22 Jun 2021

Trade Talk | Buying, Selling, and Funding an HVAC Business - Part 3

Buying, Selling, and Funding an HVAC Business - Part 3

If you've thought about selling your HVAC business, then you don't want to miss this episode of the three-part series of the Trade Talk podcast. Brandon Bolen from Live Oak Bank and Patrick Lange from Business Modification Group breaking down what HVAC owners need to do to prepare their business if they want to sell. They offer advice on how to boost the value of a business to ensure a seamless process.

Make sure to listen in and don't forget to catch
part 1 on selling your HVAC business
part 2 on funding when buying an HVAC business


In part 3, you'll learn:

  • What’s the value of service/maintenance contracts and warranties? Do they boost the value of your company?
  • Are self-funded warranties a good process to have in place when selling your business? What are the risks?
  • Four key areas to focus on if you want to sell:
    • Business focused on maintenance/service
    • Clean books and records
    • Minimize involvement in the field
    • Invest in technology
  • What’s the timeline when someone wants to sell their business?
  • Final advice for buyers and sellers.




Connect with Tommy, Brian, Patrick, and Brandon:


Brian Bohannan and Jenna Ochoa, JB Warranties



Patrick Lange, Business Modification Group

Brandon Bolen, Live Oak Bank


Read the transcript:

Brian Bohannan: Welcome back to another edition of the Trade Talk podcast. We're here with part three of the educational series. We've got Patrick and Brandon back. We've got Jenna on the show today. So guys, welcome back. Today we're going to be focusing on propping up the value of that company if you're going to sell. So in case anybody didn't catch the first two episodes, would you guys mind doing a quick introduction?

Brandon Bolen: Absolutely. So my name's Brandon Bolen. I'm a lender here on the service contractor team at Live Oak Bank. We're a little bit of a niche lender where we just focus on a handful of industries. So our team here at the bank, myself and a few other folks, focus exclusively on heating and air and plumbing home service companies in all 50 states. So really appreciate the opportunity to be on the podcast again today with JB Warranties and looking forward to providing some great information to your viewers.

Patrick Lange: Thanks for having me. My name is Patrick Lange. I'm with Business Modification Group. We specialize in the sale of heating and air companies all across the country. Work a lot with Brandon and Brian. I've got a company that uses them a lot that we're currently negotiating a transaction on. So I'm learning more and more about the JB Warranty side. But I'm happy to help out and hopefully get some valuable information for those looking to either buy or sell a heating and air company in the future.

Brian Bohannan: Perfect, thanks guys. Happy to have you back. This'll be the last episode in this series. The first one we did, we talked about acquisitions, buying other companies, and that's where Patrick kind of explained to us what that process looks like for any of our customers that might be interested in doing that as a growth model.

Brian Bohannan: The second episode, we did the lending process with Brandon and it was eyeopening. It kind of removed a lot of the uncertainty on how can you do this? What tools are available if this is what you want to do? And so that was very educational. I think that a lot of people will find value in both of those episodes.

Brian Bohannan: Today is the dream of most of these contractors is to one day sell. At some point, every business out there will change hands because nobody lives forever. And there's a lot of money going into air conditioning and home service companies right now. So what I want to ask you guys is other than, the buzz word of the last five or 10 years, was you got to get maintenance contracts in place. It boosts the value. Can you tell us a little bit about how that's viewed from your point of view? What's the value on these maintenance contracts, service contracts, extended warranties? How does that factor in when you're, when you're sizing up what a company's worth and what it might be able to sell for?

Patrick Lange: Sure. I'll go first, I guess. I think the real value, in my opinion, and I agree with that first off. I think having extended warranties, having maintenance agreements in place definitely have an impact on the value of selling a company and increases that value. I've heard people from previous years talk about, they assign an exact dollar figure per maintenance agreement. I haven't seen that in any of the deals I do. And I think the reality to me and what I see in the numbers is that the increase in value is seen in a couple areas. One, typically when you you're going to company that has big maintenance agreements in place and big long-term warranties in place is they typically have higher net income. They have more customer loyalty. They have a better relationship with those customers. And when you look through their system, whether it's ServiceTitan or Housecall Pro or whatever they're using, tracking their database, when you look at those customers, they're typically 80, 90, 95% of the income generated by the company are by those maintenance agreements with warranty customers.

