What is the Value of my HVAC Business
Whether your HVAC business has been passed down through your family, or you have only been the owner for a few years, it is important to understand how to value an HVAC business.
Your HVAC business valuation essentially comes down to two components:
Free Cash Flow
Like the name implies, the free cash flow is the money that the business will generate on day one to the buyer. Although the HVAC business worth can be complicated with terms like add-backs, EBITDA, adjusted EBITDA, SDE (Seller’s Discretionary Earnings), the bottom line is that the valuation of a HVAC company is higher if the free cash flow to the buyer is high on day one. Instead of cash flow, some owners have been getting the business to pay for personal expenses and minimizing the tax liability, but free cash flow is the most important piece of the puzzle.
How much is my HVAC business worth?
In order to understand its worth, you need to know the free cash flow. The following owner add-backs should be included in your net income:1. Recurring Items
- Owner’s total compensation
- Compensation of other family members in business
- Medical insurance for owners or family members
- Owner and family members’ car expenses (monthly payment, insurance, gas, etc.)
- Travel, meals and entertainment not 100% business-related
- Clubs (Country or golf, health, hunting/fishing, etc)
- Phone expenses (personal and family members)
2. Non-Recurring Items
REVENUE ITEMS
- PPP or EIDL loans
- Sale of asset
- Loss on insurance claim unreimbursed
- Major repair, improvement or purchase
- Major legal, accounting or consulting expense
- Any other major expense that is recurring
- Major bad debt expenses
Multiples of Cash Flow That Buyer Will Pay
After determining the cash flow, valuation of a HVAC business depends on how much of the cash flow the buyer is going to pay. There are primary and secondary considerations in the HVAC business valuation to determine whether the buyer will pay two times, four times, six times, eight times, etc.
PRIMARY CONSIDERATION
Valuation of a HVAC company shows that the initial range size of adjusted cash flow and the bands work in groupings according to size. As you will quickly see, the higher the cash flow, the higher the multiple.
- Under $500k free cash flow – 2x-4x / Valuation range $500k – $2m
- $500k-$1m free cash flow – 3x-5x / Valuation range $1.5m – $5m
- $1m-$2.5m free cash flow – 4x-6x / Valuation range $4m – $15m
- $2.5-$10m free cash flow – 6x-10x / Valuation range $15m – $100m
- $10m-$25m free cash flow- 10x-20x / Valuation range $100m – $250m
- $25m+ free cash flow – 25x+ / Valuation range $600m+
Another way of thinking of the multiple from the buyer’s perspective is how many years of that cash flow will it take to pay for the purchase price of the business : two times will take two years, four times will take four years, etc.
As you can see, HVAC business worth shows the higher the cash flow, the higher the multiple range. The reason is because larger businesses tend to have more diversified operations, customer base, revenue streams and geographic reach. This diversification contributes stability and reduces the potential risk revenue and profit volatility. As a result, buyers are willing to pay a premium for this reduced risk in terms of a higher multiple. As you grow your business cash flow, it has a significant impact – both components of value get larger: the cash flow and the multiple.
SECONDARY CONSIDERATION
A buyer’s HVAC valuation also includes a number of secondary considerations that will impact the range of sale, from the top to the bottom. Although the name implies they are secondary, they will certainly impact the range.
- Amount of new construction (lower % is better – less than 20% is great)
- Amount of maintenance contracts (higher % is better – more than 20% is great)
- Revenue growth (higher year by year % better – more than 20% is great)
- Marketing reputation management (number of Google reviews and average star rating)
- Lead generation program (consistent and repeatable lead generation flow is better)
- Size of technician crew (more technicians is better – more than 10 is great)
- Internal workflow technology integration (ServiceTitan or HouseCall Pro is great)
- Business independent of owner involvement (lower owner day-to-day involvement is better – owner able to go on vacation for a month and turn phone off is great
So how much is my HVAC business worth?
We multiply the free cash flow by the multiples, and that equals your HVAC valuation. Along with this number, there are several other considerations for how to value an HVAC business. First, the buyer is purchasing all the assets they deem necessary to run the business. This includes trucks, equipment, inventory, desk, computers and most important of all: employees. Secondly, the buyer will purchase the business on a debt free /cash free basis. This means that any outstanding debt is the seller’s responsibility to pay off, and the two parties will agree upon a specified amount of working capital left in the business at closing. Any excess over that agreed upon capital goes to the seller.
Finally, your business HVAC valuation also needs to include transaction expenses, fees, taxes, and other associated costs. A seller usually nets 70-75% of the price.
Why Work With Brentwood Growth
Access to Buyers
Over 400 private equity firms and consolidators that are actively looking to purchase.
Confidentiality
Ensure the sale of your business remains confidential to avoid disruptions for you.
Industry Expertise
More than 20 acquisitions with transactions from $80 million with an average of $4 million.
Valuation
Learn the value of your business and receive support with pricing to the market.
Negotiation
As your mediator, we work with you and the buyers to make sure both parties are satisfied.
Experience
Lead by a team with 75+ years of experience. Our experience ensures a smooth experience.
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