How to Value: HVAC Contractors

Industry Description

The Heating and Air-Conditioning (“HVAC”) Contracting industry in the U.S. contain establishments that primarily install and service heating, ventilation, air-conditioning, and refrigerated equipment (NAICS 238220). Tasks include new installations, additions, alterations, maintenance, and repairs of HVAC and refrigerated systems.

The following are some basic characteristics of the industry:

  • HVAC Contractors have a combined estimated revenue of $120.2 billion, with an annual growth rate of 0.3% in 2021-2026, a decrease from previous years
  • There are approximately 117 thousand businesses operating as of 2021
  • HVAC Contractors employ approximately 567 thousand people

This guide focuses on HVAC Contractors. Plumbing contractors, while closely related and share certain similarities, face sufficiently different market pressures.  Plumbing contractors will be the subject of a different guide.

Industry Trends

The HVAC industry is in the mature stage of its lifecycle and services residential and commercial consumers. The key external factors that influence the industry are (i) overall economic health and construction industry demands, (ii) federal tax benefits and government policies, and (iii) technology modernization. Each of these is described in further detail below.

The broader residential and non-residential construction industry directly impacts the demand for HVAC services. While the COVID-19 pandemic and stay-at-home mandates originally halted all professional remodeling projects, do-it-yourself (DIY) remodeling residential projects grew an estimated 3% in 2020. The pandemic created a boom for the remodeling industry by forcing housing and lifestyle changes: need for more space to work from home, help their children with remote learning and allow social distancing. However, because DIY homeowners lack the skill to replace HVAC systems, there is a decline in these replacement services initially in 2020.  On the non-residential commercial side, the Coronavirus, Aid, Relief, and Economic Security Act included increased tax relief for replacing HVAC systems, incentivizing many commercial or closed school buildings to invest in new systems to temporarily transform into clinics or treatment centers. As industry contractors adjusted to new cleanliness protocols, the post-pandemic economy boosted the HVAC industry due to the tremendous increased concern with indoor air quality (“IAQ”) and quality systems.

The U.S. Labor Department estimated annual inflation in May 2022 was up 8.6% when compared year over year. That marks the largest annual increase in more than four decades. Subsequently, the interest rate increase has major ramifications on mortgage rates. The 30-year conventional mortgage rate measures the average interest rate for the most common loan home purchasers use. As this rate increases, so does the borrowing costs associated with buying a home, and subsequently individuals’ available cash flow for renovations. As to be expected, in June 2022, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced that the number of constructions starts, and approved building permits plummeted compared to the previous month.  The economy health, per capita expenditures, and interest rates influence the strength of the construction industry, and by extension the demand for HVAC contracting services. In 2022, the demand of HVAC contracting services is expected to decrease, causing a threat to the industry.

Households and businesses are expected to replace outdated and less efficient HVAC systems with newer models that provide additional capabilities with less energy demands. Seasonal energy efficiency ratios (SEERs) are a rating measuring the ratio of the cooling output of the air conditioner unit over a typical cooling season, divided by the energy it uses in watt-hours. The increase in adherence to government-mandated SEERs will likely increase the demand for energy-efficient systems. In addition, growing public concern over greenhouse gas emissions and climate change will also likely increase demand for more environmentally friendly models, which might also include additional innovative features such as smart automation and climate control systems.

Key Performance Metrics

In evaluating HVAC companies, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions:

  • Average revenue per lead/completed job
  • Completed service calls per day/month/year, per technician
  • Job time, Response time and First-Time fix rate
  • Job locations
  • Customer retention
  • Gross and Net Profit by service segment (e.g., diagnostic/repair services, replacement, IAQ services, service agreements)
  • Ratio-field to sales and support

Industry Organizations & Publications

The following organizations publish useful information:

  • Air Conditioning Contractors of America
  • Air Conditioning | Heating | Refrigeration News (ACHR News)
  • U.S. Department of Housing and Urban Development
  • U.S. Energy Information Administration
  • HVACR Business

Guideline Information: Private Purchase Transactions

Most HVAC companies are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely held HVAC companies is generally the best source of information to appraise a subject company.

The following are typical appraisal multiples from sale of HVAC contractors:

–              Revenue multiple between 0.20 and 0.80 times

–              Gross profit multiples between 0.37 and 1.8 times

–              EBITDA multiples between 1.7 and 12.7 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered. 

Guideline Information: Publicly Traded Companies

Many industry operators are small private companies that specialize in specific regions or localized markets. In addition, many companies provide a combination of consulting and engineering services across mechanical, electrical, and plumbing building systems.

There are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company.

The largest publicly traded companies, that include HVAC contracting services, ranked by market capitalization are:

  • Johnson Controls International plc (JCI) – $32.8 billion market capitalization
  • Quanta Services, Inc (PWR) – $18.4 billion market capitalization
  • Jacobs Engineering Group (J) – $16.2 billion market capitalization
  • AECOM (ACM) – $9.1 billion market capitalization
  • Tetra Tech (TTEK) = $7.3 billion market capitalization

The Price-to-Earnings (P/E) ratios of these five companies range between 27.3 times and 43.3 times. It is worth noting that these companies are commercial-scale engineering consulting firms, whose services include HVAC contracts.  They also include other services, including the design, manufacture and sale of HVAC systems, so using the above information requires further consideration.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

HVAC companies are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.