Patrick Lange: And so I think from that level, you're in the customer's home more often. You have more loyalty. And the reality is they're paying you for their own loyalty. With a maintenance agreement, obviously, if they're paying the company, they're paying you to come back and be the person that takes care of their unit. So I think from a loyalty perspective, from a being able to talk about indoor air quality and other services with them perspective, you're in the customer's home more often, or client's home more often, so I think you're seeing a value there. And from a buyer perspective, a buyer views that. If they look at a company that has 50 maintenance agreements versus a company that has 5,000 maintenance agreements, they're going to know that that company with the 5,000 maintenance agreements typically is going to have a more loyal customer base, a more well-known customer base. It's not a one-time repair and they're coming out and leaving. They're in the customer's home more often. They have a better experience.

Patrick Lange: And so, although I can't give a specific dollar figure to it, it absolutely does translate into higher sales volume and sales value simply because one, typically your company's more profitable. Typically you have the ability to maintain an employee base better because you don't have as many highs and lows during the shoulder seasons and busy time, and so you get a better experience there. But then it also translates, too, from a buyer perspective, and I say they get warm and fuzzy about it. They feel better when they're looking at a company that has maintenance agreements and extended warranties, simply because of the relationship factor they know that's there.

Brandon Bolen: And I'm sure Patrick probably can speak more to this because I know he's more involved with the negotiations and different buyers putting a bid in for the business that's paper-based and they self fund warranties and stuff like that. Probably not as modern of a business, not as an attractive as an asset, so it is simply just going to have less people bidding on the business from a buyer's perspective. Whereas if you have modern business practices, maintenance agreements, warranties, stuff like that, you're going to have more buyers bidding on your business because you have a more attractive business from a customer loyalty standpoint, sales standpoint, net income standpoint, all the variables that Patrick brought up that I'm sure he probably sees more people bidding on that business, which just like buying a house probably means a higher ultimate sales price for a seller.

Brian Bohannan: Hmm. Yeah, Patrick, I think you were telling me a story before we did the last episode about you were working on a deal and it was a company that did it self-funded warranties, or they would basically just say, "We'll cover you for 10 or 15 years." And then when it came time to try to market that business, the deal ultimately fell apart. What is it about that self-funding of warranties? Is it just the pure unknown? We do meet with people that do it the right way and it can be a profit center for them. What is your? Why is it few and far between you see people doing it the right way?

Patrick Lange: Yeah, here's the reality. One, you don't see it happen often enough where there's a system in place for many of them. They're just kind of winging it. And so they may not be charging enough. They may not be putting the right protections in place. They're not in the warranty business. They're in the heating and air business and they're trying to be in the warranty business that don't know what they're doing most of the time. And from a buyer perspective, they have no way to monetize that risk. When you look at most heating and air companies, and I'm not a heating and air expert, but you talked to a lot of people and I would tend to agree that a lot of the warranty issues that come up are because of a poor installation, they haven't done a good job. They're not flushing line sets. They're not pulling along in a vacuum. They're not doing these things.

Patrick Lange: And so as a buyer coming in, they have no way of saying, "Are they doing a good job?" I can tell you like, never sold a company where the seller says, "We do cheap installations. We don't do a good job. We don't do all the things we're supposed to do." They all say, 'We're fantastic. We're the best in the world." Because I'll always ask somebody, "What should I say to somebody who wants to buy your company? Why should they?" "Oh, quality, service, we're the best there is."

