1. Understand Subjective vs. Objective Value
By Alan Simpson
It’s important to realize there are two types of value inherent in every service trade business: subjective value and objective value. You could also think of these as “feel good value” and “saleable value.” Contractors are generally proficient in creating and building the former, but have serious shortcomings with respect to the latter.
Subjective value is customers’ expectations of service and/or product quality in relation to the actual amount paid for it. It can be expressed as benefits divided by price, or quality received divided by expectations. HVAC contractors tend to excel in providing outstanding service and products to customers — many times for far less than the service and products are worth. Although that is generous to a fault, it’s a pattern that may seriously hurt the development of objective value.
Objective value for a service trade business is the market price an unemotional buyer is willing to pay to purchase that company. It’s based on the recurring net profit along with other tangible and intangible assets. It has nothing to do with how much effort, expense, and time it took to build that company, nor does it consider the owner’s personal feelings about the business, its employees, and its customers. It’s all about recurring net profit. The company’s reputation in the community is important to a buyer, but only if it’s reflected in recurring revenue.
If it’s the buyer’s perception of value that determines the price, what are the elements that a buyer considers? Basically, a buyer purchases two things: assets and the excess earnings the assets produce. Excess earnings essentially mean the revenue produced above that which could be produced by the tangible assets alone. It’s commonly known as “goodwill” and all adds to the bottom line cash throw-off that is the basis of objective value.
Simply stated, the key to building value is to create management systems that return fair objective value to the business in proportion to the high subjective value given to the company’s customers.
Alan Simpson is a Tucson, AZ-based consultant for the HVAC industry. He can be reached at 520/577-8108 or by email at [email protected].
2. Build Your Service Agreement Base
By Michael Bohinc
The best way to build value in your business is to develop and grow your service agreement (maintenance agreement, club membership, etc.) customer base. That is the most valuable asset to a potential buyer of your business. In fact, even if you’re not looking to sell your business, it’s still the most valuable asset.
Service agreements represent guaranteed, ongoing income for a company. When I analyze potential acquisitions for clients, I look at not only the number of service agreements the company has, but also what percentage of its active customer base has service agreements. In essence, you’re trying to lock in future sales for your company. Service agreements are a great way to ensure that happens.
There are a number of companies, consultants, and associations available to help you develop a service agreement program if you don’t have one in place. There’s no need to “reinvent the wheel.” If you’re looking to build real value in your business, get your customers signed up for your service agreement program. If you don’t, I’m sure one of your competitors will be happy to.
Michael Bohinc is a certified public accountant in Cleveland, OH. In 2012, he received the Servant Leader Award from the Service Roundtable. He can be reached at 216-570-0406 or by email at [email protected]
3. Involve Your Employees in the Business
By Don Kardux
The best way to view a company’s value is through the lens of its culture.
A value goal for many companies with which I work is to create an environment where “most of the people, most of the time, look forward to coming to work.”
After 25 years of consulting, I’m convinced that a positive company culture leads to high monetary value, and that the key to success is in the consistent involvement of employees in all areas of the company.
It’s a powerful lesson when employees understand that giving away a $70 gas valve means that the company has to bring in $700 (at 10% net) to have the money to replace that valve. And many companies in our industry live in a less than 10% net profit world. At 2% net profit the replacement sales for that valve would be $3,500.
Well-intentioned employees who understand how a company can operate profitably will offer suggestions for improvement, if given the opportunity in a non-threatening atmosphere. If you have employees who are not well intentioned, you might ask yourself, “Why are they still here?”
I often say to owners of companies, “You have already hired the solutions to many of your problems: your employees”. It’s true; the people best suited to figure out how to make things better are the people doing the work.
Don Kardux is the founder and president of Business Navigators, Toledo, OH. He can be reached at 800/253-4085, or by email at [email protected].
4. Achieve Market Dominance Through Differentiation
By Drew Cameron
A contracting business builds value in a variety of ways: it offers valuable problem-solving and time- and money-saving services; it brings value to the job market by offering solid career opportunities; it provides value to shareholders by generating a fair return on investment; and, if the return on investment to shareholders is lucrative, a business can and should have value reciprocation by giving back to its customers, co-workers, and the community.
How can a business provide all these measures of value while at the same time effectively, efficiently, ethically, and legally eliminating competition? By achieving market domination through differentiation.
An HVAC contractor that differentiates itself by evolving a system performance, whole-house comfort energy solutions, healthy air, quality installation, superior service, and customer care provider can squash its competition by solving problems instead of selling boxes. Such a contractor can become the “boutique for the discerning homeowner.”
