HVAC and M&A Report: Industry Trends
The HARDI trade association recently released its mid-year TRENDS outlook discussing industry trends and analysis through June 2023.
The TRENDS series is based on data HARDI distributor members provide voluntarily, leading to a more accurate account of the current industry landscape than other traditional market surveys.
Key takeaways from the HARDI report as of the midway point of 2023 include:
Annual Sales Growth
Annual sales growth for the 12 months through June 2023 was 6.3%. There are signs of slowness in the US industry, with June down 6.4% year over year, which follow mixed results in April and May.
Cooling Degree Days
Cooling degree days were significantly lower: down 22% in April, 41% in May, and 23% in June. This seasonal coolness is lowering immediate demands for equipment and products.
Supply Chain Disruptions
Supply chain disruptions continue to drive OEM price increases, though the magnitude and frequency of increases has significantly slowed. Distributors report that annual price increases passed through to customers were less than 5%, a dramatic reduction from the 26% surge in pricing observed in 2022.
Last year, heightened pricing played a pivotal role in propelling revenue growth, which offset flat to declining volumes across the industry. The present deceleration in pricing dynamics may pose a formidable challenge for OEMs and distributors as they navigate H2 2023.
Conversely, this evolving scenario could prove advantageous for contractors and service operations, who typically bear the weight of elevated equipment costs as they find it harder to fully pass through these expenses to their customers.
OEMs and distributors may see strained operating results through the remainder of 2023 after experiencing years of sizeable price increases that outstripped input costs and led to generally improved margins above historical levels. This means that while M&A valuation multiples remain strong, particularly for the very best sellers, profitability may be tamed, dampening valuations due to lighter operating results.
Service companies, for their part, remain well positioned in the current environment due to mission critical nature of HVAC service work and underlying demand being relatively non-discretionary. Particularly for service companies geared toward repair and maintenance work, we expect to see profitability remain strong, with M&A appetite showing few signs of slowing.
HVAC & M&A Industry Interview: “Ask the Executive” Reflections on Selling a Family Business
Carter Morse & Goodrich recently sat down with former Williams Distributing CEO, Mike Koster. Mike is an industry veteran and innovator with over 40 years of experience in the HVAC sector as a senior executive at Williams. (The full video interview can be found HERE)
Founded in 1968, Williams Distributing is a family-held full-service distributor of HVAC and building products equipment and supplies, serving the midwestern US through 32 locations and over 500 employees throughout Michigan, Ohio and Indiana. The Company was successfully sold to Daikin Comfort Systems in December 2022.
What was your ownership group’s motivation for selling your business?
The family had not originally ever planned to sell the business, but we did have an active board of industry advisors. They suggested that we find out what our business was worth, especially considering that the M&A market for HVAC was very strong over the last few years. We met with Carter Morse & Goodrich, who encouraged us to think about all of our objectives and motivations for the business going forward. While value was an important piece of the puzzle, equally important were the legacy of the business and finding a strong home for Williams’ 500 plus employees.
What was the most important criteria in your selection of an investment banker?
The most important aspects for us were picking an investment bank that was experienced and had a track record of success in sell-side M&A, and also was able to focus on family and owner dynamics. As a family-run business, the Williams team felt that CMG’s family and founder focus created a connection and comfort that CMG would do what was best for us, and that we would get undivided attention from the “A” team, and that they would get the job done. That all proved to be true as we moved through the transaction.
What was the most important advice that prepared you for the M&A process?
It is really not a process that you as an owner or manager are ever prepared for. CMG explained to us that it was going to be a lot of work, a lot of face-to-face meetings, and that we would really need to articulate what makes our business special and stand out before you go to market. The CMG team did a great job in helping us think through those issues and position the company for maximum buyer interest and value prior to starting our sale process.
What were the surprising sources of “value” in the M&A process?
As a family-run business, keeping the management team and the entire company together was an important factor beyond just value. The ultimate buyer (Daikin) was able to do that, although they actually were not the highest priced offer. They turned out to be the best fit for our employees and culture, and the process helped us see that. That provided a lot of value and comfort to our team.
If you had to do it again, what would you do differently?
There weren’t many things that we could, or would, have done differently. One item that we would have liked was for the sale process to move quicker – it took close to 11 months – but that is somewhat out of your control, as much as you try to affect it. The sale process just takes time when you introduce your business to a number of interested parties. For our part, we had to spend time evaluating each party to see if they would make a good partner for our business. Those considerations take longer than you would expect, and you want to make sure that you and your advisors spend the time to evaluate your options and get it right.
What recommendations would you give to a business owner currently contemplating selling their company
Expect to spend a lot of time getting prepared and focusing on how to prepare information and having someone like CMG guide you through the process, because that is very important. The CMG team provided technical support and advice that you as a business owner probably don’t think about on a regular basis or have in your tool kit, but are necessary to affect a successful sale process.
How has the Williams business fared following the transaction closing?
Our company has stayed together – the management team has remained and is motivated and we have not had employee turnover. Now we have a much larger company supporting what we do, so we have some very positive momentum, even in a slower economic environment.
HVAC M&A Activity: Current News Report
Current HVAC M&A Market Update
In parallel with the broader M&A markets, the US HVAC transaction landscape has shown a marked decrease in deal activity over the past twelve months, with closed deals down 34% compared to the prior year. While seemingly a dramatic decline, it is helpful to keep in mind that M&A activity in the HVAC sector this year is relatively in line with normal level of volume seen during the 2018-2020 time period, outside the torrid pace of 2021-2022.
HVAC Buyers Remain Active
Based on our extensive discussions with corporate strategic buyers and private equity investors, we maintain a positive outlook for M&A in the HVAC sector, across the different vertical markets (manufacturers, distributors and service operations). This optimism stems from the enduring appeal of HVAC as an attractive end market, driven by sustainable themes such as energy efficiency / sustainability, health and indoor air quality and advancements in technology which continue to drive enthusiasm and M&A activity.
- For strategic parties, who in general are experiencing slowness in organic sales this year but maintain strong balance sheets and excess cash reserves, M&A will continue to be an avenue for sustained revenue growth and realize synergistic profitability opportunities, especially at the larger end of the market.
- PE investors also continue to have a strong appetite for the HVAC across the verticals. With the number of investors in the space seemingly growing monthly, and with continued opportunities to build platforms and consolidate the space, equity investors will drive much of the middle market activity.
Implications for Business Owners
While the current M&A landscape is no doubt less frenetic than 2021-2022 as a result of higher interest rates and economic slowness, high-quality “A-rated” businesses with a track record of growth, differentiated products and services and high-quality management teams will continue to find a captive and enthusiastic buyer universe. Additionally, “B-level” companies can still be attractive in this market, but perhaps at a lower value at least until investors get past the recent volatility and find more confidence in the outlook for the financial markets. With that said, family and founder owned businesses should consider now as the best time to prepare for a future liquidity event, especially when the financial markets fully recover (which can happen quickly).
Upcoming HVAC Industry Events
- NAFA (National Air Filtration Association) Annual Convention Sept. 13 – 15 | Nashville, TN
- 2023 Decarbonization Conference for the Built Environment October 25-27 | Washington D.C.
- RETA (Refrigerating Engineers & Technicians Association) Conference Nov. 14 – 17 | Jacksonville, Florida
Whether you are actively considering an exit or just curious about options for the future, we would love to connect, learn more and truly understand your objectives. We are happy to share our insights and help explore strategies to maximize the value of your company and enhance the legacy of your business.