The HVAC industry, and in particular the replacement sector, is attractive to private equity investors because of its exposure to a large base of installed equipment that requires regular service and, ultimately, replacement. The critical nature of HVAC equipment for ensuring comfort means that customers tend to place the most emphasis on service responsiveness and equipment quality, in addition to price and other considerations.
When looking for investment opportunities, private equity firms gravitate toward companies with proven management teams and healthy profit margins.
In addition, each investment made by a private equity firm must have an actionable plan that drives the company’s strategy going forward and to which all executives and shareholders subscribe. One example would be a residential HVAC contractor expanding into new markets through acquisitions and then growing its market share with superior customer acquisition tactics.
BENEFITS OF PRIVATE EQUITY INVESTMENTS
Full or partial sale? A private equity firm can give owners an opportunity to either sell their company entirely or reduce their ownership position while continuing to run it. By seeking some amount of liquidity in the context of a private equity investment, owners can diversify their personal net worth and increase their comfort with bold expansion moves.
A more valuable business. An influx of private equity capital can enable your company to complete attractive acquisitions, reinvest in the organization, or enter new lines of business.
An energized management team. If a company is sold to a competitor, management may be vulnerable to downsizing. By contrast, a private equity firm creates advancement opportunities for experienced managers and will implement attractive performance incentives to reward success.
Strategic advice. Private equity professionals can provide support to busy management teams on a variety of projects.
Improved debt financing terms. Private equity firms often obtain better debt financing terms than entrepreneurs alone (e.g., equity cure rights, flexible covenants, removing personal guarantees).
Having a private equity firm as a shareholder is like a business “marriage.” There are some key factors to consider before selecting a partner.
Buyout or partnership? Are you willing to sell a controlling interest in your company? Will the private equity firm consider being a minority shareholder? If so, how many deals have they done in which they don’t have control?
Industry knowledge. Is the private equity firm knowledgeable about the HVAC industry? Do they have relevant knowledge, experience, and a track record of working with other companies in your industry?
Valuation and deal terms. Is the proposed valuation of the company fair? Are the other material deal terms appropriate?
Size of deal and access to capital. Relative to the size of the private equity firm, what is the size of your deal? Is the investment going to be material to the equity firm? Does the firm have immediate access to sufficient equity capital to fund the investment and follow-on financings (if required) or will it need to go and fundraise once it strikes a deal with your company?
Personal relationship. Who at the private equity firm will you, your management team, and remaining shareholders be working with during the life of the partnership? Do you feel comfortable with them? Have you completed appropriate reference checks on them and the firm’s past business partnerships?
Though this may not be the best option for all HVAC companies out there, it is a viable one, and one that deserves at least a little consideration.
Publication date: 2/11/2019