In this episode, I interview Patrick Lange, a professional business broker who specializes in selling HVAC companies. We discuss common mistakes HVAC owners make when trying to sell, the value of having maintenance agreements in place, tactics to increase the value of your HVAC company, and more!
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- What are the current market conditions for selling an HVAC company?
- Why are HVAC businesses selling?
- How is building a business to save taxes and building a business to sell, different?
- What are the characteristics of an attractive HVAC business that could sell?
- How can maintenance agreements increase the value of your HVAC business?
- What are the top three things an HVAC owner can immediately do to maximize the value of their business?
Tom: Well hey Patrick I am excited to have you on the business exit success podcast today um I I going through some of your stuff we have a couple of things in common and uh a lot of that goes to educating business owners on how they can best position themselves for a successful sale so I'm looking forward to your Insight and knowledge today and excited to have this conversation.
Patrick: Absolutely thank you so much for having me on I'm excited to be here
Tom: Awesome so yeah so let's first just start learning more about what you do your background and um you know how you fit into this selling business process.
Patrick: Yeah absolutely so I am a business broker I have been a business broker for probably 15 years or so I'd guess 14 years something like that. I used to sell everything bars restaurants gas stations flower shops you name it I kind of sold it. Eight years ago I bought one of my listings which was a heating and air company ran it for two years. I realized I I didn't want to be in business again and with employees and customers and everything and I missed the brokerage world, so um went to sell that business and I realized there wasn't a lot of information out there specifically for heating and air and smaller business companies. So I decided to change my practice focus on heating and air. I'm based in the State of Florida so initially, it was just Florida companies. About six years ago I guess I made the transition of my business to just selling heating and air and plumbing uh primarily heating and air. Since that time I've sold 120 of them around the country so I help people who are typically looking to retire and move on to the next phase of their life and sell what's oftentimes your largest asset.
Tom: Awesome so you were in the trenches doing the transactions actually helping these owners sell their businesses.
Patrick: Yeah absolutely yeah all day every day so I do about 20 a year and from start to finish we value the business take it to Market looking for buyers and then handle the transaction until the Final close.
Tom: Awesome that's funny so like from my role because again when we're selling businesses I don't do the transactions that's obviously your side. I'm trying to help these owners get financially prepared so they can sell but then hopefully you know not run out of money in retirement and a lot of that comes into making sure their business can sell for an “X” dollars amount to help fund that. So definitely some key roles there. What is the current state of the market you know I remember hearing earlier this year you know HVAC companies and heating and air were getting scooped up by these bigger players. Is that still the case? What's the current trend as of late?
What are the current market conditions for selling an HVAC company?
Patrick: Yeah there's still a lot of private equity interest. You know the market has been strong really the last three years and so they started only buying large companies. They bought all of them up and had to move down the market and so even smaller companies are getting bought up by private Equity. I think we're seeing a little bit of a slowdown obviously interest rates are extremely high and become expensive. So I think we'll get some pushback as a result of that but you know here we are in October and I've already sold 17 this year and I've got four or five more under contract. Hopefully close before the end of the year so the numbers are staying where they have been for me. The last few years anyway.
Tom: When you say that this they're scooping up these smaller ones. What size businesses are these just to give us an idea?
Patrick: I think the smallest I've sold to private Equity was probably a million dollars. $900,000 in sales. So in the heating and air space, it's a decent-sized company but you know when they first started entering the space, it was $10 million or above in sales. Now for them to be down to a million dollars in sales is quite a drop.
Tom: You know we hear of Private Equity or there are Financial buyers which maybe you can just touch on the difference between those two for folks listening, but who are the buyers right now that you're seeing come in and scoop up these businesses?
