Exclusive: SF&P Advisors’ Brian Cohen on the state of M&A in HVAC

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We would take a deal to market and have 50, 60, or 70 private equity groups signing non-disclosure agreements wanting to take a look at the opportunity. 

Brian Cohen is a business strategist at SF&P Advisors. He’s worked with hundreds of contractors on acquisitions in HVAC, plumbing, and other trades.

We talked about what he’s seeing in the market, given his point of view being at the table with both buyers and sellers. Our conversation’s been lightly edited for brevity.

How would you describe the mania of the past few years, acquisition-wise?

The absolute perfect storm. In 2020, Covid hit and everybody had to stay home. Your business life stopped, but daily living didn’t. So, you’re taking an HVAC system that’s running maybe 10 or 12 hours a day, and now it’s running 24 hours a day. And plumbing’s being used 3-4x as much. All of a sudden, HVAC companies are getting inundated with service calls. 

So that starts to happen, they can’t hire enough people, they’re working around the clock because their phones are ringing off the hook, and they get deemed essential services. Manufacturers jumped on board with all of these specials and ridiculous interest rates, and people were getting checks. 

Why would I get my 10-year-old system fixed when I have incentives to replace it? There were a lot of replacements that took place from 2020-2022, and you had this automatic spike in business growth.

What about the private equity/financial platform side?

I’m generalizing, but they were looking for a place to park some money. Restaurant flips and commercial real estate was done. All these deals happened… nobody knew what to do, but we [HVAC and plumbing] are essential services. All of a sudden, you go from having 15 or 20 active buyers in the space to several hundred. 

We would take a deal to market and have 50, 60, or 70 private equity groups signing non-disclosure agreements wanting to take a look at the opportunity. 

What were some of the conversations like during that time?

There was a lot of, “Hey, a couple of years ago your business was worth 6-7x, but I’m gonna get you 10-12x now, and you’ve grown the business.” These guys were being offered some life-changing money. Another thing is that a lot of owners didn’t want to go into business with somebody and have to answer to them. But that’s rarely the case; they’re partnering with you. They’re partnering with you because you built a great business. 

What’s happened since then?

Multiples have come off a little, but that’s because the numbers were down [in 2023]. The weather didn’t cooperate; everybody had an off-year last year. In the middle of June, it was 60 degrees for some guys. 

We came off these incredible highs, but it’s nothing to fearmonger over. This year, the bag’s mixed. Some guys are moving up, some are flat, and some are moving down a bit. By the way, there’s been so much “consolidation” that’s happened, but it still probably isn’t even 10% of our space. 

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I think the fourth quarter might be very slow this year. 

So what’s the chatter now, in 2024?

You have smaller guys — sub-$3 million in revenue — who have gotten pretty smart. They’re running their businesses a little bit differently. They’re getting more sophisticated.

Buyers are digging in a little more on their diligence — they’ll pay but for a good asset. You’ve had some exits, and guys are prepping to get their 2nd bite of the apple. For sellers, there’s some nervousness because they want to make sure their businesses are moving back up from 2023. They’re aware that you want to sell when your business is moving up and to the right. A lot of guys want to take advantage of the summer, but then you’re moving right into the election, which there’s uncertainty around. 

My feeling is that a lot of this slows up, we’re all gonna hold each other’s hands, the election’s gonna be done, and we’re gonna be back to some kind of “business as usual” at the beginning of next year. I think the fourth quarter might be very slow this year. 

Are there certain regions with more (or less) buying activity than others?

In bigger markets, there’s more competition for good assets than in smaller markets. Everybody loves the Midwest; there’s stability in the Midwest. People don’t flip around homes all the time — they’ll stay for 50, 60, or 70 years. In South Florida, we’re in and out of houses every five or six years. 

There’s industry skepticism around the “2nd bite” when owners may leave, and what happens to their teams afterward. Thoughts on that?

If your management team is incentivized properly, why are they ever leaving? When these deals happen, they’re not buying the owners, they’re buying the business, and the business is the people. The owner, who took all the risk getting the business to a certain size, will get their payday, and a lot of them do a ton of give-back — whether it be an incentive pool, a sprinkling of stock, etc. 

Also, [in some cases], you realize that the owner is the reason the business hasn’t grown anymore — they’re the bottleneck. They can get the business to a certain place, and then there’s slow growth. Sometimes, it’s great to partner at that time. Can’t get past $30 million in revenue? Okay, bring the partner in.

What do you think comes next for the industries, deal-wise?

Somebody’s gonna go public, or some of these big private equity groups will come together and do something different. And when that happens, that rising tide lifts all boats. There will be a whole other way to exit, and that could get very interesting. I don’t think we’re too far off from that, believe it or not. I’d like to think that sometime next year, that could happen.