Patrick Lange: And the reality is, unless you're looking at those things, looking at a callback rate, looking at the warranty issues, from a buyer perspective you have no way to put a dollar figure on that. And that's exactly what happened in that transaction. The buyer says, "I think the risk is here." The seller says, "No, we do a fantastic job. The risk is here." And we could never bridge that gap. And I had no way of adding value to it.

Patrick Lange: We've talked before about maintenance agreements and keeping my math easy, charge $200 a year and it's two visits. You've been there one time. There's a credit, typically, for that other hundred dollars. You've been paid a hundred dollars for work that hasn't been done. Very easy. How many maintenance agreements do we have? How much have you been paid for? How much are you owed? It's very easy.

Patrick Lange: But on a warranty situation, obviously you guys, I probably sound like an idiot to you guys, but you guys have a way of assigning that value to that, that I, Brandon, or somebody else coming in, doesn't have a realistic way of doing because they don't do it all day long. And once again, if how the job is done and how good the employees are and how much care they put into that installation has an impact on three years, five years, 10 years down the road, from a buyer perspective, I wasn't at the installation five years ago. I don't know what checks and balances they had in place. I don't know what they did. So the reality is they have no way to really put a value on that risk and I had no way to defend it. If I'm working with the buyer, I have no way to tell the seller, "Here's what we'd come up with this figure." If I'm working with the seller, I have no way to say to the buyer, "Well, here's what your real risk you're taking." Because what if it's the compressor that goes? Every compressor goes out on every unit that's been installed. How long does it take? What's the risk? What's the cost?

Patrick Lange: It's challenging in my opinion, if not impossible, to put a true valuation on that. And that's what happened in that scenario. And I've had it happen since then one other time. And I can tell you, it's substantially easier to say they've outsourced the risk to JB Warranties and now it's an income stream, as opposed to being a liability.

Brian Bohannan: Yeah. It's always a tough conversation. That happens to us, too, where we're in there and they're like, "Look, we don't believe in extended warranties. We don't need them. We do the best installs." And everyone is proud of their installs, but they don't make the equipment. They don't manufacture it. A lot of the time it's like, "Okay, well, have you ever had a part go out five years after the install?" They're like, "No." And it's like, some people you just know that they're not tracking it. And I think that part of when you can't get them to see that they don't control all the variables, there's equipment issues. Jenna here oversees all of our claims, so she deals with this every day.

Brian Bohannan: And in the time we've been doing this, we've had three or four industry-wide coil issues, TXV issues. And if something like that happens and you're self-funding that warranty or even just not reserving anything for it and you've got to go out and run all those calls for free and the manufacturers aren't giving you enough labor to cover it, we've seen companies literally have to close the doors on some of that stuff. And to me, it's just an unnecessary risk. It is. There's risk involved. Getting people to see that as it can be tough on our side.

Brian Bohannan: But so let me ask you this, guys, other than having good practices in place, what would you advise if somebody is trying to get ready to sell? Let's say we were visiting with someone from Houston a week ago, and he's like, "When you talk to the guys next, you've got to ask them, 'What should I be doing to sell? How long does it take? Do I need to be doing two years of getting ready? Can I get ready in six months?'" You sell a lot of companies, Patrick, for people. What's some advice for these guys getting ready to sell?

Patrick Lange: Great question. I believe in focusing on four things and people who've heard me speak or read my articles are probably sick of me saying it. But the first one is make a business that's focused on maintenance and service and repairs, not just installation. Obviously we've been in another kind of housing boom that's taking place. And as we learned in the past, that can't last forever. And so focusing on service is extremely important.

Patrick Lange: Next thing is clean books and records. Some people treat their business like their personal savings account. And so when it comes time for us to sell, not just from a valuation standpoint, but when that buyer needs to go get a loan for it and I've got to send them over to Brandon and it's like Where's Waldo trying to find the profits in this company. Everybody's trying to minimize their profits, which I can spend a whole show talking about why mathematically it doesn't work. But you've got to show profit. That's the reality. And having clean books and records makes it so much easier for me to say, "Company's doing X amount of sales. They are doing X amount of profit. Here's the tax return." And it proves it and it's a short conversation. If I've got to give them a 25 page spreadsheet of how it's paying for their daughter's schooling and their neighbors this and their boat payments over here and all these other things that it's paying for, not only does it make it more challenging from an evaluation standpoint, but it makes it more challenging when I send it to Brandon and say, "Hey, can you help these people out?" So that would be the second thing.

