HVAC Business Valuation Guide: Factors, Calculation & Tips

What Is an HVAC Business Valuation?

An HVAC business valuation is a process aimed at defining the economic worth of a business, to justify the asking price tabled to potential buyers during an acquisition or merger, or to plan for the future growth of an HVAC company.

Usually, they are handled by business valuation specialists—business brokers, and appraisers.

In the section below, we’ll cover the different valuation methods you can use to calculate your HVAC company’s value.

How to Calculate Your HVAC Business Valuation

Majorly, there are three acceptable methods for calculating the value of an HVAC business. They include:

• Income

• Assets

• Market

Let's take a deeper look at each one.

Income

The income method uses an estimate of the income a business is likely to generate in the future to value a business.

The income approach is a great method if your business:

• Is currently profitable

• Has a high potential for growth

It considers historical cash inflows and outflows, and current market conditions.

There are two ways to apply the income valuation method:

1. Discounted cash flow method (DCF)

DCF estimates the value of a company by forecasting its future cash flows and discounting them back to the present.

It's based on the premise that money today is worth more than money in the future. That is, $1,000 today will be worth more than $1,000 tomorrow.

1. Capitalization of cash flow method (CCF)

CCF is a business valuation method that uses the current income and ROI (return on investment) of a business, to determine its future value.

CCF is mostly used for HVAC companies with an almost constant revenue, year after year.  Because their capital requirements are steady, it's easy to predict the future cost of capital.

Also, CCF is only used for companies that have existed for a couple of years, which ensures they have sufficient financial records to forecast their growth rate.

To value an HVAC business using CCF, valuators will look at your historical net income over a period of time. For example, 3-5 years. Then apply a capitalization rate, determined by your business’s specifics. 

It's important to note that the discount and capitalization rates, highly depend on an HVAC company's:

• Prospect for growth

• Current cash flow

• Risk

The third one is important since investors generally pay less for risky HVAC businesses. 

The factors that determine the risk include...

• Spread of customers

• Current liabilities

• Amount of owner involvement in the business

• Number of contracts available

…and so on.

We'll explore how these factors influence the risk attached to an HVAC business later.

Assets

The asset approach determines the value of the business based on its net asset value. It involves subtracting liabilities from the total value of the business's tangible and intangible assets. 

There are two ways to use this approach:

1. The book value method

This method relies on the assets and liabilities on the balance sheet.

However, in most cases, the value of the business after deducting the liabilities from the assets is meager, which doesn't reflect the true value of the business.

That's where the asset approach comes in.

1. The adjusted net assets method

This method adjusts the book value of the HVAC business, to fair market value. 

It seeks to determine the true value of assets in the current market.

One thing to note:

The asset approach may not reflect the real value of the business. Usually, the income and market approach are more accurate and may yield higher values.

Market

The market approach values an HVAC business by comparing it to other HVAC companies of similar characteristics—revenue, profitability, customer base, and market share—whose transaction values (selling price) are publicly available.

The general formula is:

Value= price/parameter(comparison) * parameter(your company)

The parameters used could be EBITDA, revenue, EBIT, net after-tax income, population of employees, seller's discretionary earnings (SDE), and so on.

For example, say an HVAC company generating $600,000 in revenue recently sold for $400,000. And your annual revenue is $800,000.

Your business valuation is:

value= 400000/600000 * 800000

value = $533,333

The market valuation approach has two major advantages:

• It's comparably easy to explain and compute.

• There are no assumptions. It's based on hard data that's publicly available.

However, there're still drawbacks.

You may not find a company with similar characteristics. Its flexibility is limited. And the transaction data used is sometimes unreliable.

ServiceTitan has a FREE service business valuation calculator you can use to determine the worth of your HVAC business.

Try our free calculator

Disclaimer: the ServiceTitan Business Valuation Calculator is solely meant to provide an estimated valuation of your business. This calculator does not guarantee any price or value for your company. Please note that external factors may negatively or positively influence the valuation of your business. If you are looking for a more definitive valuation, please consult a professional.

Key Factors That May Impact Your HVAC Business Valuation

The value of an HVAC business depends on a series of factors. They include:

Revenue and profitability

A key factor affecting the valuation of a business is the revenue it generates and the money left after it's paid off expenses. Because higher revenues indicate an HVAC business is financially healthy and less risky to invest in.

