When it comes to mergers and acquisitions of small-to-middle market HVAC businesses, several items factor into the deal-making process. However, one key consideration should be at the forefront of a business owner’s mind – timing. According to the Harvard Business Review, 70% of M&A deals fail for various reasons, but timing can play the major factor in the success of your potential deal. It could also result in getting the highest valuation for your HVAC business.
Is this the right time to sell your HVAC business? The answer at the moment is yes, primarily due to favorable market conditions and increasing competition from private equity firms for strong HVAC businesses. Here is what you should be considering when it comes to timing.
- Retirement Planning: Retirement planning can play a major role in determining the timing of a potential transaction. Most business owners have a significant portion of their personal wealth tied up in their business. Selling your business unlocks that value and allows owners access to liquidity. Working with a financial advisor to determine the amount of money you need for retirement will allow you to evaluate when market conditions are best to deliver the needed exit transaction outcome to meet your financial goals. If you know what number you need, it makes evaluating offers to purchase your business much easier.
- Market Conditions: Deal activity in HVAC is on the rise, driven predominantly by increased investment from private equity. In 2011, only approximately 20 M&A transactions were completed. Fast forward to 2019, and there are more than 120 being done each year, according to Pitchbook. The HVAC industry is very fragmented and has more than 75,000 companies in the U.S. alone, which means there are plenty of other businesses available for additional consolidation. This large supply of prospective acquisition targets has driven investor demand, with investors competing aggressively for good HVAC companies to acquire. Owners considering an exit should take advantage of strong demand conditions in timing their potential exit. An experienced M&A advisor can give you insight into these investment trends and help you evaluate market demand so that you can time your exit when demand is high.
- Stage of the Business: Most HVAC businesses are smaller businesses, but they have the potential to grow and scale into larger businesses with additional capital. This is why so many private equity investors are interested in the space – they can bring capital and experience in growing businesses to help these entities become much larger enterprises. Their intention is to consolidate smaller businesses into one larger entity, and then sell the larger company to another financial investor in the future, giving HVAC business owners an opportunity to receive additional sale proceeds in that second transaction. This is known as the “Second Bite of the Apple” and can be quite lucrative – owners earn well for the initial sale of their business, but then earn even more on the second transaction in the future. If you are not quite ready for retirement yet but are considering a transaction in the next 5-10 years, a transaction with private equity could be the best fit for you. You can achieve financial security today but also earn on the rapid growth of the business in the future.
Timing is everything and the time for HVAC M&A is now. Competition for strong assets is high and the next cycle may not come for another decade. Multiples are strong and the highest they’ll be until the next cycle. It’s a seller’s market, so you are more likely to get agreeable terms that meet your needs. You can be proactive versus reactive and design the outcome you want versus reacting to a future triggering event. Lastly, your direct competitors are receiving funding from investors at a rapid pace. Per Pitchbook, 819 HVAC companies have received over $10B in M&A investment. You’ll now have to compete with the deep pockets of their partners to retain your market share. Taking advantage of the right timing can result in a very profitable and smooth transaction.