Section 2:
Running Your Business to Sell
One of the most profitable stages of a heating and air conditioning company is when that company sells. In fact I would estimate that as much as 60% of all the money you can make in HVAC comes in when you sell the company. There are a few HVAC business insiders that know this. They start a company from the ground up on day one with full intentions of growing that business until it reaches a value and then selling the business.
TIP: There is a difference between a profit loss statement and a recasted EBITDA (earnings before interest, depreciation and amortization). One shows you how profitable you are using accounting methods and one shows you how much sellers discretionary earnings should be used to place a value on the business.
All HVAC companies have one thing in common. The owner is GOING to exit the business at some point. We see it every day. Some of them will exit by selling and harvesting wealth. Some will exit due to health conditions. Some will exit due to a disagreement with a partner. Some will exit due to a divorce. Some will exit because they suddenly pass away. Covid-19 has made the last one even more prevalent. The truth is that almost 50% of owner exits are involuntary and around 79% of business owners have no written plan to outline an exit strategy. This leaves only 21% who get the chance to exit a business by selling it and harvesting the full business value. Many times, we see a fire sale where the owner passes away and the family is so distraught the last thing, they want to do is keep running the business. When this occurs a tremendous amount of money is thrown away by the unyielding influence of emotions. The truth is that if you establish your exit plan and run your company day-to-day with the intent to sell and some unfortunate event occurs then your family can just engage the exit plan. You can also leave instructions for your surviving family to call me. I will help them get the business to sell. A proper plan with a properly run business can mean the difference between your family being financially set or your wife getting a job at Walmart to make ends meet.
The good news is that every year over 1 million small to mid-sized businesses are sold. The better news is that a prepared HVAC company is quite easy to sell. When operated to build business value, a mechanical services company is very attractive to strategic buyers, consolidators, or even private equity investment if you are big enough. You only need to maximize what raises your business value and minimize what lowers your value. In the process, you will learn how to transform a mechanical business into a tremendous amount of wealth. If you are smart you will keep doing it over and over and get incredibly rich. Now that you know how important running the business to sell is, let's dive in.
The first order of business you need to know is that I am not providing you with legal, accounting, or financial advice. My strong recommendation is that you consult your CPA, your financial advisor, and your attorney when making any decisions regarding your business. I am not a certified public accountant, attorney, or financial advisor.
Next, let's look at how is the price of a mechanical business determined? The short answer is that re-casted financials are used to determine your EBITDA or earnings before insurance, taxes, depreciation, and amortization. This is basically how much money the business generates for the owner. It is also called "cash flow". This part of the equation is just basic math. How much money does the business make? The second part of the formula is known as a multiple. So, you take the cash flow and then multiply it by a number that represents the current state of the business. An owner-dependent company with lower-than-normal margins, bad employee culture, or no operating procedures might get a multiple of 2x earnings. A similar company with a good general manager, good profit based on industry norms, good team atmosphere, and well document operating procedures might get a 4x multiple. Let's examine the selling price of these two different companies:
Company 1 EBITDA $1,000,000 x 2 (multiple) =
$2,000,000 selling price
Company 2 EBITDA $1,000,000 x 4 (multiple) =
$4,000,000 selling price
So, the multiple is very important. The multiple can have the most dramatic increase in value for your company. But the EBITDA should not be ignored either. Let's look at what affects the multiple and the EBITDA.
We will look at the six areas of your business that you need to address to maximize value. Now keep in mind as you read about these six areas, that it is normal to feel overwhelmed. Our teams of advisors can come in and help you perform a gap analysis on each of the six areas. So do not stress too much. This analysis will tell you where you are and where you need to be. We can then develop a list of areas that need to be addressed along with the priority in which we need to address them. Once this is completed, we can guide your team through 90-day sprints where you implement whatever changes need to be implemented to maximize value. The good news is that once we guide you through it with your current company, then you will be a pro at implementing it on your next company all by yourself.
TIP: These six areas are what a potential buyer wold expect to see from a well run company that would be a good one to buy. No one wants to pay a premium for an HVAC business and then have to fix all the problems. You fix the problems before selling and you earn more money.
The six areas that must be addressed are:
- Leadership
- Marketing
- Sales Processes
- Product Offerings
- Overhead - financial decisions of the business
- Cash Flow
Leadership
Let's start with Leadership. What any potential buyer is looking for is a company that will continue to generate cash without the need for them to run the day-to-day operations of the business. The leadership team needs to be in place and either currently running the day-to-day or beginning to transition into running the day-to-day. Now the first thing most business owners do is say "I can't afford to hire all those people". The thing you must realize is that you already employ all those people. All you need to do is to shift their title and paradigm as it relates to running the business. If your current staff comes to you for you to answer every question no matter how small, then you are handing out fish. We must transition you to teach your team how to fish. You must get your team to start to operate by making decisions based on "how we should do it" rather than "how Tony wants us to do it". This involves creating a vision and a mission statement. Writing employee job descriptions. Developing an employee handbook. Creating checklists for how each service should be completed. Checklist for how each piece of equipment should be installed. You then must have regular employee meetings and employee training to ensure each member is bought in, understands the process, and has ownership in the final delivery. Rather than hiring a team of executive staff to lead your company, you can transform your current team into cross-functional work teams. This process aligns with decision-making and execution to empower your employees to do the right thing, make the right choice, and execute to win. This allows processes to assist employees to be successful. Once processes are doing the heavy lifting your team is less reliable on leadership and your leadership team and your company will be highly efficient, highly effective, and more profitable.
Full Scale Marketing Program
Next up is Marketing. The important thing to remember is that when I say marketing it is much bigger than just sending out some postcards. To add value your marketing must routinely generate more revenue than it costs. If it does not, then you are losing value by not adding it. For your marketing to add value, you must use a proven system. This is not the time to take a chance on some marketing that someone called you on the phone trying to sell you. Four rules govern the effectiveness of marketing:
- Great marketing is NEVER on sale. If someone is
offering you a great deal that you must sign up
for right now, it will not work. - Great marketing does not have to be SOLD. When a marketing company generates good returns, they have customers waiting to get on board through referrals.
- Great marketing is niche-specific and proven. You cannot afford to waste thousands of dollars while a marketing company learns how to market HVAC.
- If a marketing company is spending millions of dollars a year on podcast production, video production, commercials, trade shows and fancy gifts to potential new clients, who do you think is paying for all that? You. Less of your money goes to marketing and more of your money goes to keep the big circus on the road.
There are hidden gems in the marketing world, if you can't find one, we can recommend one.
TIP: While this looks a lot like the marketing program in the first section of the book, its actually different. You should use aggressive marketing to get your business to your desired magic number and then scale it back a little before placing it on the market. You want a great return for the marketing spend.
A great marketing program will be a package of several options. The package is designed to work together. Now is not...
