Brandon Jacob
Editor’s Note:This is the first of a two-part series on valuing HVACR contracting businesses after the consolidation movement.

In late 1996, American Residential Services (ARS) brought to Wall Street the contracting trades, launching what is now known as the “Consolidation Period.” The plan was to acquire enough contractors to build a publicly traded and nationwide contracting business (HVAC, plumbing, electrical, and appliance). With competing forces including Service Experts, Group Maintenance America Corp., and Comfort Systems USA, for the first time in the history of the trades, there existed willing buyers and an established range of business value that would readily be paid to owners.

From the beginning of the Consolidation Period until late 1999, a universal way to calculate the value of a contracting business was in terms of a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). As an example, one might say that an owner was paid four times EBITDA for his business. Assuming that the business was producing $200,000 in EBITDA, the valuation would be $1,000,000 less the debt within the company and an adjustment to compensate for any deficiencies in working capital.

Although the financial models utilized by the consolidators involved sophisticated analysis of historical earning streams, because of the extensive amount of completed acquisitions, a common market valuation was set for these businesses. A byproduct of this era was a fairly accurate manner to determine the value of one’s business.

However, pricing businesses in this manner was not an exact science, as the multiples of EBITDA quickly began to adjust downward as the Consolidation Period progressed. Additionally, it is important to mention that many acquisitions completed from 1997 through 1999 consisted of the consolidator’s stock exchanged for the acquired company’s stock. In these situations, risk associated with taking stock from a newly public company justified what now appears to be the overvaluation of some businesses.

End Of The Consolidation Period

By the end of 1998, the likes of ARS, Service Experts, Group Maintenance America Corp., Comfort Systems USA, Building One, Blue Dot, and even several regional players were established and buying at various paces and capacities. Although many contractors continued to estimate the value of their businesses based on the approximate four times to five times EBITDA, the pace of acquisition activity by mid-1999 slowed considerably, resulting in more conservative valuation approaches.

With the sale of ARS to ServiceMaster and Service Experts joining Lennox in the first half of 1999, only Blue Dot remained active in the purchase of residential service contractors on a national basis. Group Maintenance America Corp. and Building One remained active within the mechanical and electrical arena, but in August of 1999 all acquisitions ceased when these two consolidators announced their plan to merge and form Encompass. With the announcement of this marriage, the Consolidation Period was over and so was the reliability of depending on the recent consolidator valuations to determine an estimated value for contracting businesses.

Strategic Acquisitions And New Valuations

At the 2000 Air Conditioning Contractors of America (ACCA) show, where the aisles would formerly be lined with consolidators eager to meet prospective sellers, only ARS/ServiceMaster and Blue Dot had a presence. ServiceMaster, after the initial integration of ARS, was prepared to enter a new acquisition phase known as the “Strategic Acquisition Period.” The Strategic Acquisition Period ran from the end of 1999 until the end of 2001 and is characterized by methodical purchases of businesses at prices and terms less favorable to the seller than during the Consolidation Period.

New Period, New Values

The market had switched from a sellers market to a buyers market. Within the trades, talk continued of “the consolidators” and their multiples of EBITDA valuations. In reality, Blue Dot and ARS/ServiceMaster were the only nationwide buyers for residential service businesses and multiples of earnings were no longer used to value acquisition targets. This period can be characterized by a cautious acquisition pace, attention to specific markets, cash and notes for exchange (no stock), and a valuation process that relied heavily on the projected earnings stream, required fixed asset additions/replacements, and working capital levels.

The ability to sell a contracting business has come full circle in approximately six years. Like all the years prior to the Consolidation Period, a business owner today has few options when selling his business. These options consist of selling to an employee, competitor, or possibly a regional competitor looking to expand into a new market.

Whether or not there will ever be a renewed effort in either a regional or national consolidation play is unknown, but if there is, one can conclude that lessons learned previously will be applied to the current effort. Do not expect business valuation methods to migrate back to multiples of earnings.

Known is the fact that with the limited availability of buyers, the methods of valuing your business, whether it is to sell, for tax purposes (estate planning and gift tax), or other (insurance and divorce), is different than just a few years ago, and many different factors now must be considered.

In the second part of this series, I will discuss some of the factors that should be considered in valuing an HVACR contracting business.

Brandon Jacob has been active in acquiring contracting businesses for over six years. He has prospected, analyzed, valued, and negotiated acquisitions for ARS and ARS/ServiceMaster. Jacob is a CPA, a Service Roundtable Consult & Coach Partner, and currently assists contractors in all aspects of mergers and acquisitions and business valuations projects. He can be reached at 713-426-4041 or

Publication date: 05/19/2003