Four Questions to Ask Yourself Before Purchasing a Business
Truly understanding a business is much like understanding the condition of a car. It is necessary for a skilled mechanic to “pop the hood” to access the true condition of a car. In much the same way, you and your team of experts need to “pop the hood” of the business in order to understand the business’s long-term health and viability. Here are four things to consider before signing on the dotted line.
Will You Enjoy the Work?
Owning a business, especially if you are planning on being an owner-operator, can be a demanding path. You will likely have to log many hours, especially in the beginning. For this reason, you’ll want to select a business that you will enjoy owning.
Life is too short to own a business that you would not want to be involved in. Importantly, if you do not like the business you own, the odds of facing burnout and losing interest are higher. It goes without saying that these kinds of obstacles can dramatically harm your business. Think long and hard before selecting a business to buy, as it is a decision that you will have to live with for years to come.
Did You Examine the Business Plan?
A second factor to consider is that there is no replacement for a good business plan. When you are considering buying a business, you’ll want to dive in and understand every aspect of the current owner’s business plan. If the business plan has major holes or just doesn’t seem to be adding up, you should move on.
Do You Understand the Financials?
Similar to understanding the particulars of a business’s business plan, it is also critical that you have a very precise and clear view of a business’s financials. You should look over everything from profit and loss statements to tax returns and more. It is a smart idea to consult your accountant and a brokerage professional regarding what financial documents you should review. Before you buy a business is the time to understand every small detail of a business’s financial health, not after.
How is the Business Performing?
A fourth factor to consider when evaluating a business is the business’s overall performance. It is possible for a business to have a good business plan (at least on paper) and strong financials and yet it could still have a less than stellar future. Oftentimes, the true health of a business lies beyond the business plan and the current financials.
You’ll need to know about a wide variety of factors including how vulnerable the business is to competition, changes in market forces, the status of key management and employees, the relationship with key suppliers and customers, and any pending litigation. When buying a business, you simply can’t afford to overlook any area.
If you keep an eye on these four key areas, and work closely with experienced professionals like business brokers or M&A advisors, your odds of finding the right business for you will skyrocket. Owning a business that you love will greatly increase your chances of success, so don’t underestimate the emotional factor in the equation.
Copyright: Business Brokerage Press, Inc.
Jirapong Manustrong/BigStock.com
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Maximizing Value: How HVAC Business Owners Can Increase Their Business Value When Preparing to Sell
For HVAC business owners considering retirement or transitioning out of the industry, selling their business is a pivotal step toward securing their financial future. However, many find themselves facing a common challenge: being unable to sell their business at the price they think it’s worth. This raises an important question: how can owners increase the value of their HVAC business before putting it on the market?
Why Increasing Value Matters When Selling Your Business
Increasing a business’s value is essential for attracting potential buyers who are willing to pay a premium price. By demonstrating a strong market position, a solid customer base, and a proven track record of profitability through strategic improvements and investments, owners can negotiate better terms and secure a more lucrative deal. Strong fundamentals that produce consistent financial results instills confidence in buyers, streamlines the transition process, ensures continuity, and provides owners with financial security to fulfill their retirement dreams.
Let’s delve deeper into three key ways HVAC business owners can increase the value of their business — Growth and Profit.
3 Ways To Increase HVAC Business Value
1. Implement Effective Growth Strategies
In the competitive landscape of the HVAC industry, increasing the value of your business is not only about generating revenue but also about implementing effective growth strategies. By strategically planning for growth, optimizing your sales systems, and enhancing the quality of your marketing efforts, you can elevate the value of your HVAC business to attract potential buyers and secure a lucrative deal.
- Set and Track Growth Goals: To increase the value of your business, establish a comprehensive growth plan with clear goals and actionable steps. Create a roadmap that includes lead generation, service expansion, employee training, and financial projections. Regularly review and adjust your plan to adapt to market changes and stay on track toward increasing your business’s value.
- Pursue Recurring Revenue: Buyers want to purchase businesses with reliable recurring revenue. Ongoing service agreements or maintenance contracts are an ideal way to increase revenue in an HVAC business.
- Implement a Sales System: Maximize your HVAC business’s value by implementing a robust sales system. Train your team as comfort advisors, invest in sales technology, and develop comprehensive compensation plans. By providing exceptional customer service, improving sales efficiency, and incentivizing your sales staff, you can drive revenue growth and increase the overall value of your business.
- Invest in Marketing: Elevate the value of your HVAC business through effective marketing strategies. Develop a targeted marketing plan, align it with your growth goals, and tailor your messaging to your audience. Stay updated with current marketing trends and employ digital techniques that align with your business needs. Implement robust tracking mechanisms, measure campaign success, and make data-driven adjustments. By investing in quality marketing, you can enhance brand equity, expand your customer base, and increase your HVAC business’s overall value.
