Growth in the HVAC industry could make your business more profitable but brings challenges when negotiating mergers and acquisitions
The HVAC industry is expanding thanks to growing demand for contractors who handle heating and air conditioning installations, repairs, and maintenance all over the country. This news is positive if you already own an HVAC company because you could see your organization get far busier and more valuable in the coming years.
You can also capitalize on this growth by expanding your business in your local area by acquiring another company or merging with it. There is risk in any M&A agreement, but the HVAC industry shows no signs of slowing down because there will always be demand for these services. That makes it one of the safer industries for M&A to work out well for both sides.
At the same time, not all mergers and acquisitions are the same, so doing your due diligence before signing any transaction is essential.
Here’s a look at the recent growth in the HVAC industry and what it means for mergers and acquisitions moving forward.
A look at the numbers
The HVAC services market is already massive, with a value of $25.6 billion in the United States alone. It makes sense that HVAC businesses would be busy because nearly every home and commercial property in the country has a heating system and air conditioning, which is becoming an essential service as well.
The growth won’t stop at its current numbers. Estimates suggest the HVAC services market could grow to $35.6 billion by 2030. Other estimates say that HVAC companies could experience a compound growth rate of 9.7% between 2019 and 2025, so there’s money to be made if you handle your business the right way.
And that’s just for HVAC services. The HVAC systems market is valued at $15.16 billion as of 2020 and could experience a compound annual growth rate of 6% between 2021 and 2028.
More work should be available, too, as the industry could create 13% more jobs for HVAC mechanics and installers between 2018 and 2028.
Going by these numbers, sustained growth is inevitable. Now is the time to look at your merger and acquisition options — whether your goal is to expand or cash out.
Why the HVAC industry is growing
Before expanding your HVAC company, it’s a good idea to look at why the industry is growing to better understand its sustainability. There’s more than one catalyst for this expansion, which is good news for its long-term viability.
First, there’s an influx of new construction projects all over the country, and everything that goes up needs an HVAC system.
Spending on construction increased from $809.26 billion in 2010 to nearly $1.3 trillion in 2018. In addition, there were 6% more homes constructed in July 2018 compared to July 2019.
While the COVID-19 pandemic temporarily interrupted much of this construction, and high lumber prices could slow it down in the short term, the fundamentals are the same. We should see a resurgence from any disruption once normalcy returns.
Next, there’s greater demand for energy-efficient furnaces and air conditioners, leading to homeowners replacing their existing units. Many states are offering tax credits when homeowners upgrade these systems, as well. It’s worth noting that these tax schemes aren’t permanent, but the desire for energy-efficient HVAC systems should remain indefinitely.
Finally, there are the maintenance and replacement cycles of these appliances. Nearly every home in the country has a furnace, and about 75% of them have an air conditioning unit. Studies suggest that almost $14 billion is spent on HVAC repairs annually and that about $3 million in systems are replaced every year.
These numbers come together to create an industry with sustainable growth for the foreseeable future.
What this means for M&A
Of course, the HVAC industry’s growth means that mergers and acquisitions could become more expensive as business owners realize the actual value of their organization. As a result, any company interested in expanding must do its due diligence before making an offer.
The issue is that HVAC companies that are struggling despite this industry growth could see it as a great time to sell. However, the fact that these businesses aren’t making money and need to sell in the current landscape could mean there’s an underlying problem with the asset.
Before acquiring one of these businesses, you must determine what’s causing the issue and figure out if you can fix it.
In some cases, the location could be the problem. The inability to attract customers could also result from poor marketing, shoddy work quality, or lackluster customer service.
You’ll need to research the company and conclude why it’s struggling, so you don’t end up overpaying for someone else’s problem.
Choosing an M&A advisor
The HVAC industry is expanding, and it appears as though this growth is sustainable moving forward. However, that doesn’t mean that every merger or takeover is advisable. Acquiring a failing business with toxic assets could make it more challenging to succeed. SF&P Advisors can provide the guidance you need as you navigate the M&A process. Our team will walk you through the financials before you acquire another HVAC company and will even help you negotiate the deal, so you end with an agreement that’s right for your future. Contact us for insight on today’s acquisitions environment or to discuss a potential transaction.