Hence, potential buyers or investors scrutinize the historical financial records—profit margins, revenue generated, and so on—and potential growth estimates as part of their due diligence.

It's worth noting that two HVAC companies generating the same revenue but with different profit margins, won't command the same valuations.

For example, say HVAC companies A and B generate 3 million USD in revenue but have profit margins of 5% and 10% respectively.

HVAC company B will be twice as valuable as A. Because the amount investors will take home after paying expenses is more in B compared to A.

Specifically for HVAC companies, one major thing hugely determines profitability:

Customer base and service agreements

As a rule of thumb, companies with a large amount of reliable cash flow are generally considered more valuable.

The reliability of cash inflow depends on the diversity of the customer base and the volume of maintenance service agreements.

An HVAC company with mostly one-off refrigeration equipment repairs and one or two long-term maintenance service agreements will have a low valuation. 

That's because the revenue isn't recurring. And the potential new owner may feel that the business has a bad reputation since they can't hold onto customers.

Additionally, it can be devastating if one client on a maintenance contract suddenly unsubscribes. And the company may find it hard to survive during the fall and spring when people rarely use HVAC systems.

In contrast, an HVAC business offering a range of services to a diverse clientele, with several customers on maintenance service agreements, has a guaranteed source of recurring revenue.

Even if one client unsubscribes, the effect on their revenue would be minimal. And revenue will keep pouring in, even during slow seasons.

Market competition and positioning

The HVAC industry is a very competitive one. 

So, HVAC businesses with a huge share of the market, positive reputation, strong brand recognition, and unique selling propositions are valued highly.

That’s because these characteristics make them compete favorably with others and earn a large population of repeat customers.

Growth potential

Recall that the income valuation method primarily uses the growth potential of a business to assess its worth.

Well, that underscores the vital role the future potential for growth has to play in determining the value of a business.

Potential buyers or investors will assess factors such as market demand, expansion opportunities, geographic reach, and the potential for diversification into related services or markets. 

In essence, they love businesses that are currently growing and are positioned for future growth.

Use of technology 

As HVAC systems have increased in complexity over the years, HVAC companies are evolving by incorporating technology into their operations.

Additionally, technology helps HVAC companies automate repetitive tasks, and do more jobs in less time. This enables them to cut costs and increase their revenue, thus increasing their valuation.

For example, HVAC company software, ServiceTitan has helped several companies boost their valuation Some examples include:

• Service Champions North has been growing by 15-20% year after year with the help of ServiceTitan

• Althoff Industries increased its revenue when it joined ServiceTitan from $8.5 million in 2021 to $11.4 million in 2022.

• The Air Squad grew from $675,000 to $1 million in just one year.

And many more.

This has been possible, due to ServiceTitan’s several smart tools and features which automate and streamline business operations, helping HVAC business owners and employees focus on revenue-impacting tasks.

Some of these features and tools include:

• Marketing Pro: This enables HVAC companies to run targeted campaigns, with a higher chance of converting. 

Additionally, it gives businesses an overview of every marketing campaign running, which helps maximize their marketing budgets.

• Updated Pricebook: The up-to-date Pricebook ensures customers are charged the correct amount per the service they received. 

This transparency boosts customer confidence and ensures you don't run at a loss.

• Reputation Pro: business owners receive alerts once a customer drops a review. This way, they're able to respond immediately and resolve any challenge the customer may have.

• QuickBooks integration: Every customer transaction done in the field is automatically exported to QuickBooks. Plus, field techs can generate invoices and send them directly into QuickBooks.

This saves time and boosts the productivity of employees.

The above are just a few of the many features and tools, which help to boost a company’s valuation. 

We'll reveal more as we explore how to increase the value of your business below.

How to Increase the Value of Your HVAC Business

There are several things you can do to improve the value of your HVAC business. Let’s delve deeper into each one and reveal how HVAC companies are using ServiceTitan to boost their valuation.

Enhance service quality

The perception customers have of your HVAC company rests on the quality you render. And you can’t deliver high-quality service, if technicians are not trained, not just in repairing HVAC systems, but also in relating with customers. 

Hence, invest in training your HVAC technicians. They should especially learn how to react under pressure or pacify a frustrated customer.

Additionally, offer ongoing education and certifications to ensure they’re up-to-date with the latest industry standards and latest technologies.

