Private Equity’s Growing Grip on the HVAC Industry: What Homeowners Should Know

The Chill Behind the Deal: Private Equity’s Growing Grip on the HVAC Industry

Heating, ventilation, and air conditioning (HVAC) companies across the country complete some tremendous tasks for homeowners and business owners, including:

• Educating homeowners and business owners in the best practices and timing for the maintenance, repair, and replacement of these complex building systems.
• Installing, maintaining, repairing, and replacing HVAC systems.
• Keeping up with the rapidly advancing technology involved with HVAC systems.
• Training technicians with said technology and the tasks necessary to care for HVAC systems.
• Providing exceptional customer service to a faithful customer base.

The typical HVAC firm is a small business enterprise, employing between 5 and 10 people. Their client base is often stable and faithful, but quite small. Expansion of the client base or significantly improving facilities requires capital, so talks of improvements are often phrased in “If only…” comments.

A departure from this simple business structure is happening behind the storefront windows. Private equity (PE) firms have observed an opportunity in the HVAC industry.

Behind the Buyout: What Happens When Private Equity Takes Control

Private equity firms are large financial engines designed to acquire companies to derive profits for investors. They are familiar with the tech, finance, healthcare, and retail sectors. Are private equity firms good or bad? That depends upon which side of the arrangements you are on. When a PE firm acquires a company, expect some or all of these steps to happen.

• The large amount of capital is often attractive to capital-poor small business enterprises. HVAC firms are often susceptible to a quick buyout.
• The goal of PE firms is simple — profit for the investors. This profit comes at the expense of the original firm’s employees and the customer base.
• The PE firm’s capital cannot be tied up too long with any one firm, so the goal is to siphon as much profit as possible, followed by a rapid departure.
• To cut costs, the number of employees is drastically reduced, requiring the reduced staff to complete the same or more labor. The first to go are the most expensive (well-paid) technicians, replacing them with poorly trained rookies for a reduced wage. The results are a reduction in customer service and frustrated staff.
• Any diversification of services is generally considered fair game for a quick sale.

These steps often happen within 3 to 10 years. This keeps the capital relatively free for further acquisition and profit-taking. In the wake of the PE takeover, the original firm is often sold off, heavily indebted or bankrupt.

Sometimes this process works in the favor of an industry. PE acquisition of the United States steel industry resulted in some positive changes. Many small companies were consolidated, helping to streamline the business model. Steel manufacturing processes were also modernized, realizing profitability in an industry struggling to make a profit. However, large retail companies have been purchased by PE firms and are now bankrupt.

Decoding the Attraction: What Makes the HVAC Industry a Target for Private Equity

1. The HVAC industry grows consistently at the rate of 6.28%. The industry is preparing for continued growth by training technicians for an anticipated 40,000 new jobs. Seventy-five percent of homes have a central air conditioning system, and 89% of homes have a central heating system powered by either electricity or natural gas.
2. The HVAC industry is relatively recession-proof, since these systems require maintenance, repair, and eventual replacement. These systems employ a combination of electrical, mechanical, and chemical-mechanical components with a predictable useful lifespan.
3. The average homeowner spends approximately $300 annually on maintenance and repair. This is extremely attractive to PE investors.
4. The HVAC industry is populated by small business enterprises, which are often seeking capital for expansion and improvement.
5. Government regulations are constantly changing, attempting to protect the environment from harmful chemicals used by air conditioners and heat pumps. The regulations are often costly, requiring capital-intense improvements.
6. Caring for an HVAC system is not a do-it-yourself task. Proper maintenance requires training and (ideally) on-the-job experience with specific HVAC components. Proper training is often provided by manufacturers, ensuring the best service for their equipment.
7. HVAC equipment has a limited lifespan. Air conditioning systems last about 15 to 20 years, and heating systems last twenty plus years.

Spotting the Shift: How to Tell if a Private Equity Firm Has Taken Over Your HVAC Company

Careful attention can usually detect subtle changes in staff and services. PE firms usually:

• Remove the owner or manager, replacing them with a PE firm employee dedicated to the PE firm’s goals. These managers are the source of valuable customer information. But they are often the highest-paid employee and will object to changes to traditional services. Their loss is quickly felt by customers.
• Remove customer service best practices, since they are usually expensive, eating into profits. Anticipate changes to warranties and equipment quality.
• A PE firm may acquire several small HVAC businesses in a local market. This allows them to practice aggressive pricing, raising or reducing prices to harm the competition. Often, this practice results in weakening other local firms, preparing them for future acquisition.
• The usually loyal, well-trained, and well-paid experienced technicians are usually released, replaced by poorly trained, inexperienced, and poorly paid technicians.
• When a large enough market share is acquired in a location, the PE firm will often raise the price for poor service, a very poor business model, over the long term.

When you observe a rapid staff turnover, a reduction in service/equipment quality, and a large price increase, it is often a result of a PE firm’s acquisition.

What can a homeowner or business owner do to combat this problem?

1. Stick to your standards for quality and service. Remember, you determine who provides these services, so demand the best. Speak up and require adequate service.
2. Ask questions, especially in the face of rapid, drastic change.
3. Choose to support locally owned, independent small business enterprises for the best result.

Long-Term Relationships, Quality Service: The Northwind AC & Heating Difference

For over three decades, Northwind AC and Heating has provided award-winning service to home and business owners around the Texas Gulf Coast. We believe that customer satisfaction and long-term customer relationships is what sets Northwind apart from other companies.

You can be assured that our highly trained and professional field personnel can diagnose whatever problem you may be having. We can promise this because of the ongoing training program we require of all our technicians.

You are important to our business both now and in the future. We want to provide you with the type of service that keeps you coming back again and again. We won’t try to sell you something you don’t need!

Our philosophy is to offer you professional advice and recommendations so that you can make an informed decision that best fits your needs.

Contact Northwind Air Conditioning and Heat for all your HVAC needs!