If you spend time browsing the internet, you are likely to see a lot of interesting things. As it turns out, the most impactful technology of our time revealed our society’s obsession with cat videos, colossal fail clips, trick shots, and a slew of other bizarre things. Now if you manage to browse the internet with a specific interest in mind, it can actually be quite educational.
For an HVAC owner considering a business sale, you can learn a lot by surfing the web. As you educate yourself, one thing you may see is HVAC businesses being sold at a specific price on some business brokers web sites. What you won’t see online are businesses being auctioned. The auction process is typically managed confidentially by an M&A Advisor or investment bank. That naturally raises the question:
Should you confidentially sell your business with a set sale price or use an auction process?
The answer is relatively simple. If you believe that there is going to be a lot of interest from buyers, then an auction process, rather than a set sale price, is going to help you determine just how much buyers are willing to pay for your business. If you believe selling your business will likely only have a small pool of interested buyers, then setting a price is a good way to make the sale process more straightforward and therefore increase the chances of success. Now we naturally come to a second question:
How does an HVAC owner know if there are going to be a lot of potential buyers?
The answer to this question is not as simple. A lot goes into determining how marketable a business is so let’s break down the key factors.
A) Size: Businesses with over $1M in adjusted Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) are typically going to garner a lot of interest from buyers while businesses around $200K or less may have limited interest. “Adjusted” is an important part of the equation as it refers to earnings (or EBITDA) that have removed owner personal expenses, extraordinary expenses, and other non-recurring expenses to determine the true potential profitability. So, what about businesses in the $200K to $1M adjusted EBITDA range? Keep reading as the other factors play highly into the marketability of these businesses.
B) Services: The recurring nature of Maintenance/Repair/Replacement work is attractive to buyers so a 100% service business is ideal. Companies with a lot of construction revenue should expect buyers to scrutinize the size of projects, types of customers, and margins to determine how risky the construction revenue is. A 100% plan and spec construction business with low margins that primarily focuses on multi-family housing is not going to be attractive to buyers.
C) Geographic Market: Large metropolitan markets and growing mid-size cities will attract a lot of interest from buyers. If your business is in a small town or flat/negative growth city, then interest will be lower.
D) Ownership/Management Transition: Who is going to run the business post-closing? This question will need to be answered for the business to be marketable. An owner that is willing to work for a year or two helps answer this question, and a capable management team is also a good answer. An owner that wants to leave soon without a successor in place is counting on the buyer to have someone who can run the business and that will shrink the buyer pool.
E) Customer Relationships: A business that maintains relationships directly with many different customers is an attractive acquisition. A business that often acts as a subcontractor to general contractors or home builders is going to be scrutinized more closely. Additionally, businesses that have 30% to 40% or more of their revenue from one or two large customers will also be considered riskier and less attractive.
F) Margins: Gross margins in the 30% to 40% range or better and adjusted EBITDA margins in the mid to high teens or better are going to attract a lot of buyers. Gross margins in the 15% to 30% range and single digit adjusted EBITDA margins are going to have less interest.
Weighing all these factors, along with other factors that may be unique to your business, should help you determine whether a set sale price or an auction process is the right option for you. And now that you’re done with your educational blog of the day, you can go back to watching cat videos. (Haha!)