Patrick Lange: Minimizing their involvement in the field is really a third one. I sell a lot of companies that are run by incredible heating and air technicians that could never get themselves out of the van. And so they've limited their growth because they don't believe that somebody else can fix an air conditioner. They're the only person in the world who can fix the air conditioner. Everybody else is lazy, doesn't want to listen, blah-blah-blah. And so they are the business. And so the reality is they don't have a business, they have a very well paying job. Which is fantastic. You could be a one man person or one girl company and make 150 grand a year and never sleep and life's okay. And if that's what you want, that's fantastic. I'm not here to say that's a bad thing. But you can't expect somebody to pay you for that. And so that's the challenge because your customers do business with you because of you. If somebody else showed up, they wouldn't, we don't want them there. And so you are the business and so that's the other thing from looking from a growing of value standpoint is putting other systems and people in place.

Patrick Lange: And the other Brandon talked about a few minutes ago, kind of investing in technology. If when I get there and I say, "How many customers do you have in your database?" And you go to a 12 system filing cabinet and start looking at what number the last invoice was and that's where you gave me your count from, that's challenging. You're not marketing. You're not going to those people. So I think if you can kind of focus on those key things, what a buyer's looking for. If you put yourself in a buyer's shoes, what would you be looking for? If you came to me and I said, "You got a great business doing $2 million a year. They're making $400,000. But don't look at the tax return because it only shows a million that they're doing and it only shows $50,000 in income." You're looking at me like I've got two heads. And that's what Brandon's going to do. When I send him the books and say, "Hey, we need a loan for a million dollars on this Brandon." He calls me to ask me if I've been drinking already.

Patrick Lange: Put yourself in a buyer's shoes and make it easy. I believe in making it easy for people to spend money with you. And by doing those few key things, it's not rocket science. Repeat repetitive income, get yourself away from the business, have clean books and records, put some systems in place and you'll be able to be commanding top dollar. And it just becomes what your sales are will determine how big that check ends up being.

Jenna Ochoa: So Patrick, in your experience, when somebody thinks they might be ready to sell their business, what's the timeline? Should they give himself one year, three years, five years?

Patrick Lange: It depends on what they've done leading up to that. So once again, if your books and records are a complete disaster and you're expecting top dollar, you're going to need three years because the bank's going to ask for three years, a buyer's going to ask for three years. And so if you're okay with getting what you get, then certainly we could sell it immediately. But understand, I say something and some people are offended by it, but you can't get paid to steal twice. You can't steal from the federal government, not pay taxes, and expect me to write you a check for it. And so I understand, I've been self-employed the whole life and I understand minimizing tax liability.

Patrick Lange: But I get calls every day of people saying, I'll say, "Okay, just send me your books. I'll give you an idea of what it's worth." "Well now, I'm self-employed, you know." "Yes, sir. I know you're self employed." "You know, it pays for some things, you know." "Yes, sir, I know it pays for some things." And then the tax return comes in and they didn't make any money, but really wink, wink, they make $200,000 a year. I'm not a magician. And so nobody's going to write you a check for that. So the reality is, to answer your question, I apologize it's a long round about way to do it, but it's what have you done up to that point? You've got decent books and records? Realistically, in today's market, the average company we list is listed, marketed and sold in under six months.

Brandon Bolen: And from my perspective, since I've been working with Patrick for so long, all those four key points that he brought up, every single one of his businesses that he lists lines up with each of those points. Where before I even get a look at the confidential info memorandum on the business Patrick has listed, I know it's immediately bankable because Patrick is already thinking about those things and having that conversation with the seller.

