Everything You Need to Know About Selling Your HVAC Company

You’ve worked hard all your life and now see the light at the end of the tunnel: selling your HVAC business and immediately booking a trip to a Caribbean resort. You want to start retirement off with a bang, but what if something you haven’t even thought of throws a wrench into all of your plans?

This week’s Cracking The Code features acquisitions expert Patrick Lange, who’s brokered the sale of over 120 HVAC companies, to give clarity around what buyers are looking for and what businesses are actually worth. He gives you the facts on what can increase the value of your HVAC company so you can start planning for when it comes time to sell.

Audio Transcription (in Beta)

On today’s show and folks, this is one. You’re not going to want to miss. You’re going to learn everything you’ve ever wanted to know, but we’re afraid to ask about selling your residential HVAC company.

We have here today, Mr. Patrick Lange, the man behind the curtain that everybody wants to talk to because you got the information, you got the goods. Uh, thank you so much, Patrick, for coming out to Colorado all the way from North Florida. We appreciate it to leave all that beautiful weather to come up here in this snow storm.

But man, am I excited to talk to you as a contractor. And I know we’ve got hundreds and thousands of others out there that they just want to know what’s going on. And over the last six years, you sold 120 heating and air conditioning companies that officially makes you an expert, my friend, welcome to Colorado Springs.

Thank you so much for having me. It’s a pleasure to be here. I really appreciate it. I think to get started, you probably know more about what we need to know than we even know what questions to ask. So when we talk about the acquisition business that you’re obviously very involved in, what’s going on out there right now?

What’s the, what’s the environment out there with the economy and different things? And you hear all kinds of rumors about this and that, like what’s the real skinny on what’s going on out there? You know, it’s a, it’s a great question. And obviously if you’re on social media or anywhere in the space. You hear about interest rates and what it’s doing to the acquisitions.

And the reality is I haven’t seen it slow down. I mean, I typically sell 20 companies a year. And for 2023, we did 22 companies. So the market has been strong for companies that are positioned to sell. And I think that’s what comes down to it. It’s building a business. That a buyer wants. Yeah. You know, uh, and I, uh, and my speaking, the consulting side of my business, the work I do with EGIA, we talk to a lot of, you know, private equity guys and things.

Do you hear these things about, listen, if you’re not doing 20 million a year, nobody wants to talk to you. What’s the real deal? What’s the real opportunity or possibility for a guy? Maybe that’s, you know, you know, 2 million to 10 million, somewhere in that range. What’s the real opportunity there. It’s a huge opportunity.

That’s, that’s the reality. And I hear a lot of people say that, that if you’re not doing 20 million, nobody wants it. And the reality is. The bulk of the companies I sell are two, two to 8 million in sales. So there’s a market for it, a company that’s positioned right. That’s certainly marketed right and run right.

But, uh, it all comes down to those three things. So you really are an expert, not just in the business in general, but especially at specializing. In these smaller companies, which is the vast majority of the industry. So I think that’s great for our viewers that there’s hope if someone’s building a company and they are building it to sell it to retire that, you know, if it’s not a 20 million behemoth with a 20 percent EBITDA, they still have an opportunity.

What are some of the things. When you go in to look at a company and you’re evaluating it for, you know, a possible sale, what are the key things you’re looking for when you’re talking to the owner, both operationally and financially? Yeah, absolutely. So, so there’s, there are a few key things. Number one is what’s the owner involvement.

If you’re the best salesman, if you’re the best bookkeeper, if you’re the best technician, if you’re on every single Google review, you need to minimize yourself from the business. Buyers don’t want to buy jobs. Nobody wants to work that hard. And so having people in place, especially in this market, as you know, it’s extremely hard right now to find qualified talent in many parts of the country.

And so that’s a battle that’s taking place everywhere. But putting key people in position is the first thing. Second thing is clean books and records. So if it’s a If it’s a challenge to try to find out what you’re actually making in your business, a buyer’s going to come in and it’s going to look at that as a challenge as well.

