What an HVAC Business Looks Like at Different Valuation Multiples

Financial analyst and investor Benjamin Graham said, “The worth of a business is measured not by what has been put into it, but by what can be taken out of it.” When it’s time to evaluate how much your HVAC business is worth, many people ask me how to determine its valuation multiple. What exactly changes at each valuation level for an HVAC business?

The most significant aspects that change at different valuation multiples for an HVAC business are owner dependency, staff size, and potential for growth. Lower owner dependency, combined with more staff and significant growth potential, generally equates to higher valuation multiples.

The owner of an HVAC business must know how their business should grow to achieve better valuation multiples. This is important for selling the company or attracting investor attention, but it is also a good health indicator for your business. Let’s dive deeper into the different valuation multiples and what your business will look like at each level.

An HVAC Business at the 2.5x Multiple

An HVAC business valued at the 2.5x multiple is typically a smaller, more owner-dependent business.   

The Team

The owner is heavily involved in daily operations. They might be scheduling jobs, managing customer relationships, and even doing some (or most) of the fieldwork. Because the business is still so small, its income stream is modest, usually below $1 million annually.

The team is also usually small. In many cases, these businesses consist of only the owner and a few technicians, and perhaps someone (usually a spouse or other family member) to take care of some of the admin like sending invoices, allocating payments, and answering the phones.

Example

I’ve seen many 2.5-multiple businesses in the market. They are typical local HVAC businesses that gross $500,000 per year, with only about three employees in the team: the owner — who manages all scheduling, admin, and customer inquiries — and two technicians, often apprentices, to help with installations and essential maintenance. 

The owner calls the shots and is the only one the staff answers to. There’s no management structure, though one of the technicians might take on a limited leadership role in some cases.

Potential Buyers

When these businesses are sold, they usually go to larger, established companies looking to expand into a new market with minimal upfront investment. Such companies might value the business because of its small but loyal customer base and steady revenue. They are less interested in instant scalability and more concerned with acquiring a working business with a steady customer base.

The marketability of these businesses is somewhat limited and they may sit on the market for a long time – it really depends on if there are other companies looking to acquire into a market.    

3.5x Multiple: Growing, But Still Owner-Centric

The next step-up is the 3.5x multiple. At this level, the business generates more revenue, usually between $1 million and $2 million annually.   At this level there should be some documented systems and processes that drive the core function of the business.  

The Team

There are more staff members, sometimes consisting of two field teams (one led by the owner, the other by an experienced technician). There’s also a need for a more permanent office assistant to handle the administrative tasks.

However, the owner is still involved in most of the critical decisions, customer relationships, pricing, and strategic planning. There has been some growth, and the owner usually feels quite accomplished and successful, with good reason. But the business still isn’t scalable without significant input from the owner.

Example

A typical example would be an older HVAC business with an annual turnover of $1.5 million. It has five employees, including the owner. The team can manage much of the fieldwork without the owner, giving him some flexibility, and there’s usually an office assistant who can take care of the phone calls. However, the owner still makes all financial and business decisions.

Potential Buyers

Potential buyers may be interested in this business because it is already on a steady growth path. Still, they will have to invest time and money in process development and staff training to help the business achieve its full potential. The purpose of these investments is to make the company less dependent on its owner.

4x Multiple: Scalable Mid-Sized Business

This business is more mature than the previous two, generating between $2 million and $3 million in annual revenue. It has begun to scale, and a clearly defined organizational structure and management are in place.

The Team

The owner is usually less involved in the day-to-day operations, leaving those tasks to an office manager and operations manager. All processes and procedures are well-documented, so there’s little to no dependence on any single person — when someone takes a day off, the business continues to function because other team members can pick up the slack.

Example

An HVAC business with an annual turnover of $2.5 million is a good example. The team consists of 10 people, which includes a full-time general manager (often the owner), an office manager, and a lead technician who manages all fieldwork. In other words, the owner is free to focus on high-level business decisions.

Potential Buyers

Potential buyers include larger firms or investors drawn to the business’s scalability and reliable cash flow. They will expect transparent financials, plenty of growth potential, and a good, solid reputation in the local market. Their focus will be continued growth through system improvements and possible expansion into new markets.

5x Multiple: Established, Owner-Independent Business

Seen by many as the Holy Grail of valuation multiples, the 5x multiple is definitely one to aim for. At this point, an HVAC business will be well-established and typically generate at least $5 million annually. 

The Team

At this point, the business will have more than 20 employees, which includes field teams and a full complement of management and administrative staff. 

The managers have generally been in their roles for several years and are compensated at market rates. Combined with refined systems for every operational aspect of the business, they ensure that the business owner can step back — the company can continue to run smoothly without direct owner involvement.

Example

A good example would be an HVAC business with 25 staff members, consisting of the owner, 3 managers, an office assistant, and four teams of technicians handling installations and maintenance. It has been in business for over a decade and has a good track record in the industry.

Potential Buyers

This is a highly scalable business with strong internal systems, a diversified customer base, and sustainable growth. Potential buyers and investors will be interested because the company will continue growing without a long transition period and provide a decent revenue stream, even though the initial capital investment will likely be quite significant.

On that note;

So, those are the differences between the different valuation multiples for an HVAC business, but it doesn’t necessarily make one multiple better than the other. Aim for a higher multiple by reducing your involvement if you want to sell the company or draw investors. But if you love what you do and want to be involved, I advise growing the business to a point you’re comfortable with.

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