A Simple Guide On How To Value an HVAC Business

Business valuation helps HVAC business owners (and their business broker) determine how much their company is worth. This is how you get clarity when it’s time to make a transition, for whatever reason.

HVAC company owners might find this process less than straightforward because of the nature of the service business industry. However, arriving at a number or range that represents your business’s value can help guide decision-making processes when engaging with potential investors, buyers or a business broker. Plus, this clarity can make a difference in your growth trajectory. Consider this a primer on how to calculate business value, the role of a tool like a business valuation calculator, and how HVAC industry businesses might require a different approach to fair market value.

Understanding HVAC Business Valuation

Business valuation is the due diligence HVAC business owners take to come to a number that appropriates your company’s worth. Along the way, you’ll learn important information about your venture’s financial health, market stature, and untapped potential. Sellers have a few options when it comes to business valuation methods. Each can be helpful in achieving your goal of a business sale. Whichever valuation tool you choose will give you an advantage in estimating your company valuation through different lenses.

Before getting into the nitty-gritty of a business valuation calculator, sellers like yourself should understand a few basics, such as:

• Deciding on the purpose of the valuation: What’s the why behind this exercise? Do you anticipate a sale, getting new investor funding, or needing a clear picture of your HVAC business’s current standing? Defining your intention will lead you to the best valuation method for your service business.
• Reading financial data to understand your business’s position: Financial data is king in valuation in service businesses. With this in mind, you should have accurate and current banking documents like balance sheets, income statements, and cash flow statements.
• Recognizing current market conditions: Economic conditions and industry-driven developments can impact valuation for a service business. With respect to HVAC companies, both seasonal demand and tech disruptors play a part.

Selling Your HVAC Company: Valuation Techniques You Can Apply Today

There’s no singular path to valuation in the HVAC industry. Below, we break down each technique sellers use to calculate value and what’s involved when you work with a business broker:

Book Value

Book value for an HVAC company is derived from financial statements. It calls for subtracting total liabilities from total assets to calculate net asset value.

Calculation:

Book Value

=

Total Assets

−

Total Liabilities

Book Value=Total Assets−Total Liabilities

One advantage of this formula is that it provides a picture in time of an HVAC company’s net worth and fair market value. On the downside, it doesn’t reflect future growth potential or intangible resources that potential buyers might be interested in.

Discounted Cash Flows (DCF)

The DCF method is helpful in quantifying anticipated cash flows.

Calculation:

DCF = CF1 ÷ (1 + r)2 + CF2 ÷ (1 + r)2 + CF3 (1 + r)2 + CFn (1 + r)2

where:

CF1 = The cash flow for year one

CF2 = The cash flow for year two

CF3 = The cash flow for year three

CFn = The cash flow for additional years

DCF is different company valuation formulas because it takes into account the time value of money, resulting in a more refined view of future earnings potential.

Market Capitalization

Market capitalization, often used in the context of publicly traded companies, is determined by multiplying the share price by the total number of outstanding shares.

Calculation:

Market Cap

=

Share Price

×

Number of Outstanding Shares

Market Cap=Share Price×Number of Outstanding Shares

This process is not often used in the context of private companies, it can be useful if you need to assess immediate valuation of your HVAC enterprise based on market opinion.

Enterprise Value (EV)

EV is a figure that indicates the total value of an HVAC company. It reflects equity but also debt.

Calculation:

EV

=

Market Cap

+

Debt

−

Cash

EV=Market Cap+Debt−Cash

This analysis might provide more granularity for prospective HVAC company buyers, as it covers all financial elements that affect net profit.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

EBITDA helps you and your business broker estimate your HVAC company’s operating performance and more accurately calculate which moves might have an outsized impact on earnings and, ultimately, profitability.

Calculation:

EBITDA

=

Net Income

+

Interest

+

Taxes

+

Depreciation

+

Amortization

EBITDA=Net Income+Interest+Taxes+Depreciation+Amortization

EBITDA can help sellers, buyers and business brokers gain insights into efficiency and profitability.

Present Value of a Growing Perpetuity Formula

After performing this calculation, you’ll get a more focused view of whether a decision like selling your business will be profitable at this juncture.

Calculation:

PV

=

𝐶

𝑟

−

𝑔

PV=

r−g

C

Where:

𝐶 C is the cash flow,

𝑟 r is the discount rate, and

𝑔 g is the growth rate.

Present value can paint a picture of how a strategic investment might pay off.