Patrick: So a little bit of everything so we have some private Equity Funds so it's actually a private Equity Group that's actively buying and managing these businesses. What I classify as Financial buyers so it may be somebody who was in the trades owned a heating and air company and they've they've brought in outside money to help them acquire other companies. So instead of going to a bank for a loan, they're going to an investment type of firm. Whether it's private equity or family office or somebody they know and getting Capital to go out and buy these other companies. Then we see a lot of other moms and Pops buying other moms and Pops so people who want to expand. You know the biggest problem facing the industry and so many of them right now is lack of qualified labor. So finding somebody to do the work. Most people do not have a problem getting the phone to ring. It's when the phone rings who's going to do it. So we see other companies that are struggling to attract or retain talent as buying other companies that have the talent already there.
Tom: That's not just your industry that's finding good talent you know retaining them as well is definitely one of the biggest challenges I see all all over the place.
Patrick: Yeah absolutely and unfortunately the trades are not immune to it.
Why are HVAC businesses selling?
Tom: Absolutely and that comes into like when we talk about the timing of when to sell. You know usually when you're rocking and rolling, you're busy and revenues going up. Like no one's like I want to keep this going I don't want to sell right now. Actually, that's the best time to talk to someone like you to at least explore what could we get for this. So when people come to you to sell what are some of the reasons they're coming to sell? What are those triggering events that are saying, hey I need to call Patrick?
Patrick: Yeah quite often it's it's an age factor. You know they're reaching retirement age many of the people who I sell businesses for still love the business and love the industry. But their body can't take it or their husbands or wives are saying, hey it's time for you to slow down. Or their family's doing it. yeah also you know the the lack of Labor is pushing a lot you know they've been kind of beating their heads against the wall. You brought up a good point just prior to that though oftentimes they wait too long. So the right time to sell is when things are operating at peak efficiency. Unfortunately, too many people come to me and when I'm looking at their numbers they're doing a million or $2 million dollars in sales and they tell me they used to do four million. They're still expecting to get paid for what they used to do in the past. They've lost some employees they've lost some customers or they lost some drive. They've slowed down and and don't want to work as hard and so as a result their businesses declined and now they're coming to me expecting to get what was worth previously. That's not going to happen so I do podcasts like this. I do speaking opportunities. We write articles I've got videos on YouTube. I do all that to educate them on that process because to me once you start your business you should start you know putting a metric in place of what is it worth. Just like you do obviously with your clients in their financial plan. You know you're tracking that progress and knowing where you are. Most people don't know what their business is worth. They really don't know who to ask and so so we try to give as much information as we can to anybody that says here's where you are today if your plan is to make it to x amount of dollars or x amount of years or whatever that is here's what you need to do to get there just like you're doing from the financial perspective. And I think you know both of them are super important and I tell people you know the mathematics of the sale is the easy part. Once you have done the financial planning part you know what the check needs to say to walk away. It either makes mathematical sense or it doesn't. It's everything else and so I really work on everything else. Well you know someone like you is doing the financing part of it. How much do you need to make it to and through retirement right not just get to retirement but be able to make it all the way through? So and obviously you do a great job in doing that. My job is saying okay now that we know where the target is here's what we need to do to get there from a business perspective.
Tom: Yeah and it's almost like you don't want to go into that arena blind. Like you want to go in and know like, Hey listen I did the numbers I want my lifestyle to look like X we need to get at least here. If better great. But if less it's not going to work. And that probably helps you to be like okay great now we have a goal to shoot for let's find people that can fit that criteria to make it happen.
Patrick: Absolutely so when a seller comes all the time I'll say what does the check need to say for you to walk away. I always ask that and so many times they say I don't know. Well if it's your largest asset and if done right you only get to do it one time. You can't take back, you know I just sold my business, you can't two years later say, wow I didn't realize I needed more money to live on. And you can't change your mind. And you're giving away the Golden Goose or selling the Golden Goose at that point so knowing what that number needs to be from someone like you is so helpful for my side of the business because then we know where it needs to be and then it's a clear answer. Here's what the check needs to say. The business is not there as of now or the business is. So now you're working because you want to as opposed to having to.
How are building a business to save taxes and building a business to sell, different?