And then they’re going to question, are the numbers really real? And so having clarity on your numbers is the other thing, business mix. One of the things I preach a lot of times when I’m speaking is staying away from new construction. And I get a lot of people angry when I do that. Because there’s a lot of people who make money at new construction and with all the construction taking place around the country, somebody has to be putting in the air conditioners.

But what I’m talking about is from a buyer’s perspective, buyers want service repair and replacement business. And if a large focus of it is new construction, they’re very nervous. So. Those three things are really kind of the, the first things that we talk about. We look at when looking at a business. You know, one of the things here at EGA contract university that I talk a lot about, uh, Gary Alex, who is Yoda, as far as I’m concerned, on the financial side of this industry, Drew Cameron does the same thing.

One of the things that we strongly encourage you to do. And by the way, I’ve had about half a dozen of my own companies. And the first thing I do is set up a clean set of books. With our accounting people, right from, from day one. And so we preach about departmentalization, proper, uh, overhead allocation, these types of things.

So you can really see not just what your business is doing, but what your departments are doing individually, uh, on a scale of one to 10, having a, a departmentalized, uh, income statement that’s accurate, timely, and relevant. How important is that to a buyer? Extremely close to that, you know, 10 being the most important being that 10 because so many people obviously as a business owner, I’ve been self employed my entire adult life.

They’re running a business to minimize taxes and running a business to show a profit is two different businesses. And as business owners, we were often taught by our accountants and other people do everything you can to minimize taxes. Well, if I’m coming to buy your business. I want to know how much money I’m going to make.

And if I can’t look at a departmentally analyzed set of books, if I can’t look at what’s really going in and what’s going out, I can’t have confidence in the money I’m going to give you for that business. Right. Right. Over the last 20 years, I’ve built my career on designing and implementing. Sales systems from a buyer’s perspective, how important is that type of system, a sales process with a skill set of, uh, salespeople, not necessarily just, you know, service techs may be dropping off a bit, or as you mentioned, the owner being the sales guy, how important is to build a sales team and have an organized sales process for revenue?

Well, it’s obviously, as you know, if you have that, your revenue is going to be higher. And so they’re buying the business based on revenue and profitability. It’s extremely important, but it’s also one of the thing, things that these private equity and larger buyers are seeing is they’re looking at a business that doesn’t have it.

And they know what they can turn that into by bringing in a sales system. So it hurts the seller because they’re not able to get as much money as they could, but it’s an incredible opportunity from the buyer’s perspective. So it sounds like, uh, like all systems, the sales system, the financial systems, the operational systems are critically important to have.

Now we all know that people are concerned about inflation. Interest rates are really high right now. Uh, what do you see moving out 12, 24, 36 months? You, Do you see there’s going to be continued opportunities for profitable, well run companies to be able to find buyers? Absolutely. I think, uh, I joke when I bought my own heating and air company, somebody had told me we’re based in Florida.

He doesn’t know a husband dumb enough in the state of Florida to tell his wife, he’s not going to fix the air conditioner. And I think that’s, that’s around the country, whether it’s winter, summer, whatever the case may be. And so I think a well run profitable company is always going to have a market.

Yeah. It makes me think of a story I tell sometimes. So when I, First got in this business in 2003 as a comfort advisor, 2004 opened my first company, grew that very quickly, did a couple of acquisitions and sold it in 2010. And I told my wife, I said, if I ever think even joke about getting back on the contracting side, I want you to shoot me, right?

Well, here I am all these years later back into it. What I forgot is to tell. My new wife, that was my ex wife. I told that I forgot to tell the new, new wife. So when I brought it up four years ago, uh, she said, that sounds like a great idea. And of course we were doing it with her family. So she really, really liked that.

But we’ve grown that company, uh, to 10 million last year or fourth year with the express purpose of getting it ready to sell. So I’m loving this conversation. Of course, you know, we follow the advice of guys like you and Gary Alex and smart guys that know about this stuff. And you gotta have the management team.

