Increase An HVAC Company’s Value with Service Agreements
Training your teams to think about service agreements improves stability of cash flow
Service agreements are the lifeblood of a residential or commercial contracting company. They do far more than simply fill in the slow times with tune-ups. Service agreements dramatically increase the value of your business. Service agreements create recurring revenue which is what most potential buyers are interested in. If you want millions of dollars for your company, you need to find someone who has millions of dollars lying around. Sophisticated buyers do not want your vehicles or equipment. They are millionaires. They can go buy those things without your help. What they are seeking to do is acquire companies that have assets that they cannot easily just go out and buy themselves. What they want is recurring revenue. That’s what service agreements offer you.
Recurring revenue is the portion of your company's revenue that is expected to continue in the future. Unlike one-off sales like service calls and replacements, these revenues are more predictable, relatively stable, and can be counted on to occur at regular intervals going forward with a relatively high degree of certainty.
Service agreements are sold with the promise of a certain level of service for a certain price. Today, service agreements are typically sold with a monthly fee that goes on in perpetuity or until canceled by the buyer. Annual fees and annual renewal notices are becoming a thing of the past. Today, buyers are used to pulling out a credit card, signing up for a monthly service, and forgetting about it.
Service agreements increase your recurring revenue. Buyers will pay more for recurring revenue than they will for one-off revenue.
Marketing and Selling the Service Agreement (SA)
You should advertise a “clean and check” using whatever method has worked for you in the past. Give this service a more appropriate name such as “high-performance tune-up” or “precision tune-up.” Establish a “loss leader” price such as $98.50. After performing the tune-up, the technician will work to convert a single tune-up sale to a service agreement sale that includes three visits. Here is how the service tech might explain it:
“Today’s high-performance tune-up will cost ninety-eight dollars and fifty cents. If you were to invest just two seventy in a service agreement, you would receive three high-performance tune-ups, 15 percent off future repairs, a life-time warranty on repairs, and top priority dispatching. Best of all, I can make today’s high-performance tune-up the first one under your agreement. That will keep you from having to pay the ninety-eight dollars and fifty cents for today’s work.”
Today’s visit will be considered the first visit with two more visits roughly six months apart. The idea is to get your technician back in their home — as close to the expiration date as possible and renew the SA to the standard two-visit type. You should be able to convert 60 percent of your tune-ups into an SA sale.
After performing a demand service call, the technician will offer the client an opportunity to invest in a SA and still get the 15 percent discount. Here is what the tech might say:
“Your total investment for today’s repair is four eighty-nine sixty-two. Do you own one of our High-Performance Service Agreements? You don’t! Okay. I just wanted to see if you qualified for the seventy-three dollars and forty-four cent discount. If you would like to invest just one seventy-eight in a service agreement, I can go ahead and give you the seventy-three dollars and forty-four cent discount as if you already owned one. You will also receive two high-performance tune-ups, a 15 percent discount on any future repairs, a life-time warranty on repairs, and top priority dispatching. Would you like to invest in our High-Performance Service Agreement today?”
Your Choice of Words is Important
When you want to emphasize a dollar amount, spell out the dollar amounts with words and not numbers. Always say “dollars” and include the words “hundred” or “thousand.” Use this strategy when speaking about discounts. If you want to downplay a dollar amount, say the numbers and avoid the words dollars, hundred, or thousand. Also notice when and how I use the word “pay” versus “investment”.
Service Agreements are Great for Everyone
- Service agreements are good for your customers. They can provide energy savings, reduce breakdowns, and offer peace of mind.
- Service agreements are excellent for your employees. They provide a work routine for service departments when business seasonality slows the labor demand.
- Service agreements provide a proven training ground for new or prospective service technicians.
- Service agreements help you to lock in your existing customer base.
- Service agreements allow technicians an opportunity to sell accessories and create equipment replacement leads.
- Service agreements build recurring revenue, making your company more valuable.
Service Agreement Sales Goals
As a rule, techs should be able to convert 25 percent to 50 percent of their demand service calls into an SA sale. If your company does not have dedicated maintenance technicians, you want to have as many service agreements as it takes to fill in your slow time and keep your service technicians busy. You should have approximately 250 SAs per one million of service sales or about 250 SAs per billable service employee. Once you grow beyond those numbers, you can build a dedicated maintenance staff.
If your company does have dedicated maintenance technicians, your goal is 1000 SAs per one million of residential sales (service/maintenance/accessories) with a best-in-class target of 1500.
Suggestions for Implementation
- Owners and managers must be committed to this process.
- Someone must own this project. Assign a champion to oversee every aspect of it.
- Be sure you price everything properly. You need departmentalized income statements and you need to know your breakeven on labor. Don’t use multipliers or rules of thumb. You must get this part right.
- Set goals for SA sales and post the progress on a scoreboard for everyone to see.
- Create an SA culture. Train technicians on selling SAs. Be sure they believe in your SA program.
- Pay spiffs to technicians for selling them and pay your office staff a bonus when monthly SA sales goals are met. I recommend paying techs $15 for each complete system and $5 to be split with the office staff.
One day, your company will either close or transfer ownership. Whether you are selling to an outsider or handing your business over to a family member, a well-designed service agreement program is the best way to assure that you create the most value for you and the next owner of your company.