Purchasing an HVACR contracting firm can be extremely profitable for a distributor if done with the right people and the right motivation.

I wasn't too shocked the other day when I read that Lennox (the two-step HVAC manufacturer) has started to buy out some of its HVAC contractor dealers. Its unorthodox direct-to-contractor sales strategy would naturally allow this. And besides, the privately held company went public just a few months ago, and in a hot stock market, it had to find some ways to invest all the money coming in to grow the company.

So the quick fix is to buy someone out. That's what several manufacturers have done lately, buying out competitor manufacturers - it's what the consolidators are all about, and it's what several public utilities are doing (buying out contractors). So is it your turn?

I raised this same question in the November 1999 issue. Of course, the reasons I gave for buying out HVACR contractors in that article are entirely different from the reasons manufacturers, consolidators and utilities are doing it. They look at HVACR contracting as a stable, lucrative cash cow. After all, the consolidators are doing it, so it must be a good investment, right?

I'm sure that Lennox had other reasons - other than too much investment money - for buying out some of its dealers. It's likely that in some cases Lennox was just trying to retain a dealer presence in a territory by buying a key company that might have otherwise failed, or perhaps the price was too tempting to pass up. The company may also be trying to cut costs by eliminating the need for remote sales offices.

As for buying them at a good price, remember that HVACR contractors are usually family-run businesses with poor cash flow, and there's often no one to pass the company along to. So sometimes you can pick up such a company pretty cheap.

A good investment?

Many of the consolidators and utilities are finding out that HVACR contracting firms can be poor investments. Some of the consolidators are already on the financial ropes. I recently read that one of the utilities that had purchased several contracting firms is losing something like $5 million a month on the investment. I wonder how its customers and investors view that.

The problem with HVACR contracting firms is that they are inherently small businesses, and much of their sales is usually tied into the owner's personal contacts and efforts. If you buy such a company, you lose the No. 1 source of income when that person retires.

This can be overcome if you can step in and quickly prove that the purchase has bettered the company. That's why the first two years need continued investment. You can't immediately raise prices, but you must improve the company's image by purchasing new trucks, uniforms, tools, advertising and a good computer scheduling/bookkeeping program, while finding better people to man the operation.

Now, realize that buying HVACR contracting firms as just an investment in your company's growth (like all the above-mentioned companies are doing) is pretty perilous. Pick up a 10-year-old telephone book for your area and see how many of the contractors listed back then are still in business. Probably at least 40% have gone belly up - even in a booming economy. Mismanagement, unrealistic pricing and uncollected bills are usually the problem. Also, HVACR contractors, because their businesses are relatively new, usually don't plan for the inevitable economic downturns that North American economies experience in regular cycles. They usually are geared so high and the owner is taking so much of the profits that when business falls off, boat, house and luxury-car payments usually put the company under.

If your company is like most supply-house operations I'm familiar with, you have enough stability, business acumen and resources to help any HVACR contracting firm ride the tides of business and survive.

So why aren't more wholesalers trying to buy contractors? You have to deal with issues such as stipulations against such purchases in contracts with your suppliers and trying to keep nervous contractors from thinking you're going to compete against them with unfair pricing and practices. Also, you have to run the new companies well, not leave them to some idiot son or foul-up employee you can't fire. You can overcome these obstacles.

The best contractor purchase for your company to consider is one or more of those that are doing well, don't sell your brand and are in a sales territory where your product line doesn't sell well. That way, you aren't dependent on the direct profitability of the subsidiary company, but your core company is making more money from the increased product sales. And the better the purchased company is run, the more profitable both are.

Managing an HVACR company

Managing such a company well can be a problem. While wholesalers excel at money and stock management, they are usually poor advertisers and people managers, and they're not too good at public relations, either. If I purchased a contracting company and was looking for a manager, I'd forget about existing employees with technical experience. I'd want business people who are ambitious, are properly financially motivated, and have good ideas about promotions, advertising and scheduling. Then give them some middle managers who have the skills to know what's happening.

If you or your company have money to invest, forget about that hot stock tip. Have your lawyer send out a "feeler" to local contractors to find out anonymously which ones might be interested in selling their companies. Then carefully proceed, making sure the price, potential and territory are right.

Regardless of the losses that larger companies are experiencing in this market, if you have the right people in place and the right motivation, purchasing an HVACR contracting firm can be extremely profitable and the right thing to do in the long run. If your suppliers have any legal qualms, just let them know what you're trying to accomplish. After all, it's in their best interests. I'm sure they'll not only stay out of your way, they'll try to participate in making the purchase successful.