How to Value My HVAC Business for Sale

How to Value My HVAC Business for Sale: Understanding SDE, EBITDA, and Market Multiples

If you’re looking to sell an HVAC business, understanding key valuation metrics such as Seller’s Discretionary Earnings (SDE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is essential. These metrics, along with industry-specific data and market assessments, can give you a guideline for your business’s potential value.

However, remember that two nearly identical HVAC companies, each earning the same EBITDA, can be worth very different amounts. That’s why working with a professional, like Legacy Venture Group, Business Brokers in Tampa, is highly important. A proper business valuation not only provides a realistic value range but also highlights the factors driving that value, so you can decide if it’s worth making improvements or if now is the right time to sell.

What is SDE, and Why Does It Matter?

SDE, or Seller’s Discretionary Earnings, measures the total financial benefit an HVAC business provides to its owner. This metric is useful for smaller businesses (typically with less than $2 million in revenue) because it focuses on the actual cash flow available to the owner, including non-essential expenses that a new buyer may not incur. For example, if you’re running personal expenses or one-time costs through your business, SDE allows those to be added back, providing a clearer picture of actual profitability.

Formula for SDE:

$$\text{SDE}=\text{Net Profit}+\text{Non-Recurring Expenses}-\text{Non-Recurring Income}+\text{Non-Operating Expenses}-\text{Non-Operating Income}+\text{Depreciation}+\text{Amortization}+\text{Interest Expense}+\text{Owner’s Total Compensation}$$

Using SDE to determine the value of your HVAC business for sale offers a realistic view of what a buyer might earn. It’s essential to get this right because HVAC business owners who plan to sell their business should understand their business’s actual worth and what drives that worth.

Calculating EBITDA for an HVAC Business

For larger HVAC companies, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) becomes the preferred metric. EBITDA adjusts SDE by accounting for the potential replacement of the owner with a manager, assuming a corporate or professional structure in which a hired manager, not the owner, runs day-to-day operations.

Formula for Converting SDE to EBITDA:

$$\text{EBITDA}=\text{SDE}-(\text{Manager’s Salary}+\text{Manager’s Benefits})$$

This conversion gives a more standardized view of profitability, often favored by investors. For example, if your HVAC business’s SDE is $641,138, and the cost to hire a manager is $120,000, then the EBITDA would be:

$$\text{EBITDA}=641,138-120,000=521,138$$

This EBITDA figure helps potential buyers understand the HVAC business’s financial potential without the nuances of owner-specific expenses.

Benchmarking HVAC Business Value with Industry Multiples

Once you’ve calculated SDE and EBITDA, you can compare them with industry benchmarks to see how your HVAC business valuation in Tampa aligns with similar companies. Multiples of revenue, SDE, and EBITDA give insights into the expected price range for HVAC businesses.

Industry Multiples for HVAC Businesses

1. Multiple of Revenue: The median multiple for HVAC businesses is 0.43, with a high of 1.56.
2. Multiple of SDE: The median SDE multiple is 2.93, with an upper range reaching 4.00.
3. Multiple of EBITDA: The median EBITDA multiple is 3.81, with a high of 5.52.

For example, if your HVAC company has annual gross revenue of $3,231,847 and an EBITDA of $526,686, here’s how you might calculate its value:

1. Using the Median Revenue Multiple:$$\text{Business Value}=\text{Gross Revenue}\times \text{Median Multiple of Revenue}$$$$=3,231,847\times 0.43=1,389,693$$Using the high revenue multiple of 1.56:

   $$=3,231,847\times 1.56=5,041,681$$

2. Using the Median EBITDA Multiple:$$\text{Business Value}=\text{EBITDA}\times \text{Median Multiple of EBITDA}$$$$=526,686\times 3.81=2,006,666$$With the high EBITDA multiple of 5.52:

   $$=526,686\times 5.52=2,905,321$$

These valuations only provide guidelines; two nearly identical HVAC companies with the same EBITDA might have very different values depending on various factors driving the business’s worth. It’s here that engaging a Tampa business broker, like Legacy Venture Group, can make a significant difference in uncovering the underlying elements that influence the value of your HVAC business for sale.

Calculating EBITDA as a Percentage of Revenue

Understanding EBITDA as a percentage of revenue offers another helpful benchmark. In the HVAC industry, the median EBITDA percentage of revenue is 11.48%, while the upper range is 36.73%.

Using the Median Percentage:

\text{EBITDA} = \text{Gross Revenue} \times \text{Median EBITDA %}$$=3,231,847\times 0.1148=370,155$$

Using the Upper Range Percentage:

\text{EBITDA} = \text{Gross Revenue} \times \text{Upper EBITDA %}$$=3,231,847\times 0.3673=1,186,808$$

These benchmarks allow HVAC business owners to compare their business against others in the industry. However, keep in mind these metrics are only part of the story. Working with a reputable Tampa business broker, such as Legacy Venture Group, gives you access to market-based assessments that go beyond EBITDA and revenue multiples to understand what drives the value in your HVAC business for sale.

Why Work with a Business Broker of Tampa for an Accurate HVAC Business Valuation?

Achieving a fair and accurate business valuation in Tampa involves more than just multiplying EBITDA by an industry median. An experienced business broker, like those at Legacy Venture Group, can conduct a comprehensive market assessment of price, looking not only at the numbers but also at the intangibles that affect value. This type of valuation gives owners a clear picture of their business’s strengths and weaknesses, allowing them to make informed decisions about timing, improvements, or even waiting for the right market conditions.

Key Drivers of Value in an HVAC Business

Some of the factors that drive the value of an HVAC business include:

• Customer Loyalty and Contract Base: Recurring service contracts add value because they provide consistent revenue.
• Experienced Staff: A qualified team, especially licensed technicians, can make an HVAC business more attractive.
• Brand Reputation and Customer Reviews: Positive online reviews and a strong reputation can differentiate your business.
• Operational Efficiency: Well-documented processes and systems add value by reducing dependency on the owner.

Knowing these factors can help owners prioritize where to invest efforts to increase their business’s value over time.

Conclusion

measures, they should be seen as starting points. Two nearly identical businesses with the same EBITDA can have vastly different values due to factors unique to each company. That’s why it’s so crucial to obtain a business valuation in Tampa from a reputable Tampa business broker, like Legacy Venture Group, Business Brokers. They offer not only a valuation but insights into the drivers that affect the price, helping HVAC owners decide if they should make improvements, hold off on selling, or proceed with the transaction. This approach ensures owners receive a clear, comprehensive picture of their business’s true worth.

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Asking yourself “when should I sell my business?” https://buybizusa.com/seller-registration/ 

Check our business valuation training organization: NACVA: https://www.nacva.com/directory.asp

Check out Brian Stephens at IBBA: https://www.ibba.org/broker-profile/florida/brandon/brian-stephens/

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