The HVAC industry remains highly fragmented, and growth through mergers and acquisitions can be an attractive option for companies looking to develop new products, streamline internal processes and expand operations into new markets.
The Benefits of a Targeted Acquisitions Plan
In the early stages of development, many new heating and cooling companies look to grow by fostering stronger customer relationships, adding new services and networking with complimentary trades. However, more established businesses that have exhausted conventional opportunities may want to grow through acquisitions. When done properly, purchasing an existing HVAC company can provide a variety of benefits that are more immediate and impactful than other growth strategies.
- Increased Revenue and Profitability: The most obvious benefit of growth through mergers and acquisitions is the instant addition of the target company’s sales and associated profits. This can be especially appealing if the acquisition is only marginally profitable and the selling price is discounted. You may anticipate the elimination of redundant processes that will result in savings that fall directly to the bottom line.
- Geographical Diversification into New Markets: Entering fresh markets through an established company can provide a number of ancillary benefits. Your new customers can be exposed to the existing products your company sells while the target company may have new products you can introduce to your existing customer base.
- Enhanced Negotiating Power with Vendors: Acquiring a heating and air conditioning company can offer valuable benefits with suppliers and vendors. Increased leverage can lead to lower pricing on popular items, and the target may have deals in place that are superior to your own. In some instances, vendors may extend rebates and discounts unavailable to smaller companies.
- Promotes Improved Economies of Scale: When managed properly, larger companies gain certain cost advantages due to output, size and the scale of operations. In general, the cost of specific services can be reduced as the number of instances increases. Based on volume, larger companies can specialize, which lowers costs and raises productivity.
- Reduced Competition: Acquisitions in existing markets can be particularly valuable since the process effectively eliminates a competitor. In many instances, this provides an opportunity to consolidate market presence and normalize area pricing.
Determining an Acquisition Candidate
A targeted acquisitions plan must be well conceived and properly executed. If you have decided that mergers and acquisitions is a viable strategy, consider the following as you develop your business plan.
- Identify a Suitable Candidate: Potential merger partners can be found through ads, personal acquaintances, industry sources, word-of-mouth or through the services of a merger & acquisition advisor. When you have found a potential candidate, it’s preferable to work through a third party when contacting the owner of the target company. Working with a M&A advisor can assist with this process while maintaining confidentiality .It’s also always important to determine that the cultures of the respective companies are compatible before entering into negotiations.
- Prepare Funding Sources in Advance: Most owners have expectations of receiving a considerable amount of the purchase price upfront. However while cashing out is most desirable, many owners are open to seller financing with earn-out provisions as part of the transaction. Therefore, always try and explore your financing options in advance. The right mix of debt and equity is specific to the project, and your banker and accountant can be helpful in crafting a financing arrangement that is suitable for both parties.
- Plan for the Transition: Post acquisition planning is often ignored during negotiations. A plan to integrate critical employees into your company quickly and efficiently should be developed before the deal closes. Key employees must feel confident that their jobs are secure since people often experience uncertainty and fear during a merger transition. Recognize that the physical changeover in IT systems often represents the dividing line between the new company and the old, and you may experience some resistance at that point.
Take Care of the Details
If you plan to grow through acquisitions, it’s important to attend to the details of the transaction. Your merger & acquisitions advisor and attorney along with other members your acquisition team will assist you with the process. They walk you through the procedure and all the critical documents, including a letter of intent, confidentiality agreement, tax returns, financial agreements and other relevant instruments. Although the process is complex, an HVAC acquisition can take your business to a new level of relevance and profitability.