This contractor will dominate the traditional replacement market by solving problems others ignore. The business will transcend to serve the distinguishing customer with distinctive tastes (often affluent) who wants to be catered to and is willing to pay for unique custom solutions and to be pampered with excellent service and outstanding customer care.
In the world of selling performance-based solutions, sales performance metrics benefit greatly while streaming all that value to customers and back to the business as follows:
• You will have happier customers who will readily become ambassadors for your business and cheerfully refer you and become your best lead generators
• You will have more skilled and satisfied co-workers who now solve comfort-compromising, health-threatening, and energy-wasting problems they were previously unable to address
• Shareholders will be elated as they receive a solid return on their investment.
All of this will put you in a position to share the profits with your team via more and better benefits and bonuses, as well as the ability to give back to the community. I can think of no better way to build value to a business than creating a business that gives back.
Drew Cameron is president of HVAC Sellutions, Pocopson, PA. He is a Contracting Business.com and Service Roundtable Tom McCart International Consultant of the Year Award winner. He can be reached at 888/621-7888 or by email at [email protected].
5. Build Your Active Customer List
By Lorainne Ball
In residential contracting, the most valuable thing you have is a strong active customer list. These are the people in your service and maintenance program. Even if your building disappeared tomorrow, you could still continue with a strong active customer list.
Not only is this list a strong revenue source, it’s also a great source of referrals and viral marketing if you use it as part of an integrated email and social media program.
Lorraine Ball is the creative director of Roundpeg. Follow her on Twitter @lorraineball or @roundpeg.
6. Communicate Effectively With Your Customers
By Frank Besednjak
In the minds of most customers, the difference between one HVAC contractor and another is minimal. Most customers will consider the overall value received as “fair” or “good” based simply on someone actually showing up, calling them back, and repairing or installing something correctly without leaving them feeling like they were ripped off.
A stand-out business is one that provides experiences that far exceed what the customer expects from the typical contractor. I recently spent some time reading a few complaints on-line about contractors. Most of those were either communication-related or time-related. I read things such as, “He showed up three hours late,” “No one called me back as promised,” “They never showed up and never called,” and “I had to talk to three different people before I found someone who knew what was going on.” Based on these comments, if you at least show up when promised and communicate often and effectively, you will be better than most of your competitors.
In addition, having a real person answer the phone 24 hours a day, 7 days a week will put you far ahead of the competition. Getting a professional answering service is always worth the investment. One of my clients had most of his incoming calls go in to his voicemail. He was reluctant about investing roughly $100 per month for a live answering service. But when I was able to get a service for him that offered a free one-month trial period, he was surprised to find his business increased by more than 50% during that month. This was simply because people will not leave a message on voicemail because they want to take care of their issue now. They will hang up on voicemail, but they will not hang up on a real person.
Frank Besednjak is president and CEO of Training Source, Inc., Louisville, KY. He can be reached at 888/538-5383.
7. Document Expectations and Policies
By Steve Coscia
Contractors can build more value into their companies by documenting employee expectations and policies. This infrastructure can be easy, it ensures future stability, and it serves as a valued resource as companies grow. The same goes for processes and procedures. When companies document what they do, then they can do what they have documented. Writing things down eliminates what I call the “vapor factor,” which is the absence of documentation.
Contractors who attend my seminars continually ask me to email them a PowerPoint slide with a comprehensive list of employee expectations. The expectations list is the most requested item, thereby indicating that both residential and commercial contractors value this resource. A documented list of expectations and policies must be printed on a form, signed by both the employee and the company owner, and then placed in the employee’s personnel file. Referring back to a signed and dated document is much better than referring back to the vapor of a conversation that transpired months earlier.
Every manager has had to take corrective action with employees and these events can be handled with greater ease when the criteria are written down.
Steve Coscia is owner of Coscia Communications, Havertown, PA. He is the author of the HVAC Customer Service Handbook and he wrote a college curriculum for HVACR customer service skills. He can be reached at 610-853-9836 or by email at [email protected].
8. Two Words: Maintenance Agreements
By Vicki LaPlant
Two words describe the most significant way contractors can build value in their businesses: maintenance agreements. Maintenance agreements build value in the business both in the short term and the long term.
In the short term, maintenance agreements increase sales. And if the conversion of tune-ups to the sale of accessory add-ons and equipment replacement is managed correctly, maintenance agreements also lead to increased profits. One out of every four service repairs or tune-ups should be a lead for replacement equipment. Add to that the fact that the 2010 Decision Analyst Home Comfort Report shows that a residential maintenance agreement customer spends $500 more on a system replacement than a non-maintenance agreement customer, and you can see how maintenance agreements increase profits. And profits are the backbone for determining the valuation of a business being positioned to sell.
