Competing with Private Equity in HVAC: How Independent Contractors Can Continue to Thrive
Private Equity (PE) is entrenched in the HVAC industry. Their involvement in the sector is impactful, with many contractors selling their businesses to PE firms over the past few years. Yet, plenty of individual/small HVAC contractors continue to operate and thrive. What's the secret?
Entry of the Private Equity Firms
What led to PE firms' most recent entry into the market? Most point to the pandemic and the shutdowns that followed. With people spending more time at home, the need for home services soared.
PE firms, who are always looking for investments, noted that HVAC was considered an essential service and profitable. “PE firms figured out that HVAC is a cash cow and it's steady and predictable,” says Ken Smith, managing partner and senior vice president of United Comfort Group, and vice president of Plumbing-Heating-Cooling Contractors — National Association (PHCC).
Some may recall that this is not PE's first foray into the HVAC industry. They entered the industry in the 1990s as well. At that time, firms quickly cashed out. In contrast, this involvement has staying power.
“This time, our industry has enough sophistication including better operating platforms and more tech available,” says Brandon Jacob, owner of Brandon Jacob, CPA. “Buyers are also more sophisticated and are able to quickly get up to speed about what is and what isn't relevant.” He adds, they quickly find real efficiencies.
Capstone Partners’ sector update from Fall 2024 noted that M&A of HVAC rose nearly 7% in 2024, and they projected a continuation. Cindy Sheridan, CEO of PHCC, concurs, “PHCC anticipates there will likely be continued growth in private equity partnerships, as well as increased business consolidations and further diversification of plumbing, HVAC, and electrical companies.”
While we may be experiencing a new phase of PE in HVAC — consolidation of firms — their involvement in the industry is the reality today and moving forward.
Competing with PE Firms
The entry of a PE-backed firm into your market can be intimidating. After all, they have a plethora of advantages, including deep pockets, the ability to pay to obtain top talent, more buying power, and greater access to capital. Yet, the individual/small business can thrive in today's marketplace.
Let's consider some steps independent HVAC contractors can take to compete with larger firms.
1. Establish(ed) Relationships with Customers/Community
Warm and fuzzy — two words that are not associated with PE. Large PE-backed HVAC firms are laser-focused on productivity and following systems.
“PE firms can offer many positives; however, they can be transactional and less concerned about the customer experience,” says Angie Snow, a principal industry advisor for ServiceTitan and former co-owner of Western Heating, Air & Plumbing, with her husband, Ryan Snow. “Still, people buy from who they know and trust.”
Sheridan adds that the trust between customers and owners is valuable. “A small business owner can develop personal relationships and trust with their customers, leading to faster financial decisions on the customer's part.”
Another way to establish relationships is through community involvement.
“It's not just about writing a check for a local fund drive,” says Jim Hinshaw, vice president of sales at Service Nation. He advises, “Be involved in the community.”
Hinshaw relates the story of one of his customers, an independent HVAC contractor who is having phenomenal success. “They call their service people ‘Super Techs,’ and instruct them to help customers beyond their HVAC need. If a customer needs help moving a box in their garage, the tech will help them.”
Of course, this adds time to the service call. However, word has gotten around about the company's level of service and helpfulness, leading to great appreciation for them. It's also made the company a top choice for HVAC service in that area.
2. We’re a Team
We're all aware that the industry is facing a talent shortage. PE firms can pay techs higher salaries and give them a career path. That's appealing to many techs. So, what can independent HVAC contractors do to attract and retain employees?
First, recognize that not everyone wants to work with a more formal company that focuses on systems and rules. Lots of people are drawn to a more relaxed and informal work atmosphere that an independent HVAC contractor can offer.
Once again, relationships are important in gaining/retaining employees. In a PE-backed company, an employee may walk past the boss at corporate headquarters and not even recognize them.
There's an opening for the independent. “Get to know your people,” Hinshaw says. “Say ‘how you doing,’ ask about their lives, and establish a relationship.”
Establishing the relationship has multiple positive impacts. “The employee relationship can and normally is much more personal, and the teams are usually much more close-knit, which fosters loyalty among the troops,” Sheridan says.
Employees can feel they are part of something they can impact rather than a cog in a machine. Part of establishing this is developing and sharing a mission statement, vision, and objective with employees. If employees are part of creating these elements, they feel more bonded to the company.
3. Two Can Play at That Game
Although an independent HVAC company can't compete financially with a PE-backed company, there are ways to make the playing field more even.
One of the significant advantages that PE brings is buying power. The independents don't get the best price on everything from equipment to HVAC parts. So, they either accept a lower margin or price their services above the PE-backed firm.
“The independent contractor would benefit from joining a community,” Snow says. “This will help them get better buying power and the knowledge they need to scale and grow.”
Another way to compete is to utilize technology. There are technologies in the marketplace geared toward the small business owner that increase efficiency in the back office. By investing in technology, independent contractors can use their time more strategically.
There's a lane for independent HVAC contractors in the post-private equity world. Independents can thrive by using their advantages in today's marketplace.