What HVAC/MEP Owners Need to Know About Selling Their Business
By Bobby Lewis
What is driving HVAC/MEP industry consolidation and what does it mean for business owners
Industry consolidation within the HVAC/MEP market ramped up over the past several years, most notably in residential and commercial service and replacement markets.
Private equity activity drives this trend by seeking to scale the fragmented marketplace through mergers and acquisitions (M&A).
After a 20-plus year lull in industry roll-up strategies, M&A activity picked up in the late 2010s and peaked in 2021 after COVID-19 caused a slowdown in 2020. Since then, there has been a healthy pace of transactions, albeit not at the unprecedented rates of 2021.
In addition to the highly fragmented marketplace found with HVAC/MEP service providers, institutional investors seek the re-occurring nature of HVAC/MEP services and the mission-critical nature of maintaining comfort within one’s home or commercial and industrial buildings. Also, service trades tend to be resilient through economic downturns and require on-site, skilled labor protecting the industry from artificial intelligence or outsourcing that has become a threat in many other labor-intensive industries.
Looking forward, baby-boomer owners and new market entrants will continue to present a favorable environment for consolidation. Additionally, the demand for continued M&A is a core method to deliver the return profile for private equity’s buy-and-build strategy.
On the valuation front, owners of successful HVAC/MEP companies have benefited greatly from the increased interest in the space. In many cases, select companies trade for two or three times historical levels – premiums that some consider unsustainable. While valuations remain well above historical norms, increased interest rates and uncertainty are beginning to reduce EBITDA multiples.
What companies are most sought after?
The market remains interested in companies focused on service and maintenance work, followed by replacement or retrofits. New construction remains less desirable given the cyclical nature of housing starts and general construction. Other factors that impact interest and valuation include scale, brand recognition and reputation, use of technology, investment in human capital and current fleet/equipment condition.
Having marketed several HVAC/MEP clients to prolific industry buyers, the attributes of highly desired companies are:
• Reputable brand in a stable or growing metropolitan market.
• More than 80 percent of revenue driven by service work, maintenance agreements and system replacements.
• Minimum annual revenues of at least $5 million, ideally $10 million to $100 million.
• Healthy profitability and cash flow with net margins exceeding 10 percent.
• Strong management teams in place with a growth mindset.
• Well trained and loyal workforce.
• Ongoing investment in fleet and technology.
Note that not all HVAC/MEP contractors are viewed the same and every business will be evaluated individually. Remember, the industry is largely served by smaller, family-owned contractors who have 20 or fewer employees. And there is a significant disparity between the smaller players and larger, market leading brands when it comes to valuation metrics and deal structures.
Navigating the buyer pool and ensuring success under future stewardship.
The buyer pool is diverse and expanding within the HVAC/MEP market. In the lower and middle market, private equity dominates the M&A field. However, there are several other types of buyers including public entities, family offices, independent aggregators, and executive buyers. Anecdotally, there are well over 100 active HVAC/MEP buyers in the market, and likely many others that stay below the radar.
This raises the question: Who is the right buyer for my business? The answer depends on the personal goals of the selling shareholders, the culture of the company you built and your vision for the business.
Know that buyers/investors come in many different flavors, and navigating the realm of suitors can be taxing if you don’t know what you’re doing. Beyond transaction economics, it is prudent to understand integration strategies, rebranding expectations, changes to employee benefit/compensation, capitalization, investment horizons, cultural alignment, technology implementation, and the list goes on.
An experienced M&A advisor or investment banker can help navigate the buyer field and ensure that you realize the most desired outcome in the sale or recapitalization of your HVAC/MEP company.
Bobby Lewis is a partner at , based in Charlotte, North Carolina, catering to privately held, small to mid-sized companies across the Southeast. Bobby grew up in his father’s HVAC business and spent his summer as a helper while pursuing his undergraduate degree at NCSU and MBA at UNC Charlotte.