In the long term, maintenance agreements are one of the guarantees that a company will continue to be profitable after it’s sold. A maintenance agreement ties the customer to the company, not an individual owner. When determining the value of a business, we consider maintenance agreements to be an off-balance-sheet asset. A company with maintenance agreement customers and a good database can produce evidence of the dollar value that each maintenance agreement customer adds to revenue. This is a guarantee of continued revenue once current ownership is no longer involved.
Maintenance agreements are both a successful short bunt and a long home run for any company wanting to build value.
Vicki LaPlant has been working with HVAC contractors for 30 years as a trainer/consultant. She is a longtime member of the Contracting Business.com editorial advisory board, and can be reached at 903/786-6262 or by email at [email protected]
9. Create an Operations Manual
By James Leichter
One of the best ways to increase the value of any business is to create a detailed operations manual. When a sophisticated businessperson considers buying a business, he or she is looking to acquire things that can’t be readily reproduced with cash. After many years of experience, managers develop proprietary methods, rules, policies, and procedures that separate their company from others. These take time and effort to develop. Developing these things and committing them to paper increases the value of your business.
An operations manual makes important rules and policies clear to all employees. It spells out who does what, when, and how. When building your operations manual, start small and keep it simple. Your first step is to write out a clear employment policy manual. Your next step is to add an organizational chart and matching job descriptions. Write out procedures on answering the phones and handling important paperwork. If it’s important, write it out and place it in a binder.
An operations manual is the cornerstone of any franchise. It contains rules, procedures, standards, and proprietary methods that bring value to the franchise holder. An operations manual also helps bring order to an otherwise chaotic business. With an operations manual, your company will be less stressful to work for, easier to manage, and far more valuable when you sell it.
James Leichter is president of the software company Aptora Corp., a lifelong contractor, and operates a blog site at www.mrhvac.com. He can be reached by email at [email protected].
10. Make The Business Valuable Without You
By Matt Michel
To build value in a business, make the business valuable. Make it possible for the business to run without you. After all, if your company can’t exist without you — you don’t own a business, you own a job.
Start by implementing business processes that are documented and repeatable. You’ll be better off if the processes are industry-best practices that are familiar to others who might be interested in buying your business. To that end, join a best practices group or alliance. The group will give you accountability to others, comparability with peers, and makes your business more saleable (and valuable) to outsiders.
A number of these groups exist within the industry. They aren’t free, but neither are they expensive. The cost is comparable to adding a truck or two, and your bottom line will almost assuredly grow by more than the net generated by an additional truck. Moreover, the rebate programs that these groups carry will more than pay for your membership.
In a challenging economy, many contractors fear the future. FEAR is False Expectations Appearing Real. It paralyzes you into inaction, freezing you in place. That’s a recipe for failure. To overcome economic headwinds, invest in your business, in your market, and in yourself. Be aggressive when everyone else is hunkering down so you keep your customers, while taking the competition’s. When it’s harder to get and keep a customer, exert more effort in customer acquisition and retention, not less.
Matt Michel is CEO of The Service Roundtable. Visit www.serviceroundtable.com or call 877/262-3341.
Two Contractors Weigh In
Lenny Pereira, general manager of Air Around the Clock, Coral Springs, FL
The company is consistently voted a Rheem Top Contrator. It builds value in three key areas.
• Service. “We sell service. That’s our main ingredient. There are many low-priced
competitors around town, and customers can be price conscious,” Pereira says.
• Accessibility. Pereira: “Our phones are answered by a live person from 7:00 a.m. to 9:00 p.m. If you have a problem, even at 8 o’clock in the evening, you’ll speak to someone, not get a recording.”
• Quality and training. “We’ve branded ourselves on our name, our quality, and our service. Every technician must be dressed in our uniform, wear a badge, and attend training during the off-season.”
Richard Ellis, owner, Action Aire, Brownsville, TX
Richard Ellis and his team at Action Aire, Brownsville, TX, build value by playing HVAC “small ball.” “My message to the team in the morning is to go for a lot of singles rather than focus entirely on home runs,” says Ellis, a 2011 Ruud Reliable Top Contractor.
“We notice that a lot of companies will try to knock it out of the park with one job. This, unfortunately, can lead to overpricing,” he says. “If we can hit a lot of singles, we’ll score more runs in the end. We give a good price and keep the price stable all year round.”