You gotta have the systems. You gotta have that set of books, uh, that you’re talking about. So that should be exciting for everybody. That’s building a company that has a desire to sell, that there’s still going to be opportunities down the road. Do you see, um, and I don’t want to get into the specific multiples cause I’m sure there’s a million variables that affect that, but do you see it changing much as opposed to maybe two or three years ago, or is it pretty much about the same?

I think at the upper end of the market, we’ve seen it slow down a little bit. Um, I think buyers have slown down, um, you know, it was kind of a mad frenzy buying up all these companies and we’ve seen at the upper end, but realistically in companies doing 2 million to 6 million in sales, I’ve seen the multiple remain the same and I think it would continue moving forward.

Okay. So let’s talk about, uh, that’s all the exciting stuff. Uh, and, uh, I’m sure there are times where you got to, uh, come in and in fact, we were talking about a video on YouTube that you have, uh, having to tell somebody their baby is ugly, which really is just being saddled with the burden, uh, the bearer of bad news that a company just isn’t worth what folks think it’s, it should be or might be, or hopefully would be.

What are some of the glaring mistakes that people are making that are going to cost them when it comes time to sell if they decide to do so? You know, there’s a lot of them, but some of the key things I see is one, taking your foot off the gas. You know, as we start to age, may not work as hard, may not put as much into it, may slow down on the marketing, may slow down on hiring, putting, I come to a lot of people who are nearing the end of their trajectory and they don’t want to hire new people and buy new trucks and spend more money on marketing.

Well that value of that business is declining Yeah, and a buyer’s going to pay you for what the business is doing now what it did five years ago So that’s probably the biggest thing I see when I look at a business And as they’re doing that declining they’re doing more of it on their own So instead of hiring somebody now, they’re the number one tech now They’re the number one salesman and so they become the face of the company which they may not 20 years in a previous conversation you and I were having you had made that point very Um, uh, very accurately, I thought that because it is getting so hard to find good people, we know that we’re stretched thin on the labor market and finding good help.

And like you say, a guy gets a little bit older, he’s tired of dealing with these kids. And in my day, we did it like this. And next thing you know, revenue goes from five million, starts going down. He’s probably making more money because he got rid of all those people. But he has to realize that they’re not going to buy what you were doing three or four years ago.

So it sounds like your advice would be, if you’re thinking about cashing out, retiring, you’re going to have to put up with the younger people and you’re going to have to train people and develop them. Keep spending the money on marketing, keep that management team in place. You may be a little less profitable, right?

By having the managers. But at the end of the day, you’re not going to be able to sell a company that doesn’t have a management team in place. A hundred percent accurate. And I see that all the time. That’s probably the biggest conversation I have when I tell people their business is not worth what they think it is.

They say, well, I’m more profitable. Well, yeah, you’re more profitable because you’re doing everything. The minute you come out of the business, you don’t have a company. You have a high paying job. And I’m not saying there’s anything wrong with that. If you want to be a lone man and a helper in a truck, and that’s what you want to do and make a bunch of money, I’m all for that.

But understand you’re not going to get the value when it’s time to sell. So don’t think that you could minimize expenses, minimize people, cut every single corner and be as profitable as you can be, and somebody’s willing to pay you for that. Because they’re not, they’re going to put somebody else in that truck to do that, to do your work.

And that profitability is going to go down drastically. And I know you deal with a lot of different buyers, a lot of different sellers, a lot of different private equity groups and different things. Talk to us about, uh, the different types of things they’re looking for. Like I know some will come in and they want the management team there and they, they’re not leaving.

They got to sign on for a year or two or three or whatever. Others might be like, I don’t care if you want to go, we’ve got a management team. We can come in. What are the different types of, uh, management structures and situations buyers are looking for? So just like there’s a, uh, a myriad of buyers out there, there’s all sorts of options for people.

I have some people that come to me and say, listen, I’m not staying. So when we go to market looking for a buyer, we tell buyers they’re not going to stay. Does that eliminate buyers? Absolutely. It does because there’s certain buyers out there that there needs to be a management system in place or management people or the owners willing to stick around.