2. Increase Profit
Profitability is the #1 driver of value in your business. Profitability is crucial for increasing the value of your HVAC business. By strategically focusing on pricing strategies, efficient pricing delivery, and operational efficiency, you can enhance financial performance and attract potential buyers.
- Pricing: Optimizing your pricing strategy is crucial for increasing profit and the value of your HVAC business. Align pricing goals with business objectives, implement a flat-rate model, and regularly review and adjust pricing based on market changes. Streamline pricing updates with electronic price books and efficient vendor management practices. By capturing the true value of your services and reducing costs, you can boost profitability and enhance the overall value of your business.
- Pricing Delivery: Enhancing HVAC business profitability involves effective pricing delivery strategies, such as bundling services, implementing tiered pricing, and offering add-ons. Diversifying your pricing approach increases profit per transaction, improves customer satisfaction, and enhances the overall value of your business.
- Efficient Operations: Increasing operational efficiency is crucial for maximizing profit and elevating the value of your HVAC business. Incentivize technicians with piecework payments, utilize dedicated parts runners or efficient inventory management systems, stage jobs, and minimize unbillable time. By reducing costs, improving profitability, and streamlining operations, you can make your HVAC business more attractive to potential buyers.
3. Achieve a Healthy Business Mix
When it comes to the value of your HVAC business, your revenue mix matters. Buyers want to see a healthy combination of recurring revenue through maintenance contracts and strong installation, repair and replacement revenue (while maintaining AOR equipment costs as no more than 25% of sales).
The revenue breakdown between maintenance contracts and one-off projects for a residential HVAC company can vary depending on the company’s business model and market conditions, but a 30/70 – 50/50 mix is ideal.
- Maintenance Contracts: Maintenance contracts typically provide a steady, recurring stream of revenue for an HVAC company. These contracts involve providing regular inspections, scheduled maintenance, and priority service to customers over an extended period, usually annually or biannually. The revenue from maintenance contracts can be more predictable and stable compared to one-off projects.
Aim to have a significant portion of your revenue come from maintenance contracts, ideally around 30% to 50% or even more. This can provide a baseline of income that helps cover operating costs and ensures a consistent cash flow throughout the year. - One-off Projects: One-off projects refer to individual installations, repairs, or system replacements that are not part of a maintenance contract. These projects can include installing a new HVAC system in a home, repairing a specific issue, or upgrading equipment for a customer. Buyers prefer minimal exposure to new construction and property management.
The percentage of revenue from one-off projects will depend on factors such as the size of your customer base, the level of competition in your market, and the demand for new installations and replacements. Generally, you can aim for around 50% to 70% of revenue from one-off projects.
It’s important to strike a balance between maintenance contracts and one-off projects to ensure a stable cash flow while also tapping into the potential for growth through new installations and replacements. Offering maintenance contracts helps build customer loyalty and can lead to more opportunities for one-off projects through referrals and upselling.
What’s Next? Bonus Tip for Maximizing Your Business Value
The best way to maximize your business value is to work with an expert who knows the HVAC industry, knows what it takes to prepare a business to sell and can do the heavy lifting to get your deal over the finish line.
If you’re an HVAC business owner looking to secure a successful and profitable exit strategy, connect with our HVAC team expert, Jon Buehler, and learn more about how we can guide you on the journey toward maximizing the value of your HVAC business and achieving your transition goals.
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Take These Steps Before Buying a Business
If you’re buying a business, you might be feeling overwhelmed about all the details that are involved, especially if it’s your first business. Buying a business is certainly no small task, and that’s why you’ll want to dive into the process headfirst and make sure that you’ve carefully examined the business.
Here are some of the most important elements to consider. While some of these aspects don’t immediately come to buyer’s minds, they should be high on your list of considerations.
Legal Documents
Reviewing legal documents might not seem like the most enjoyable task, but this activity should be one of the first things you will want to do before buying a business. Most worthwhile businesses will have a long list of legal documents to show, ranging from documents showing trademarks and copyrights to consulting agreements.
Tax Documents
When it comes to paperwork, tax documents are obviously also a necessary element to review. Some things that you should be watching for are forms that do not adhere to the IRS rules. It goes without saying that you don’t want to be the one taking responsibility for a previous owner’s error.
Business & Retirement Documents
The list of documents you’ll want to review doesn’t end there, as you’ll also want to check into retirement documents such as balance sheets, investment statements, and income statements. You’ll want to ensure that all of the qualified and non-qualified retirement programs run by the business are up to date. You might need to check the parameters of the Department of Labor’s rules.
Work with a Business Brokerage Professional
Your business broker or M&A advisor will take you through the due diligence process to help you make sure that all aspects of the business have been reviewed thoroughly before you sign on the dotted line. Be sure to work with an experienced individual who is proactive when it comes to making sure all of your questions have been answered to your satisfaction.
