I. Introduction
This article dives into the burgeoning relationship between private equity and the HVAC industry, highlighting the transformative effect of consolidation in this sector.
II. Why Investors are entering the HVAC Industry Today:
To answer the question of why capital is flowing into the sector, we first have to understand what investors are looking for. Unsurprisingly - it’s the same thing that many business owners are hoping to cultivate for their own teams and businesses:
Investors seek:
- Repeat revenue
- EBITDA in excess of 10%
- Barriers to entry
- Strong margins
- Low capital requirements
- The ability to consolidate backoffice operations
- Barrier to entry (e.g., takes time to build the business)
- Essential non-discretionary services
- Highly diversified customer base
- Technology drives efficiencies
The good news for firms interested in acquisition is that the same things you need to build a great business are what investors look for. But the question is - why now?
Why now?
With a market size and criticality, this industry has seen the burgeoning of a tech ecosystem and high growth businesses over the last decade. Investors see potential for consolidation and growth, driving investors in - with over 80 investor led strategies in the industry. Nearly 150 deals were done in 2022. In fact, there have been such powerful behemouths that have emerged - with firms generating up to almost a billion dollars in revenue.
Increased adoption of IoT
Over the last decade, a wave of innovation has entered into the HVAC industry that has set the stage and consumer appetite and market.
With respect to the HVAC trade, the rise of attention to indoor air quality (IAQ) and smart thermostats, have expanded product lines and impact for HVAC firms. In fact the smart thermostat market was worth $1.2 Billion in 2022, and is projected to grow to $3.8 Billion by 2029. The U.S. indoor air quality market was worth $9.8 billion in 2022 and is projected to grow to $11.9 billion by 2027. But it’s more than technology that can be sold - it’s the use of it that can streamline businesses: which can drive operational costs down and save time, while generating revenue.
Increased access to innovation
Field Service Management platforms are prevalent in the largest HVAC firms - with more than 40% penetration across the industry. But Field Service Management platforms are just the start of the innovation ecosystem. They create a starting place for a suite of software:
- Proposals
- Financing
- Fleet Management
- Load calculation & Sales tooling
- Scheduling
- Marketing
While it may seem like a great deal of software - the truth is it’s a fraciton of what exists in other industries. The recent wave of innovation has enabled a jumping ground for teams to optimize their efficiency.
Investors often think a bit differently about software purchases - they think about what can you do to accelerate productivity - even if it comes with an upfront cost.
Incidence of Extreme Weather driving Home Improvement spend
Whether it’s something we’ve experienced or not. The average numner of of weather and climate disasters from 2017 to 2021 increased by 17 per year ( National Oceanic & Atmospheric Admin.). The World Meteorological Organization has also seen a 5x increase in the number of disasters over the past 50-years.)
III. Benefits of Aggregating HVAC Businesses
Investors see a significant opportunity to drive both revenue and cost savings - which is one of many reasons to invest in the HVAC industry.
A. Efficiency and Cost Synergies: When HVAC companies unite under the umbrella of private equity, cost efficiencies emerge with the support of management effort. Shared resources lead to operational smoothness - whether it be through consolidated back office support, consolidated marketing resources, or training-based resources. On top of this, aggregation strategies can access preferential pricing on equipment and subscriptions, which can help them increase their margins.
B. Enhanced Market Presence: Aggregation is not just about size; it's about strength. A consolidated HVAC entity can command a larger market share, building a brand that stands out and is recognized across regions.
C. Access to Capital and Resources: Private equity opens doors to capital and resources that can be out of reach for individual HVAC businesses, fueling growth and innovation - this can include access to advisors, new innovation, and differentiated resources. An aggregated brand can also invest the resources to exapnd further - opening up more locations that build on an existing footprint.
IV. Key Areas to Manage
Integrations aren’t easy! They require thoughtful consideration of consolidation of systems and processes. For businesses that are acquired, they may often be asked to switch softwares, financing companies, etc. They require attention to company culture, and customer satisfaction. Strategies to maintain these core values are crucial - as always!
VII. Conclusion
The impact of private equity in the HVAC industry is undeniable and potent. It's an avenue for growth, innovation, and stability in an ever-changing market. HVAC business owners stand at a crossroads where consolidation is not just an option but a strategic pathway to success.