Tom: Another layer on top of that is there seems to be some light bulb that goes off when they're like hey we can sell for two million. But that's not the check that you're going to get when you sell for two million. There's more that comes and I just did an episode on this. There are taxes. There are fees. There are all these other layers that when you peel back the onion, oh you sold for two but you may get 1.2. You may get 1.5. So again just to what Patrick is saying the planning in advance, knowing your number, but then I'm sure you can help them too with hey here's the net that you're going to actually get in your pocket that we need that check to say. So that's some really really good Insight.
Patrick: Yeah absolutely and so what has to be paid off. You know is there debt that has to be paid off with the business? Really one of the biggest things that people don't realize is what the business pays for. So many of my clients haven't bought a personal vehicle in 30 years. You know they haven't had the business, they haven't had Insurance. Haven't paid for a cell phone. Haven't bought gas. Haven't you known these little things that don't sound like much but you put a pencil to it and it becomes real money? So looking at those things through the process obviously that you do with them, it helps identify those things so then when you say yes to accept the offer, you can do it with confidence that the check's going to be big enough. You're 100% right net net because there are going to have to be paid out of there and making sure you understand that before you cash that check is important.
What are the characteristics of an attractive HVAC business that could sell?
Tom: Yeah 100%. So what are some of the characteristics of heating a company they come to you, they want to sell? And you know you're probably sitting at their kitchen table or in a meeting in your office. What are some of the characteristics that you want to see in a business that's like I can sell this thing?
Patrick: Yeah great question. Really it's not just Heating and Air companies, I think of all the businesses I've sold over the years, and it's all the same. One is clean books and records. So building a business to save taxes and building a business to sell, are two different businesses. You know our whole lives are being self-employed. It's always about minimizing taxes and minimizing taxes and many people people treat their business checking account like it's their personal bank account. So they bleed the business and then when it's time to sell they're not showing any profits, but they're (wink wink) we're making a lot of money. Well, a buyer is not going to pay you for what they can't prove. So make sure that you have clean books and records that easily show the profit. That's once again, not heating and air companies that's anything. The second thing is minimizing yourself in the business. If you're the best salesman, the best technician, the best person who answers the phone, the best accountant, the best in the business, and your name on every review on Google, chances are a buyer is going to be scared when they buy it. Because they know when you walk out the door, everybody's leaving with you. So separating yourself from the business and making the business its own identity as opposed to just you is the other thing. Building a business once again heating and air company or not that's built on recurring revenue. If you're constantly having to look for new clients and spending money on marketing. You have a marketing business, not a heating and air, plumbing, or electrical business. Whatever trade you happen to be in. So identifying those things and building a business that's built on relationships, developing relationships with your customers that generate repeat and referral business, obviously the cheapest client acquisition is going to be referrals. So anything you can do to boost that up is going to be beneficial and then really the fourth thing for heating is staying away from kind of flashes in the pan. So in heating and air companies and other trades, a lot of that's going to be new like new construction. Doing new construction work could make or break you. In a great year, you can make a lot of money and if the economy drops you could be out of business. So buyers when looking at businesses that have a one-off type of income, they don't like that. They like slow consistent overtime revenue so do those four things no matter what industry you're in and when you get to me or somebody like me they're going to be able to achieve your goals from a sale price.
Tom: That's great and I want to back up to something you mentioned where you know we all as business owners, again one of the perks of being a business owner is you can you have so many ways to reduce your taxes. And by all means do it. But if you're coming to the point in your life where it's like I think I want to maybe sell this thing or explore getting out. You at least need I would say three to four years maybe that's too long, of showing profit. Three years is ideal.
Patrick: Three years most buyers are going to ask for three years of financials. But here's the flip side of that. If the goal is to sell someday. We don't know when that day is going to be. You know some of my clients come to me because of health issues. Some of them came to me because of the divorce. Well if you've been bleeding this company dry and minimizing taxes and minimizing taxes and now you find out you've got an illness. Let's use that as a horrible example. You have an illness and you need to sell. Put yourself in a buyer's shoes so if I came to you and said Tom I've got this great business for you. We're asking a million dollars and you look at a tax return. It shows that it's lost money in the last three years. How much are you willing to pay me for it? Probably not much. So if you put yourself in a buyer's shoes that helps eliminate a lot of the things that you're probably doing wrong today.