The items on your to-do list might seem overwhelming at first, but remember that a lot of focus and effort now will save you a ton of hassles and issues later. And you might end up dodging a bullet by spotting a serious issue that causes you to change your mind about a business. Always be sure to protect yourself and your best interests.
Copyright: Business Brokerage Press, Inc.
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Why You Should Address Your Company’s Weaknesses Head On
By spotting your company’s weaknesses you can take steps to remedy them and improve operations, however, this is only the beginning of the benefits derived from spotting these types of issues. You should be the world’s foremost expert on your company and the investment that it represents. Identifying and repairing any negative issues will pay dividends both today and potentially for the life of your company.
There are many areas of weakness that companies may experience. In this article, we’ll look at a few of the key areas that many share
Workforce Issues
An area of business weakness that is receiving a good deal of well-deserved attention in recent years are problems related to the workforce. Workforce headaches are varying between industries and sectors. It has been well documented that young people are not entering trades in the numbers needed to replace retiring workers. This is a fact that is causing significant headaches for many businesses. An aging workforce will impact some businesses more significantly than others. Understanding the labor situation as it pertains to your business is a critical move for any business owner.
Overreliance
Being overly reliant on any one supplier, customer, product line or even employee or group of employees, may have an impact on your business in a number of ways. Supply chain interruptions, disruption to income and cash flows, labor shortages and a diminishment in the perceived value of your business by future buyers are just a few of the issues you may encounter. Diversification isn’t just a smart way to handle one’s portfolio, but is also a smart way to address your business plan. If your business is overly reliant in any one area, it is a good idea to measure the risk vs. reward and seek out ways to diversify if necessary. Your business will be stronger and worth more in the end.
General Industry Decline
Nothing lasts forever. Once upon a time, the country’s landscape was littered with Blockbuster Videos, but today Blockbuster Video has joined the vast and great technological dinosaurs of the past.
There is no escaping the fact that industries change. Being on the tail end of that change without a transition plan to meet new and potentially more profitable opportunities is not a good place to be. One of your key jobs as a business owner is to identify issues and problems within your industry and adapt, ideally ahead of the competition. Part of this adaptation may ultimately include knowing when it is time to exit your business entirely.
Business brokers and M&A advisors specialize in helping business owners spot weaknesses and then strategize to make significant improvements. The world of business is changing and evolving faster than ever before. Engaging with experienced advisors who can help you navigate this flurry of ongoing change could spell the difference between success and failure; while greatly improving the value of your business, rewarding you handsomely in your retirement.
Copyright: Business Brokerage Press, Inc.
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Getting the Most out of a Partnership Agreement
As an entrepreneur and business owner, your partnership agreement stands as one of the most important business documents you will sign. Business structures can be as complicated as the people that create those businesses. Quite often, business owners create businesses with friends or loved ones and, as a result, will not have a proper partnership agreement in place.
It’s important to note that not having a partnership agreement in place is a mistake. There are too many unknowns and too many variables not to have this essential document. You need a legal framework to protect your business from the vast array of potential pitfalls that may have an impact.
The Key Elements of a Solid Partnership Agreement
At the top of the list of every partnership agreement is a clear outline and understanding of rights and responsibilities. All too often partnerships run into trouble as the rights and responsibilities of the parties aren’t clearly thought through and then outlined in a partnership agreement.
Mapping out rights and responsibilities will help eliminate problems in the future. A partnership agreement should be seen as a serious legal document. As such, it is prudent to work with an experienced lawyer in the area of partnership agreements.
What Every Partnership Agreement Should Address
At the top of the list, every partnership agreement should address how money is to be distributed and which partner(s) will receive a draw. The issue of who will contribute funds so that the business becomes operational should be very plainly spelled out in the partnership agreement. A failure to address this issue could end the business before it even gets off the ground.
Issues such as what percentage each partner will receive and who will be in charge are two additional key areas that should never be overlooked. In terms of issues that are frequently overlooked by those forming a partnership, it is common for those forming a partnership to overlook long-term issues such as what is to happen in the event of the death of a partner, what steps are to be taken to bring in a new partner, and how business decisions are made.
Without a solid partnership agreement in place, business owners may find themselves in the last place they want to be, namely, court. A lengthy court battle can weaken your business in a very wide range of ways including a hit to company morale as well as the loss of key customers and employees. A legal battle between business partners can destroy what would otherwise be a healthy and thriving business.
The time you invest in the creation of a business agreement is time and money well spent. In fact, it is safe to state that a business agreement might just turn out to be one of the greatest investments you ever make.
Copyright: Business Brokerage Press, Inc.
Jirapong Manustrong/BigStock.com
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