Also, using the right tool makes it easier to deliver quality services, leading to satisfied customers and word-of-mouth referrals.

ServiceTitan's Customer Experience Software helps HVAC companies exceed customer expectations by a mile and deliver top-notch services easily.

Here's an example:

Lee's Air slogan is "100% satisfaction guaranteed." 

Question is: how can they make such a bold assertion, in an industry like HVAC where customers punish companies for false statements?

The answer is ServiceTitan's Customer Experience software. With it, they build trust, communicate effectively with customers, ensure techs arrive early, and keep track of their reputation.

How's this possible?

1. Send appointment reminders and arrival notifications to customers

You can confirm an appointment or let customers know a technician is on the way via text or email.

Also, you can use these messages to ask further questions about their appointment, so techs arrive with all the tools they need.

This keeps customers' minds at ease, knowing that their issue is being handled. They’re more likely to patronize you again and send you referrals.

1. Guarantee early arrivals by allowing customers to track techs

ServiceTitan’s Customer Service Software allows customers to track HVAC technicians in real time, using GPS.

Not just that.

You can send a brief profile of the technician to customers, making them more comfortable with the technician before they arrive at their doorsteps.

1. Make it easier for customers to reach you

Give customers a convenient way to reach you, by installing ServiceTitan's Web Scheduler or Chat to Text widget on your website, resulting in more bookings.

By using this tool, you'll satisfy customers, who will be more likely to leave you a positive review and referrals.

It's a win-win: you get more revenue and positive reviews.

Expand service offerings

The HVAC industry is a very competitive one. One way to stand out is expanding the range of your services beyond conventional HVAC installation and repairs.

You could add services like energy efficiency audits, indoor air quality assessments, smart home integration, and other specialized services. 

This diversification can help attract new customers and increase sales.

Develop maintenance programs

Cool Today is a $23 million business today, thanks to the over 17,000 memberships it has. 

According to Jaime DiDomenico, president of Cool Today, memberships account for 20 to 40 percent of their total revenue. 

Maintenance programs provide a guaranteed source of ongoing revenue that HVAC companies can rely on to invest in growth initiatives and handle other business expenses. 

They also reduce marketing expenses, build a loyal customer base, serve as a strong proof of your business's reputation, and help generate referrals. This increases the value of the business.

So, offer annual service agreements that include regular system inspections, filter replacements, and priority service. 

By doing so, you’re not only generating more revenue but also helping to prevent major system failures and extend the lifespan of the customer’s HVAC equipment.

At this point, I can hear you say: but maintenance programs are hard to sell.

Well, that’s partially true. Because convincing people—not just customers— to part with their hard-earned money is difficult, talk less about paying extra for maintenance programs.

However, DiDomenico is an HVAC business owner who’s been there and done it. 

In a recent ServiceTitan webinar, he shared the following sales tips he has used to increase the maintenance agreements at his company by over 240%:

• Showcase its value to customers. You can dedicate some pages of your website to talk about it. Highlight the savings in price and time and the peace of mind it brings. 

Also, coach technicians to highlight the benefits to customers.

• Appreciate new and repeating members. You could send thank-you notes. This urges them to renew. Then reward customers who have renewed 10 times with a gift package.

• Invite customers on membership plans to special events

• Incentivize CSRs and employees with bonuses and commissions, internal recognition, and so on, to sell memberships. Remember: you encourage whatever you reward.

Finally, if you find it difficult to craft a service agreement on your own, use ServiceTitan's HVAC Service Agreement Template.

It’s fully customizable.

Strengthen your online presence

Having a strong online presence is necessary for the increasingly competitive HVAC environment. 

It builds credibility and attracts new customers, most of whom rely on online reviews to select a reliable HVAC company. I mean, numbers from Brightlocal's recent local consumer review survey is proof:

• 80% of consumers believe reviews influence their decision to patronize care service businesses.

• Most consumers—76 percent—read local online reviews.

• 98% of consumers use the internet to find details about a business

It’s why top HVAC companies pay close attention to their reviews.

Ann Collias, Growth Marketing Strategist for Ease Air, and Roland Black HVAC, both belonging to Griffin Brothers Companies, says “We are very hyper-focused on online reviews. What is out there online speaks a lot about your company.”

Thus, it’s advisable to take control of your online reputation. 