Tom: Yeah that's such a good point and I think there is a statistic by the exit planning institute that 50% of business exits are forced. They're not like hey I'm ready to go. 50% are forced because of life events like you mentioned an illness, disability, a disagreement, a distressed environment like covid happening that usually forces you to be like I can't do this anymore. And what I see oftentimes is like a contingency plan or a succession plan, there is no plan. There's nothing in place that can back that up. So again planning ahead, and talking to someone like you in advance is definitely a good thing to secure your legacy and you know your personal financial future.
Patrick: Absolutely yeah I agree completely. I haven't seen the study recently but IBBA the International Business Broker Association had published some information previously that 80% of businesses listed for sale never sell. Yeah so there's only a 20% success rate and a lot of that in my opinion is because of poor numbers. I think poor marketing and poor other things but I think there are other things that go into that. But numbers are the first thing people are going to look at and that's an atrocious ratio to me. I mean to think 80% failure rate at something is just horrible. But we sell a lot of businesses where people have a lot of good numbers and a lot of clean books. And all the things we've already talked about yeah and they've got a plan in place of when they hit that point here's where it's going to be. If it happens sooner great. If it happens a little later, great. But at least it happens.
How can maintenance agreements increase the value of your HVAC business?
Tom: Yeah and one of the biggest things that we talk about are these value drivers you mentioned financials and operations. You know getting the owner out of the truck, so having good people and technicians on your team, so you're not the one that's doing everything. Recurring Revenue that's a really attractive value driver. Especially for buyers and I think that may segue into for these companies the maintenance agreements. Which is a pretty hot topic I think. I think I heard someone say to you on another podcast or something that they're not important. Where it's like they're super important. They can make up the majority of the revenue of a business that tends to sell. So can you just speak about maintenance agreements and their role in making a business attractive?
Patrick: Yeah and so we'll use heating and air companies specifically obviously because that's what what I do, so maintenance agreements are incredible. One they don't necessarily generate a lot of revenue. When you charge most maintenance agreements are $200 a year and it's two visits to the client's home. Where it's beneficial is one, the client's paying for their own loyalty. So if I'm paying you $200 a year to look after my system, if my system stops working, well who am I calling first calling. The guy I'm paying 200 bucks a year for. So automatically they're paying for their own loyalty. The second part it helps during shoulder season. So typically you do maintenance in the spring and fall time you know before summer so you can check the system before they ramp up for the summer and then in the fall before winter before they need to run their heaters. So it gives you an opportunity to keep your guys busy when it's typically slower. Like I'm in North Florida and today I think it's supposed to be in the 70s well a 70° day I used to love owning a heating and air company because if it's 70 degrees nothing's running and nothing's breaking right. The windows are open and it's a good day. So having the opportunity to keep your guys busy. It also helps you educate younger guys so they can go through systems and check things a lot more often. Taking time for things that may not be broken yet helps them identify things and helps them get better. Then it finally, it helps deepen the relationship with the customer. If you're in the customer's home two times a year. There's an opportunity to talk about indoor air quality and other things that if it's just a demand call, you know it's 4th of July at 8 o'clock at night, you're not talking about indoor air quality. You're fixing the air conditioner and running to the next call. And so that gives you an opportunity to help deepen that relationship. Identify what the customer needs really are in their home. Is the equipment that they have met those needs or should you give them some options for other things? It allows us to deepen that relationship, take time, build trust, and explore other opportunities. A lot of companies are adding multi-trades to their business. Now they're doing heating and air and they're adding Plumbing or electrical or vice versa so they can talk about the water heater, talk about other things that they may be able to take a look at. So maintenance agreements are incredible opportunities. It helps you deliver better service to the customer and it helps you do a better job for your business and retain talent. So when you look at companies that have big maintenance programs where a large percentage of their customers run a maintenance agreement, you'll see 80 to 90% of their revenues coming from those maintenance customers. So they're minimizing marketing expenses. You know they've got a built-in database that's taking care of them.