So, but the beauty is the market is strong enough. Is, you can dictate, as long as you’ve built this strong company, you can dictate how your exit’s gonna be. Yep, yep. So, um, if, and I kind of, we’ve kind of touched on this, but you’ve got a company two to $5 million and the owner has pulled back a little bit ’cause he got tired of training these guys and got tired of paying these guys.

Uh, you know, what, what are the kind of the first steps that he should do? Like, okay, I’m, I was at 5 million, now I’m at three and a half. Obviously you wanna get him back to $5 million in revenue. But what are some of the first steps that he or she should take to make it more attractive if their desire is to sell it?

I think really the first thing is to back up even farther than that is find out what it’s worth So many people base the value of their company if they heard the guy down the street sold their company for x amount of multiple Nobody brags about the bad deal they got so nobody goes out and says hey, I sold my business and I Finance to a hundred percent of it.

And I’m never going to get paid. They always talk about the great multiple they got. So my advice to everyone, whether it’s meet with me or somebody else in the industry is find out what your business is worth. We offer all the time, come to me and I’ll give you a free valuation. Let’s see where the starting point is.

Many people have come to me and said, wow, I didn’t know it was worth that much. I’ll sell right now. I’ve had other people come to me and say, Oh my gosh, I am so far off of what I thought it was worth. I’ve got to put a system in place and that’s where what you offer what EGIA offers the training that you guys provide Then you could find what’s the next step for them to plug into to help grow that business Many of them aren’t willing to do the work.

So they need to know where it’s at right now. Yeah so, uh As you know, uh, we’re currently in my company talking to one of the groups that you’ve done a lot of work with and the very early stages, like very preliminary, what’s kind of the timeframe if somebody starts, they call your office and says, Hey, I got this company.

It’s pretty good set. It’s making money and you know, you can sell it. What should people expect in terms of a timeframe from the time they call you to the time they’re sitting in a closing table and somebody sliding a check across the table? So there’s a few different factors that have an impact on that.

One’s location. You know, if you’re in a big city, a major metropolitan area, everybody’s trying to get to that could help speed up the process size of the company. A bigger company is much easier and faster to sell than a smaller company, but a well built company, and let’s say 3 million and above in sales, service repair replacement.

You’re not the head technician, head salesman, head everything. There’s some layer of management in place. Um, and a realistic selling price three to six months is real. So it can happen pretty quick. Yeah. Yeah. Very quick. So what level of, uh, intimate examination should a contractor expect from a very, uh, sharp, smart group of people with a lot of money buying these companies?

I mean, they don’t get in those positions. Well, like you said, sometimes they get in the wrong position because they know people, but for the most part, these are pretty sharp folks, right? How invasive is the process and what should contractors be prepared to expect? Because we’re talking about contractors always talk about the average contractor.

He came up in his town, maybe didn’t go to college. Uh, he’s built his business by the sweat of his brow, the skin of his teeth. He’s got the big house, got the boat, got the toys. He’s, he’s the, he’s the big guy on campus in his little town, right? He’s not used to answering to anybody. He’s not used to people poking around his banking account, his tax records, and his income statement.

What should we expect as contractors? Yeah, I jokingly call it a financial colonoscopy. And it is. You know, many times in the due diligence process, depending on who the buyer is, they know more about the seller’s business than the seller does. Many of my sellers are incredible technicians and know more about indoor air quality and how many CFMs can go around a corner than anybody does.

But they don’t know much about their business. And so often these buyers will bring in CPAs to go through your, your books. And they’re going to ask you why two years ago on a Tuesday, did you spend 4, 000 on this check that doesn’t have anybody’s name on it? They’re going to ask everything because if they’re going to pay you a million, 2 million, 5 million, 20 million for your company, they’re going to make sure that it’s a good deal for them.

Yeah, yeah, you had mentioned to me earlier that there’s different types of private equity groups and buyers just like there’s different type of contractors Would you say that there are some that come in and not naming names at all? Because this is something we all have to do our due diligence and find out about we’re not going to put things out there publicly But are there some that come in and they’re striving?