Brandon Bolen: But then from our perspective, I'd say around this time of the year, right before tax filing season, it's a common occurrence where you'll have somebody where they weren't really thinking about selling, but they have a banner 2020 and their profit and loss, it hasn't been audited. It hasn't been filed with the IRS. It's just a profit and loss, looks awesome. But their tax returns for the previous three years look terrible because they're either it's been a bad year or they're just running everything through the business. And from my perspective, as soon as I get that listing or not a listing but a business, and I look at it, I'm like, "oh man," and I'm sure Patrick sees it too when he gets people that come to him. And it's like, "Hey." My gut is like, "I don't know, is this real or not? Was 2020 accurate and the buyers get the same thing?"

Brandon Bolen: So if you want to sell and you want to get top dollar, it's probably good to start thinking about it three years in advance so that when Patrick or myself looks at your business, we say, "Oh wow, this business is really consistent or it's consistently growing." Because the buyer is going to have the exact same gut feeling when they look at your financials.

Brian Bohannan: Point number four you said, Patrick, technology. Can you elaborate on that? What are you looking for on the technology side? What would be a good investment for these guys as far as ...?

Patrick Lange: I think it's a minimum of CRM, whatever CRM you want to use, but you've got to be able to track the data and how you dispatch. I get to a lot of companies that they've got calendar book that they're turning to see what they're doing next week and can we get a guy or a girl out there on next Thursday? And so they have no way of tracking the data. So when a buyer comes in and we have a pretty educated buyer pool out there today, they're coming in, they're saying, "Oh, what's your average job size?" "I don't know." "What's your average install?" "I don't know." "How many installs did you do last year?" "I don't know."" How many maintenance agreements did you do?""I don't know." So they have no way of tracking it without going to the master book or master file cabinets and saying, "Here's where it all is."

Patrick Lange: And so what has happened in those meetings always, is they'll come up with a number, "Oh, our average install is about $6,000." "Okay, well, give us your data. We're going to go through it and digest it ourselves." And the buyer will go through and come back with a spreadsheet and say, "No, your average install, $4,000." "No, it's $6,000." "Here's the data." Because they've never looked at it. So having that to be able to track.

Patrick Lange: And so as a buyer, if I'm buying your company and Mrs. Smith calls and I have no way of seeing what we've ever done at Mrs. Smith's house. I have no clue what kind of unit she's got. I've got no clue, have we been there before? Every company can tell you about the chewing out phone call they got from somebody calling to scream at them, "You're guy did a bad job." Come to find out it wasn't even the right company they called. Well, if you don't have any way to track that, when Ms. Smith calls, you can bring up in your system and say, "Yes, ma'am, last week when Susie was there, this is what she fixed. This is what the problem was. Here's what the notes say. We've got photos of it. We've got this and we've got that." You're going into it blindly. And so a buyer's going to put a bigger value on that when they can bring up everything that's been done at her house, how it was done, what was charged, everything. And so that technician that's on his way there.,He's got the update too, so he's not going into it blind. And so it's just so much more efficient and you have a pool of people you can market to. And there's so many other things that having a quality CRM does for you and just finding what works best for your situation, but just something.

Patrick Lange: And I've sold companies that have antiquated systems that haven't been updated in 15 years, some that are top shelf updated every day, tracked from anywhere in the world. And a buyer doesn't typically argue about, "Well, you're with ServiceTitan and not Housecall Pro." Or just that there's data they can access in a way that they can access. And they may migrate it to whatever platform they're more comfortable with, but at least they can look at the data and get real access to information they can trust, not, "Let me dig through the file and see what we did last time we were at Mrs. Smith's house."

Brian Bohannan: Yeah. It's always an interesting feeling when you walk into a contracting office for the first time and there's the file cabinet room and there's 40 file cabinets. And it's like, "What happens if there's a fire?" And to your other point about kind of getting out of the field, there's also that occurrence where you walk in and you can just see someone in the office that is literally doing everything. They're dispatch. They're answering the phones. They know everybody. They literally have are wearing 10 different hats. It's like, "What happens if that person retires?" There's no real ...

