, services, invoices, and answers the phone, your business isn’t worth what you think it is.”

Biava continued, “I’ve seen guys who have businesses like this and think their business is worth $800,000 because they generate revenue of $800,000 and can make $150,000 a year.”

In these situations, Biava said, the value isn’t there yet for the buyer. He recommended, “If you’re going to sell your business one day, you need to find time to work on the business and develop the infrastructure that will create value.”

Bill Stribling, owner and COO of Sullivan Service Co. in Birmingham, Alabama, has purchased two companies, each time from the second owner, not the founder. Stribling said one of the most important things in the HVAC industry is the number of service agreements a company has.

Stribling comes from a business background and explained he was able to buy both of his companies because the previous owners were better technicians than businessmen. Stribling bought Sullivan Service Co. in 1998 and Gas Engineers in 2001. Both are located in Birmingham, Alabama.

“In terms of buying and selling businesses, it’s a fairly simple equation,” he said. “In its simplest form, all you’re really trying to do is [ensure] the business spins off enough cash to pay for itself in three to five years. Basically, if you take the earnings and multiply it by three or five, you have some sort of valuation of how much companies usually sell for in our industry.”

But, Stribling continued, there are other factors that come into play that can make a company worth much more to a buyer.

“The really good companies — the ones worth a multiple of five — would be companies that have a good background, fairly constant earnings, and, more importantly in our industry, a lot of service agreements, because that’s a commitment to buy,” he said.

Silberstein also noted that private equity buyers are attracted to HVAC companies with a strong service contract base.

“Service contracts allow you to put a fence around your customer. You know they’ll call you when they have a problem,” Silberstein said.

Another important thing to remember, Silberstein said, is how long it can take to successfully buy or sell a business.

“The runway for some of these deals is pretty long,” Silberstein said. “I had a client who completed a transaction two years ago, and the first time I had showed him an offer was eight years previously.”

In the ensuing eight years, Silberstein explained, his client completed two acquisitions and worked to build his company’s profits until he reached the point where he wanted to sell.

“It’s really staying on top of the business and seeing where the growth is,” said Silberstein.


The reality concept boils down to one thing — multiples of earnings and EBITDA,” said Lon Cassel, owner of Cassel Home Comfort in Champaign, Illinois.

EBITDA equates to “earnings before interest, taxes, depreciation, and amortization. The reality is what your business looks like on paper, in financial statements, for a period of three years including the current year, and it’s where most people would look first.

“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. That gives 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 percent 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 was 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 3-5 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.

For more information on determining the value of an HVAC company, visit

Publication date: 9/19/2016

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