To do an analysis of financial analysis to get a fair deal for themselves and the contractor Versus some that are going to come in and just try to You know whip you on the on the fence post to try to beat you down to the lowest possible Is is is it is the same out there or is it lots of different type of strategies and that kind of stuff?

Lots of different type of strategies and so That’s where I think working with somebody like me and whether it’s me or somebody else I’m not saying i’m everybody’s right answer But having somebody in your corner most of my clients have never sold a business And for most of my clients the biggest sale of their life And, and these, many of these buyers are calling them and, and you could talk to any contractor across the country and they’re getting 10 emails a week and 10 letters a week saying they want to buy.

And the reason they’re sending them that oftentimes is so there’s not somebody like me in the way. Right. So that they can deal directly with them and they can say, this is the way it normally happens. This is what the price needs to be. And because you’ve done all these things wrong, this is what we’re doing.

Many of these companies, and we’ll use private equity as an example. They’re incredible at making money. I can’t fault them. We’re trying to get the best deal. Sure. That’s what they’re trying to do But I can’t fault the seller for trying to get the best deal for themselves as well So what you’re saying is absolutely accurate.

There are some people who make an offer to get it under due diligence To come in and beat you up and say, Oh, you said everything was wrong. You said the EBITDA was here. Here’s what the EBITDA really is. And now you’re a deer in headlights because you don’t even know what EBITDA is, much less how to calculate it.

And they’ve got 25 Harvard CPAs that are telling you you’re wrong and you know how to fix air conditioners, not EBITDA. And so, so they do that intentionally. There’s other great buyers out there who their due diligence is confirmatory. They’re just making sure that what. What you told them is accurate.

They’re going to go through it. It’s a quick process. I’ve had some buyers, we’ve closed in 10 days, 10 days from the date they met, they walked out with a check in their hand and walked away. It’s crazy. And so, so there’s, there’s a wide array of those people out there. Yeah. So, uh, how early on. Well, first of all, you’re right.

That’s why people like you are necessary for people like me with HVAC companies, because it’s kind of like you get into a wreck and they always tell you, don’t ever talk to an insurance company. You have to hire an attorney, right? Because the reality is you just don’t know what the, what the expectations should be or whatever.

And you’re going to get hoodwinked, right? Just because you’re dealing with sharks in many cases, right? Sometimes literally some of these, you know, these acquisition folks. So, uh, in terms of these guys coming in, I think it’s really important. That we have people like you in the industry, that if people want to know more about who’s, what style this equity, private equity group is, and that you’re a perfect person to ask that that’s what you do for a living to evaluate those things.

How soon should a guy like me start talking to you? Before I’m ready to sell, or do you wait till you’re ready? What’s the, what’s the advice there? Great question. And the answer is yesterday. I firmly believe at the end, there’s two reasons to own a business. One is to make a profit and two is to sell it.

And I believe that profit’s not a bad word. And selling a business is not a bad thing when you’re ready to transition. But if you don’t know what your business is worth, you have no. clue, are you closer or farther away from that target? And so it also makes it much easier if you know what it’s worth and what you’re shooting for.

When that private equity, we use that as an example, or that buyer comes to the table and says, Hey, I’m going to offer you X amount. You know, that’s a great offer, a bad offer. Many people wait until it’s too late. And then I’m sitting across the table with somebody at 70 years old and I have to say, Hey, your business has no value.

Yeah. I mean, imagine if that person had come to you three or four or five years earlier. And they were maybe in bad shape, but you could have said, here’s what you need to do in the next 36 months to get this thing straightened out because, uh, it comes a point of, of no return. So, um, what questions have I failed to ask?

You know, when you’ve got an expert like yourself and you’ve got a layman like myself, at least when it comes to this business buying stuff, sometimes we don’t even know the questions to ask. Right. What obvious things are out there that I haven’t even asked you about yet that anybody who’s thinking about selling their business should know.

