When owners take one of the many calls they get from business brokers and M&A advisors, the conversation often turns to valuation multiples in the current market. While valuation is important, owners often aren't aware of the type of sale that will most likely be successful for them. Today’s market presents a wide variety of opportunities to consider from thousands of potential buyers. Generally speaking, these opportunities can be broken down into five different types of transactions.
1. Private equity platform: Private equity (PE) firms prefer to make an initial investment in their HVAC growth and consolidation strategy by purchasing a large “platform” company. The platform business acts as the nucleus of the investment. The PE firm will acquire other similar HVAC businesses to expand the platform's reach geographically. Best practices and organic growth strategies from the platform are then applied to the newly acquired businesses. To qualify as a potential platform company, an HVAC company should generally have the following characteristics.
$30M or more in revenue
10% or greater EBITDA margins
Strong recurring revenue base from maintenance and service work
A strong management team that wants to stay on
Quality operational systems
An owner willing to retain 30% to 40% of the equity
The PE team brings the experience and capital to execute acquisitions which can lead to high growth. As a part of a consolidation strategy, the PE firm will ideally make between 10 and 30 add-on or tuck-in acquisitions (more to come on those) over a three to seven year period before exiting their investment. A typical exit is a sale to another PE firm.
2. Geographic expansion or add-on acquisition: Large HVAC companies will often look to enter a new geography by purchasing a company. In the world of consolidation, these are referred to as "add-on" acquisitions. When a PE consolidator, a public company, or a private HVAC buyer is entering a new market via acquisition, they typically target companies with $20M or more in revenue although some will look at businesses closer to $10M. The size range is largely influenced by business mix and profitability. A highly profitable service company with $8M to $9M may be seen as suitable to establish a presence in a new market whereas a $12M project oriented company wouldn't necessarily be seen as a fit.
3. Tuck-in acquisition: In this type of sale, a larger HVAC company with an office nearby will absorb the sellers operation into theirs. This is the most common opportunity for HVAC companies under around $7M in revenue. HVAC companies of this size are often acquired by a company that already has an established footprint in the local geography. Larger companies seek out these types of acquisitions as it's difficult to grow quickly acquiring employees and customers one by one. Post-acquisition the larger company will typically integrate the smaller company into their existing offices, processes, and brand name.
4. Entrepreneurship by Acquisition: As recent MBA graduates and corporate executives look to shift from corporate America to entrepreneurship, they often look to buy a small to medium sized business that they can run as the CEO. The broad category sometimes applied to this type of acquirer is "search fund." Within this designation there are three specific types.
Successful entrepreneurs/executives with their own capital (who have often recently exited a business)
Funded searchers who have raised money from investors to fund their search in exchange for the option to invest in the acquired business
Independent sponsor searchers who, after finding a business to acquire and having the owner sign a letter of intent to sell, then raise the acquisition capital from pre-screened investors
This type of acquisition comes with a CEO to run the business which can be ideal for owners who are eager to retire and turn the reigns over to someone else.
5. Non-platform private equity sale: Simply because your business doesn't meet the criteria listed as a fit as a PE platform company (see #1) that doesn't mean PE firms aren't still potentially a good acquirer for you. In fact there are approximately 4,500 PE firms in North America and many of those firms focus on a specific niche. Examples of some PE niches include:
Long-term hold investors
Underperforming or distressed companies
Acquisitions of the business by the management team
Transition to an ESOP
Family succession
So which of the five types of acquirers is right for your business?
A focused buyer search by a knowledgeable advisor can help answer that question. An owner may prefer to have an advisor conduct a broad search across multiple types of buyers or simply focus on one specific type. A good advisor can help an owner understand which type of acquirer is mostly like to meet the owners exit goals. The number of acquirers in the market presents many opportunities and finding the right buyer in a disciplined and organized fashion is a must.