Firstly, optimize your HVAC website for search engines to boost your online visibility. You can follow this article to find Tips to Boost Your HVAC SEO in 2023.

Then capture your Google-My-Business page and stack it with reviews from satisfied customers. The more, the better. A study by G2 and Heinz shows customers like to see 11-50 reviews before they buy.

It doesn’t stop there…

Do your best to respond to reviews. Whether it’s on your Google My Business profile or social media handles. 

And if it’s a negative one, reach out to the client and resolve their complaint. Because despite your best efforts, there’s still the tendency to make a mistake. And your interaction with them could reveal valuable insight and turn the dissatisfied customer into a loyal one.

According to Ann Colias, Growth Marketing Strategist for Ease Air and Roland Black HVAC, both Griffin Brothers Companies, “If we get a bad review, it's just an opportunity to build a better relationship with that client.”

However, understandably, managing reviews and responding to each one is grunt work. Plus, other tasks may suffer if you’re to manually search for and reply to each online review.

Fortunately, it doesn’t have to be with ServiceTitan Marketing Pro.

It helps HVAC companies to garner positive reviews from customers and give timely replies.

Reviews from your company listing on different platforms like Google and Yelp, are automatically consolidated into a feed. This eliminates the hassle of jumping from one platform to another, in a bid to respond to reviews.

Additionally, review data insights allows you to match a review with the job and HVAC technician it came from.

You can use this data to discover and coach techs that are lagging in interacting with customers. You could also encourage techs to continuously deliver excellent service by running an in-house rewards program.

For example, Brian Choate says ServiceTitan helped his company—Choate’s Air Conditioning, Heating, and Plumbing—launch a rewards program that hands out monthly awards to techs with the highest amount of positive reviews.

“We have all their [technicians] stats on screen,” he says. “They’re always following what place they’re in, and we like a little friendly competition.”

This incentivizes techs to deliver quality service, which results in more positive reviews, leading to a boost in the company’s online reputation.

Finally, ServiceTitan’s Marketing Pro automates the entire review collection process. It automatically sends review requests immediately after techs have finished the job.

This increases the chances of a response and helps you get more reviews. As ServiceTitan Strategic Project Manager Heather Donaldson, says, “Reputation is kind of a numbers game. The more people you're asking for reviews, the more likely you’re going to get a high amount of reviews back.”

This makes it easier to convert potential customers and drive more revenue.

Monitor financial performance

Monitoring financial performance is key to the health of any business, including HVAC companies. It’s a vital aspect of HVAC company management.

HVAC businesses should maintain accurate financial records and regularly analyze their business's financial health. 

Tracking HVAC company KPIs and metrics, like revenue growth, profit margins, customer acquisition costs, and customer retention rates is imperative to ensure a business is on the right track to success.

Also, demonstrating consistent financial performance and growth potential makes an HVAC business more valuable.

According to Kyle Berkman, vice president of Intrepid Investment Bankers, who has helped HVAC companies navigate the sales process, “It's one thing [for entrepreneurs] to build a great business for decades or with lots of desirable characteristics and value attributes.”

However, “conveying those value attributes to investors is a different skill set than building a company,” he adds. They want to see metrics and KPIs that prove consistent growth.

That’s where having ServiceTitan’s Field Reporting Software comes in.

It helps you track financial and performance metrics conveniently without having to dig through paper documents or switch between platforms.

You can customize the dashboard to reflect the KPIs and metrics of importance to your HVAC business.

This way, you can ensure your business’s financial performance doesn’t dip, from any location you are in the world.

You can also submit these reports to investors, to prove the company's historical performance and justify your asking price.

Additionally, ServiceTitan's Field Support Software gives you up-to-date reports on the performance of techs.

This includes the revenue they've generated, memberships sold, and so on.

This way, you can ensure employees are productive and offer adequate support and coaching to anyone who's struggling.

To Sum Things Up

Knowing the value of your HVAC business helps reveal the price to demand from investors. And if you’re not selling yet, undertaking a business valuation will reveal its current value, and help you take necessary steps to increase it.

You can implement the tips listed above and use a comprehensive HVAC company solution like ServiceTitan to boost your valuation.

ServiceTitan is a comprehensive HVAC company platform, stocked with all the tools HVAC companies need to run their business successfully, cut costs, and generate revenue. You can take advantage of the free demo to find out how you can implement it in your business too.