Well, I think it’s where to get information. Um, I think the more informed you are when you’re looking at, um, when looking at selling, we, once again, with social media and all the events and all the articles being written, you’re getting all these 10 times, 40 times, all these crazy multiples out there and nobody knows what it means to them.

And so I think, I think. Looking for information. Myself, other brokers, other, Gary, other educated people write articles all the time about it. Um, I have a YouTube channel that we’ve got tons of information. EGIA, I’m speaking at EPIC again this year. So, so get as much information as you can. I’m not saying you have to sign up for somebody or commit to something.

Get information. Ask the questions. Most people, you run your own business for 30 years and you never go outside and never ask anybody anything about your business. And so it’s almost taboo to what it’s worth. And they end up asking the guy buying them what their business is worth. And that’s going to the barber and do I need a haircut, you know, and that’s the same thing.

And so I think, I think there’s all sorts of information. I did the YouTube channel specifically, and anybody who’s ever watched it, I’ll pull over, I’ll be driving down the road and somebody will call and ask me a question. I’ll think. That’s a great question. More people need to ask that. And I’ll pull over, jump out with my selfie stick and record a video saying, have you ever thought about this?

How’s inventory treated? What about maintenance agreements? What about these things? So I would get as much information as you can, unbiased information. So you’re not asking the barber, do I need a haircut? So you’ve got the Joe contractor. He’s got a nice little business. He’s doing five to 15 million a year.

Pretty well run. He’s making some money. Um, like when a private equity company comes to them, cause we all get those letters you’re talking about. You don’t know who to even return the phone calls on. You don’t know who to trust. I just always ignore them. Uh, the people I talk to are people that I have met in the business.

Um, but they come to and they say, Hey, we want you to sign this NDA. Like what should the contractor be concerned about? Is there any risk NDA too soon? Or my thinking was, what if I signed it and I wanted to talk to somebody else about buying the company? I really wouldn’t be able to do that if I was under an NDA.

What considerations should we have on the NDA so we’re not hamstringing ourselves, uh, any more than we have to, to have these conversations? Great question. Typically, an NDA is just going to be an agreement that you’re not going to share any information that they give you and they’re not going to share any information you give them.

So typically, there’s no obligation. It’s an NDA. Typically, you become obligated when it gets to an LOI or a letter of intent because then you’re often granting them exclusivity and then you can’t talk to other people. The NDA is just saying, hey, You’re going to give me privileged information that the rest of the world doesn’t know about.

And I promise not to tell you anybody else. And you’re going to do the same about them. So you’re, you’re handcuffed from the standpoint of you can’t be running around town saying, Oh, I talked to XYZ company and they’re reviewing it. And they’re going to buy me because your NDA says you can’t say anything about it.

Just like they can’t be saying, Hey, I’m talking to Weldon and we’re thinking about buying his company because rumors start employees get scared. Customers get scared. Competitors see blood in the water, it creates a bad thing. And so the NDA really is not something to be paranoid about, in my opinion.

It’s the next step of getting to the LOIs when you need to be worried. Yeah, man, this is great stuff. And I just know and I’m very grateful for you coming out all the way across the country to have this conversation, because I feel like not only did I get a lot of straight, accurate. Talk information, uh, all of our viewers did, and these are questions that everybody out there is asking.

And as you said, there’s so many different sources of information, many of it conflicting, many of it, much of it untrue probably. And I appreciate so much of coming out and have this conversation with you, Mr. Patrick Lang. If folks want to chat with you and have that conversation, how would they, how would they reach out to you this way?

You could reach me directly. My website, my phone number’s on there. I, as I mentioned, I have a YouTube channel. I’m extremely active on LinkedIn and Facebook. Connect with me anywhere I’m at. EGIA and all the events, come to my booth, come listen to me, talk at Epic this year. Um, and reach out anyway. I’m happy to help any way that I can.

And I really appreciate you letting me come today. Absolutely. And it’s Patrick Lang folks, L A N G E. And your website is? BusinessModificationGroup. com BusinessModificationGroup.com. Awesome. Thank you so much, Patrick. Have a great rescue day. We’ll see you soon. Fantastic. Thank you.