Times Revenue Method

This valuation method forecasts the maximum value of an HVAC services company as a multiple of its revenue for a defined period.

Calculation:

Value

=

Revenue

×

Multiple

Value=Revenue×Multiple

While not too complicated, this method is not ideal for companies in the HVAC industry that tend to have profitability variations.

Earnings Multiplier

Business leaders operating a service can use this formula to estimate a company’s share price compared to those in a similar industry.

Calculation:

Value

=

Earnings

×

Multiplier

Value=Earnings×Multiplier

This formula has its limits for sellers, as it doesn’t necessarily factor in future growth potential. This variable can carry a lot of weight in the marketplace in determining HVAC company value.

Liquidation Value

You can use this valuation formula to quantify an entity’s value if it were compartmentalized and sold. This is often the case when an HVAC business is failing and the owner needs to extract cash from it.

Calculation:

Liquidation Value

=

Sale of Assets

−

Liabilities

Liquidation Value=Sale of Assets−Liabilities

This calculation can be handy in situations like a business closure or selling assets because it can often produce a higher number than other business valuation methods used by sellers.

Factors Influencing HVAC Business Valuation

Generating a company’s value or worth is an exercise that must reflect context-specific factors, like:

HVAC Industry Licensing

Staying current on licenses means a company is in good standing with HVAC industry regulations and standards. All things being equal, a service business that’s in compliance may be valued higher because of its stature.

Techs & Crews

The caliber of HVAC technicians and crews matters in a valuation setting. Highly skilled staff and consistent performance can mean a leaner operation and a higher degree of loyalty from a customer base. Both can lead to impressive earnings, recurring revenue, more leads, and higher valuations—an attractive combination to buyers.

Owner Involvement

Potential HVAC company buyers (and their business brokers) might be interested in a business owner’s relationship to the operation. One that is deeply tied to the owner’s skills, knowledge, or expertise may be valued lower if the interested party fears instability or weakened performance after the HVAC business changes hands.

What is a good pre-deduction profit for HVAC?

HVAC industry experts agree that an EBITDA multiple should range between 5x to 8x. These figures speak to industry stability and growth potential. Higher multiples can be an indication of impressive financial performance and competitive position. Lower multiples can suggest operational roadblocks or lower profitability, turn-offs to buyers.

What is a good profit margin for HVAC?

A healthy HVAC company has margins of 10% to 20%. This sweet spot means revenue and costs are balanced. Higher margins can mean a tightly run business and robust market demand. Higher margins can mean a tightly run HVAC services business and robust market demand. Keeping this number or improving it matters as far as value and profit are concerned.

How To Retain Maximum Value When Valuing an HVAC Business

You can do your part to maintain your HVAC business’ value by doing one or more of the following:

Clean Up Your Books

Behind every high-value HVAC company are systems in place that help them stay organized. Having current and detailed records in place in ServiceTitan when selling your business can inspire confidence in the market.

Retain Quality Techs

Having an A-team you can count on can shape business value, drive profit and lead to a business sale when the time comes. Professional, prompt, and hardworking people are the cornerstone of strong customer relations and longevity in HVAC services.

Get Contracts in Place

A number of ongoing business relationships and related service agreements usually mean consistent recurring revenue and other value drivers. This can be an advantage as your business might be perceived by buyers as more stable than an HVAC company without such a strong book of business captured in ServiceTitan.

Invest in Tooling

Purchasing the most state-of-the-art equipment and scaling up inventory is an investment in the future. It also tells potential buyers that you take HVAC service standards seriously.

Try Podium’s Business Calculator to Calculate HVAC Company Worth

Podium’s business valuation calculator can help you come to a more accurate number when setting out to determine your HVAC business’ value.

How does it work?

Podium’s Business Calculator looks at financial metrics like profit and market conditions to fully capture business valuation. It’s more accurate in that it pulls in financial statements, industry benchmarks, and market trends to offer a more detailed view of the state of affairs to prospective service business buyers.

What does it take into account?

An HVAC business’ value is multi-dimensional. With that in mind, valuation methods for a service business rely on such inputs as revenue, profit margins, cash flows, and industry-specific parameters.

How reliable is it?

HVAC business owners and anyone operating a service business can trust Podium’s Business Valuation Calculator when selling their businesses because it uses sophisticated algorithms and the most current market data. However, this tool isn’t meant to be a replacement for professional advice from a business broker. It’s best to seek out a financial expert for guidance specific to revenue, profit, earnings, selling your business or other goals.