Patrick Lange: Gets sick with COVID. I mean, that's the reality. You can't come to work. What do you do?

Brian Bohannan: Yeah. Well, any other advice, guys, before we wrap up this series? It's been a lot of fun getting to know you guys, spending some time with y'all. I think this will be an interesting listen for, and maybe an interesting watch, for a lot of the JB Warranties contractors. But any final closing thoughts on acquisitions, funding, propping up the value of the business to sell before we conclude?

Patrick Lange: I'll jump in and then let Brandon talk, but obviously I'm on your podcast and I'm a fan of everything you guys do at JB Warranties. I See the value in it longterm, and not only for the company that's running it, but the company that's buying it. So I see that in the transition. Obviously we've talked through these three podcasts, I use Brandon Bolen a lot at Live Oak Bank a ton. And so if you're looking at lending, needing a loan for an acquisition or for your business, there's no doubt he would be the number one person to call. And if anybody has any questions, a lot of people I find don't know who to call for answers. Please give me a call. I'm happy to answer any questions that I can. You have a question about valuation, if you want to know kind of a ballpark of where am I at in the value. Am I doing the right things? Give me a call, send me an email, send me a text, get with me on social media. Any way that I can answer any questions, I'm here to be a resource.

Patrick Lange: I've sold my own businesses in the past, and sometimes you're kind of on an island going, "I don't know who to call or who to trust or what to talk to or what to even ask." Give us a call. Everybody on here, I think, is happy to help people out and that's why we're doing this is to kind of give some information out there so you can make an educated decision. And I'm really okay if I'm not the guy you go with. I'm not right for everybody when it's time to sell, but I'll certainly point you in the right direction and help you do that. So, my closing thought is if we can help or if I can help, don't hesitate to reach out to me.

Brian Bohannan: I appreciate it.

Brandon Bolen: And from my perspective, the biggest thing I can tell the listeners is to plan, plan, plan, plan, plan, plan. That is super important whether you are buying a business or whether you are selling a business, whether you are just operating your business. From our standpoint, if you're self funding warranties, that's a liability. That's a question mark. If we give you a loan, let's say as a bank, if something happens to your business, are you going to be able to repay the loan? We're looking for certainty, so paying for extended warranty, insurance is one of those things that you need to plan for. Because one day you're going to look to sell, you're going to look to grow, and there's going to be people that are going to have to make decisions based on how you operate your business.

Brandon Bolen: And then when it comes to selling your business, we just had a customer who I had done a webinar two years ago. And all I did was educate and didn't hear from him for, I didn't even know the guy existed until a year ago. He reaches out and starts planning to transition his business. And now the loan's in closing. And so it was a fairly decent size deal that if he had not started listening and educating himself and planning, it wouldn't be where it is today. He might not know. He might not be able to buy the business. It might be being sold to somebody else and he has to continue to run it and won't be the owner. So it's really important just for buyer and seller to plan and to contact people like Patrick, who, I mean, I don't know if there's anybody who has a better pulse on where the industry is from a buying and selling standpoint. Patrick's a great representative for both buyer and seller and helping you getting the transactions done. We're lucky to partner with him on deals. And really appreciate the opportunity to speak with everybody and hope they found the info on the podcast series informational.

Brian Bohannan: Guys, it's been a true pleasure, really appreciated it and hoping to see you guys out in the field a little bit more. Some events are actually going to be taking place in person and not in our living rooms, so looking forward to that. And Patrick, Brandon, thanks guys. Jenna, appreciate you joining us. We'll get this thing published and hopefully they do find some value in it. So with that, we'll wrap up the podcast series and we will be back with the next episode soon. Thanks guys.

Patrick Lange: Thank you so much.

Brandon Bolen: Thank you.