Consolidation Craze: Will HVAC History Repeat Itself?

The cyclical nature of things is not relegated just to fashion. In fact, it is currently happening in the HVAC industry. I am talking about consolidation. When I first started on The ACHR NEWS about 15 years ago, I was told a fair share of horror stories about the consolidation craze of the 1990s. Come to think of it, I was rarely told a success story unless it revolved around the previous owner buying their company back for pennies on the dollar and making it flourish again.

In preparation to handing out the Legends of HVACR award at the ACCA conference in a few weeks, I got on the phone with the winners — Lee Rosenberg and Warren Lupson — who had both sold their businesses to consolidators during that trend. Although he stayed in the industry, Lupson was never a contractor again, while Rosenberg eventually bought his business back.

Things are a bit different in 2020. Back in the 1990s, it was publicly traded companies that were buying up and consolidating the HVAC contractors. This time, it is private equity professionals looking at the HVAC industry with big eyes.

“It’s certainly happening. It is just happening in a different manner,” Rosenberg said. “Back in the day of consolidation, it was all about uniformity and branding. Changing the names of the companies was a huge mistake. I get it. These PE firms want to glue companies together, and then they are going to flip it.”

This is not to say history is doomed to repeat itself. From the outside looking in, it makes some sense. There is a sharing of overhead and increased buying power in numbers. All good things.

There are already some success stories — one of which was written about in this publication a few weeks ago. Goettl is a growing HVAC contractor with a very old name. The firm started in Phoenix in 1939 and produced air conditioners for high-temperature clients for decades, until the mandate for high-efficiency units forced Goettl to end production. The contracting side of the business continued under several owners. Ken Goodrich’s father was a Goettl dealer in Las Vegas, so when the opportunity came to buy what was left of the firm in 2013, he took it.

Goodrich partnered with Baum Capital Partners, a PE firm that focuses on the lower middle market, last year to expand his acquisitions. Goettl operates several locations in the West and recently entered the Texas market via a 2019 acquisition. They are having great success.

But as one manufacturer emailed me this week, “Most private equities are not Ken, and they don’t understand the business.”

I actually have received more than a few emails since our story ran, asking if history is doomed to repeat itself.

Obviously, only time will tell. But if contractors are interested in retiring or getting out of the business, there are opportunities in this trend.

“I certainly think it could be an exit strategy. And I think they have probably learned a lot if they have done their homework,” Rosenberg said.

Contractors interested in this avenue would need to do some homework first. Make sure your company is in order and attractive for these folks. This can mean making sure you have a profitable business and making sure you are not the entire business. As always, the number of maintenance agreements you have in place is important. You should have a strong leadership team in place so all the institutional knowledge does not walk out the door when you leave. Think about what the buyer is looking for in a business.

It will certainly be interesting to watch this play out.

See more articles from this issue here!