Tom: And it gets you as you mentioned more at-bats to be in front of a customer and when issues happen they know who to call and it just gives you more opportunity to get new revenue for the business.
Patrick: Absolutely. Deeper share of wallet because you're in the home more often. The relationship's better and when it's you know if you're in that customer's home two or three times a year and you do that for three or four years when it's time to replace the equipment, who are they going to call? Well they going to call the person that they've had 10 visits with that they've talked about that knows their dog's name
What are the top three things an HVAC owner can immediately do to maximize the value of their business?
Tom: Well as we come to the end, what are again I try to keep these episodes where we're giving some good actionable tips for folks, what would you say are like the top three things in HVAC or Heating and Air companies or again any company that could really apply to but we'll stick with HVAC because that's your expertise. What are the three things they should be looking at if they're considering selling that you know so when they're not sitting across from you, you're like this isn't sellable. What are the top three to prioritize that someone can work on?
Patrick: So know your numbers. Know where you are. Many people don't. They don't know what their sales are. They don't know what their business is worth. They don't know any of that stuff. And so finding out their numbers, what they need, what their business is worth, and what they need to do to change that, if it's not where it needs to be, I think would be the first thing. The second thing you know we've discussed about is clean books and records. Stop having the business pay for everything and you know minimizing taxes numbers, if you're looking at selling, the numbers are way in your favor on paying taxes than selling the business for a higher multiple.
Tom: And when minimizing real quick I didn't mean to cut you off sometimes that's investing in a qualified CPA to clean up your books. And maybe delegate some of it you know because I'm sure a lot of us get QuickBooks, we do it on our own, and you know your business. but if you want clean numbers that are accurate and being reviewed, putting some money back into your business and hiring someone qualified could maybe be a good idea, no?
Patrick: Absolutely, you know I don't work on my own air conditioners. I can't fix air conditioners. I'm not gonna do my own taxes. You know I mean at the end of the day, I'm not gonna do my own taxes and so that's not my lane. I need to focus on what I'm focusing on and I agree completely. It's getting the right people on your team. Because when you go to sell and they start going through the due diligence process and if you're building a bigger company and it's a private Equity Group showing up with 15 CPAs to pick through your books, many people look like a deer in headlights. You know they don't even know what they're talking about or what's going on. If they can say here call my accountant, they'll take care of the process for you. That makes things so much easier and less stressful for you.
Tom: Absolutely yeah and that's such a good point you want to almost do because there's a due diligence process when someone's interested in you, they're going to open the hood to your business and look in everything, so do that if you can like a mock trial of that in advance. If you have issues, you can take care of them before then because you only get one chance to sell your business. Very unlikely that you get to to sell two businesses. Unless you're really a a true entrepreneur at heart and want to do it, have the time and energy, and money to do it. But yeah, the sooner you get through hey here's what my books look like, here's what we got to clean, that due diligence would probably be a good idea.
Patrick: Absolutely yeah definitely and having those people on the team as you'd suggested would be extremely important to make that happen.
Tom: Yeah, wow fantastic Patrick good super 30-minute session here on some tips what are some ways that people can find you, connect with you, learn more about you, list whatever you like?
Patrick: Yeah absolutely, I appreciate that my company is business modification group so my website is businessmodificationgroup.com. I'm extremely active on LinkedIn and Facebook. Feel free to connect with me on either of those. I've got a YouTube channel. I probably have 60 or 70 videos that talk about buying and selling and heating and air companies specifically. But like the podcast today it can be applied to any business so looking at that as well and reaching out to me directly all my contact information is everywhere. If you have a question even if I'm not the guy to help you, I can try to point you in the right direction, so don't hesitate to reach out. I'm happy to help anyway.
Tom: Awesome thank you, Patrick. Appreciate your time man. Really good stuff.
Patrick: Thank you for having me. I had a great time and hope you have a fantastic day.
Tom: Thanks, you too.