Would you sell your HVAC business?

I came across an article in the Wall Street Journal that discusses the aggressive foray of private equity into the trades sectors. The article titled America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs made me ponder whether this is something that we could soon expect to see in Europe too.

Many small and family-owned trade businesses such as electricians, plumbing services, HVAC installers and other contractors in the US are now being bought by private investors or larger competing groups.

The article presents a couple of cases where this appears as a panacea for the daily business grind of these hard trade jobs that too many people shy away from.

The story told is that of tradespeople that are given a large sum of money to help them retire early while keeping them on board for a 2-5 year transitional period where they can keep doing what they are doing without uncertainty, stress and overtime.

Nevertheless, I’m skeptical – to me at least this sounds like a very one-sided perspective. Why would you spend decades of your life putting together a growing, profitable business that is at the top of its game, with a good reputation and families that depend on it only to sell it all and start again?

There are, of course, a bunch of reasons many of which are hard to resist. Some businesses are facing financial difficulties, or the owners don’t have the health and energy needed to keep up with the demands of the job.

Others are close to retirement and don’t have successors interested in the trade or the family legacy. Those retiring see this as a viable plan to protect their employees while cashing in on their years of hard efforts.

And there are also those that have no option but to sell because their competitors will accept the offer if they decide to turn it down.

That last one I find troubling.

As with many other businesses, consolidation is an inevitability for some trades in the long run.

The trades have mostly been a family or small team affair, pretty much forever.

With AI threatening so many white-collar jobs in the future, the professional trades could be some of the few remaining safe havens for the next generations.

Whether you’re a plumber, electrician, HVAC technician or in any other trade, you always had the option to work for someone else or to go freelance in pursuit of our own dreams.

That may not always be the case though as the industry becomes more streamlined and competitive through acquisitions and growth.

If the consolidation of the sector becomes widespread, freelancers, small teams and family-owned businesses will have to compete with larger well-financed firms, as well as home service apps that can kill profit margins.

Undoubtedly, there are compelling benefits for investors to build a mini empire in HVAC installations as a larger business can negotiate lower purchasing prices, spread overhead costs, cover a wider region, they can afford to invest in specialist staff, better training and -crucially- they can get a better return on their marketing efforts.

Now, competing with such an adversary can be a real challenge if you’re in a small outfit, and that’s exactly why it’s hard for some business owners to turn down such an offer.

If you say no, your competitors may say yes (prisoner’s dilemma anyone?) in which case your competition will become even more intense, and you will feel the crushing pressure of FOMO.

From a competitive standpoint, independent HVAC installers offer personalized service, and may be less prone to complacency compared to larger groups - but is this enough?

Let’s look at how future trends in HVAC could shape such a decision.

Large groups can offer competitive equipment leasing terms and watertight SLAs taking over the commercial sectors, making it very hard for smaller installers to compete in.

Add to this the trend of large utilities moving in on home installations, and you’ve got a very tough environment to compete in as an independent.

Then inevitably there will be a slew of Uber-type home service hiring applications that will decimate profitability and freedom as everyone and their dog begin to rely on them.

What about the buyer? Are consumers going to be better off if the trades become some sort of oligopolistic corporate quagmire?

Lack of a personal touch, variability in service levels, price increases, dealing with chatbots instead of actual people – these are real dangers which are evident when looking at other industries.

We have been a family-owned vertically integrated heat pump manufacturer for more than 30 years. We manufacture and install our own products to achieve the highest installation performance possible, which provides important value to customers. Although the business has grown from strength to strength, we aren’t a division of an impersonal large corporation that is riddled with bureaucracy that is obsessed with meeting management targets. So perhaps there is a middle ground to reach?

I think there is an important role for SMEs like ours in the trades sectors as they offer the best of both worlds. However, as in other industries, these businesses are often forced into consolidation as industries mature.

I personally believe that in the long run it is better for competition, consumers, employees and the industry to have a healthy base of smaller installers and independents irrespective of whether some installers consolidate into SMEs or larger groups.

And although currently there are many independents that aren’t experienced heat pump experts, this is changing with the availability of better training and the promise of greater heat pump adoption.

The PE firms / acquirers usually win, but this isn’t a zero-sum game. Both the seller and the buyer can be winners.

The rationale for buying HVAC and other trade businesses is pretty solid. Trades are recession-resistant, cash-rich, scalable, they own hard assets, they can usually be improved in profitability, they provide an established customer-base for up-sells and cross-sells and are unlikely to be completely replaced by AI or robots any time soon. The smarter buyers will focus on offering unbeatable service, competitive value and building a strong brand.

Consolidation is a natural progression as in many other markets - solar PV, healthcare, retail, construction, real estate and so on. Alas, market dynamics evolve and those who ignore market trends do so at their own peril.

So, there is no right or wrong answer and there are too many parameters to generalize.

But what would you do? Would you sell?