Business owners often ponder the value of their HVAC business as they invest long hours into maintaining a profitable operation. While selling your business may be something you plan to do later, understanding today what drives the value of HVAC businesses will automatically ensure that you realize greater financial rewards when the time does come to sell.

The factors the drive value are numerous, however, no single element is as important as your company’s ability to demonstrate historical profitables. It is often said the best way to predict future results is by studying past performance. This notion rings true in the world of business valuations. Without historical profits, or worse yet, with a history of losses, the value of your business can be as low as the value of the assets. And what is the value of a few worn out vans?

Another factor that drives residential service and/or Add on/Replacement HVAC business valuation is the company’s customer base. The strength of the customer base will have a direct affect on the buyer’s assessment of risk. As the perceived buyer’s risk increases, the tolerable investment by the buyer will decrease. Customer base strength is a product of several different features and includes:

1. Age of customer list
2. Number of customers serviced annually
3. Work mix
4. Customer concentration/market share
5. Service agreements/service contracts

Age of customer list

This translates into the number of years in which your business has provided services. Naturally, the longer you have been in business, the greater is your depth of total customers served. Buyers will be enticed by a long list of satisfied customers that can be immediately relied upon to be serviced.

Number of customers serviced annually

Naturally, as an HVAC business grow in size; the overall impact on any one customer diminishes. This may or may not be true for those HVAC businesses that allow one or two customers to make up a significant amount of their annual volume. These customers can include commercial accounts with multiple locations. While these customers may be consistent sources of work, a buyer may view these accounts as riskier than a larger residential customer base with no customer concentration.

Work mix

A classic example to this is the combination service/ and/or Add on/Replacement and new construction shop. While the work mix may be a perfect matrix for a profitable business, the facts remain that a business with multiple work mixes will have a difficult time maximizing value for each of those different work mixes.

Customer concentration/market share

Having more customers in a smaller geographic surrounding or dominating a market will enhance your company’s value. This ring especially true for smaller HVAC contractors whose greatest asset may be the ability to deliver to buyer dominance in smaller piece of a larger market.

Service agreements/service contracts

A sure way to build the value of your HVAC business is to adopt a service agreement program and build that service agreement base as diligently as possible. Building a solid service agreement base will pay dividends today as well as tomorrow and should be an arrow in every HVAC contractor’s quiver. To a buyer, service agreement customers are the customers that are most likely to stay through the transition. Additionally, a buyer can immediately start to service these customers by performing the semi-annual tune-ups that are customary with most service agreements.

How exactly service agreements affect the value of your business can be subjective. In certain situations, the lack of service agreements can sour a buyer’s appetite quickly. No agreements – no deal. There are also instances when buyers formulate the purchase price of small HVAC business based solely on the number of customer agreements. While, basing the purchase price of an HVAC business completely on the number of customer agreements deemphasizes other relevant factors, it demonstrates how important certain buyers view such agreements.

Owners of HVAC businesses have a lot on their plates trying to service customers and still make a fair to better living. At times, maximizing the value of your business for the day in which you sell may seem like something that can be put off for later. This may be tempting but inadvisable as many of the changes you make to your business to enhance the future value will add immediate results to your bottom line today.