US HVAC Services Industry Update – Fall 2024

By Alberto Sinesi, Director and Robert Murphy, Senior Managing Director

The Heating, Ventilation and Air Conditioning (HVAC) services sector continues to witness sustained demand spurred by increased construction activity, growing awareness of environmental implications resulting in stricter regulations and government subsidies, mounting concerns regarding indoor air quality and the ongoing need to replace legacy infrastructure. However, the industry faces a shortage of qualified technicians as baby boomers retire and outpace the number of younger professionals entering the trade.

We previously provided a Fall update specific to the manufacturing and distribution segments of the U.S. HVAC market found here. The update herein will focus on the HVAC services sector.

Observations on M&A Trends

M&A volume in the HVAC services sector has remained healthy year-to-date with both public and private strategic acquirers exhibiting strong deal appetite. Private equity firms are active via add-on acquisitions to existing platforms and brand-new platform acquisitions. Public companies have demonstrated an appetite for M&A, leveraging strong cash positions on balance sheets to make acquisitions.

So, what is driving this M&A wave?

Market Fragmentation: Firstly, the HVAC services sector is a characteristically fragmented arena. It encompasses a broad universe of participants with different scale – from sole proprietorships to large and diversified corporations – that deliver generalist and specialist offerings to commercial, residential, and industrial end users on a local, regional or national level. This dynamic has enabled service businesses with critical mass to roll up competitors and execute accretive tuck-in acquisitions of smaller privately held businesses.

Growing Demand for Recurring Services: Further, technologically advanced commercial and industrial applications for HVAC parts and systems have boomed across the sector, fueling the need for continued service, preventive maintenance and repair. This, in turn, ensures more predictable future revenue streams, highly coveted by market participants.

Strategic Acquirer Interest: As an integral part of their growth plans, strategic acquirers have diligently pursued bolt-on and expansion acquisitions of companies with compatible and scalable business models. Select examples of M&A criteria include the following:

• Scale and Efficiency: Larger companies are acquiring smaller operations to achieve economies of scale and expand their market reach.
  
  
• Innovation: The need to incorporate advanced technologies like energy-efficient solutions as well as modern refrigeration techniques is driving acquisitions.
  
  
• Geographic Expansion: M&A is being used as a conduit to penetrate new markets or strengthen/complement existing footprints in high-growth geographical areas.
  
  
• Service Diversification: Market players are expanding the scope of their service offering through M&A to provide more comprehensive solutions and attract customers in new end markets.

Private Equity Interest: The HVAC services sector remains particularly attractive for private equity investors given its fundamental resilience, predictable cash flow model and underlying defensible demand — even during periods of economic softness. Transactions in this sector are also easier to underwrite. Moreover, given the elevated private equity interest in this sector, entrepreneurs have been open to rolling over a portion of their proceeds into the acquiring entity and thus generating additional upside from selling their businesses.

Insight on Consolidation Cycles: Residential Versus Commercial

Looking ahead, the broader sentiment is that the residential HVAC services segment is now midway through its consolidation cycle, whereas M&A activity in the commercial HVAC services segment is still in its early stages.

Sponsor-backed residential HVAC platforms are expected to continue executing their roll-up strategies to enhance scale and geographic footprint, while private equity interest is likely to gradually shift toward commercial service businesses. This is expected particularly with commercial businesses that have a more diversified, yet durable, customer base in less cyclical end markets (e.g., health care, semiconductors, digital infrastructure, etc.) and those that have a large portion of their business stemming from direct-to-owner relationships.

Overall, investors’ consensus is that transaction multiples for high-revenue visibility, high-margin businesses with a large service component will remain robust (i.e., north of 10x EBITDA), especially in the current M&A environment, characterized by a persisting shortage of A-quality assets and third-party financing constraints.

Key Company Attributes Influencing Valuation in the HVAC Services Sector

Several critical business attributes affect buyer appetite and valuation considerations in the industry. Aside from the target’s track record of sustainable profitable growth and margin profile, market participants in the commercial and industrial HVAC services sector have put emphasis on the following aspects:

• Direct-to-Owner (DTO) Versus General Contractor (GC) Relationships: DTO reflects a direct relationship between the service business and the end customer, whereas GC projects are typically procured via a competitive bid process. DTO work includes recurring revenue from repair and maintenance contracts as well as replacement projects and is thus less susceptible to macroeconomic trends. Also, DTO work typically generates higher gross margins and comprises shorter project cycles and an increased number of smaller transactions vis-à-vis GC work, which tends to be centered around larger construction projects with elongated lead times (at times well over 12 months).
  
  
• Customer Reoccurrence: Customer stickiness denotes the likelihood of a customer reengaging a service business for repeat project work with regular cadence.
  
  
• Service and Maintenance as a Percentage of Revenue: Business models relying primarily on continued upgrades, maintenance, repairs and replacements (as opposed to more lumpy project work) guarantee a more predictable flow of business.
  
  
• Renovation Versus New Construction as Percentage of Revenue: In general, renovation jobs are perceived as less risky than new construction activity given that the latter is typically tied to macroeconomic cycles.
  
  
• Diversification: The notion of “diversification” indicates the degree of dependency of the business on end customers, GC relationships, suppliers, sector of reference (i.e., residential, commercial and industrial or a mix thereof), as well as specific projects.
  
  
• End-Market Exposure: The nature of the end markets where service businesses operate also affects value. Service businesses with an established footprint in more stable sectors like education, healthcare, pharma, government, warehouse, offices and data centers are expected to trade at healthy multiples.
  
  
• Project Size: Smaller projects (in dollar terms) are usually seen more favorably than larger projects with the latter carrying an inherent concentration risk associated with cash conversion cycle, human capital allocation and overall project slippage. A business mix over-indexing smaller projects is much more likely to achieve a stronger valuation.
  
  
• Service Differentiation: Businesses having access to mission-critical technologies and differentiated capabilities are likely to boast a strong financial profile, making them compelling M&A targets.
  
  
• Employee Retention: Amid an industry-wide shortage of skilled workforce, a history of consistent employee retention over several years of operations provides insights into the health of an organization. Depending on geography, the presence of unionized labor may play a role in buyer preferences.

Prominent Recent HVAC Services M&A Transactions

Noteworthy HVAC Services Consolidators

• Crete United: Crete United, a provider of HVAC, electrical, plumbing and building automation services, has continued to execute on its inorganic growth plan since Ridgemont Equity Partners acquired the business in June 2022. The company’s M&A strategy has prompted the acquisition of 18 add-on assets (four this year).
  
  
• FirstCall Mechanical: FirstCall Mechanical, a leading commercial services company offering HVAC, refrigeration, electric and plumbing services primarily to distribution centers, universities, industrial facilities and government facilities, has made 15 acquisitions since private equity firm SkyKnight took control of the business in January 2022. The company’s M&A strategy revolves around the expansion of the existing footprint in the high-growth Southeast region.
  
  
• Orion Group: Orion Group has made over 35 acquisitions since Alpine Investors formed this commercial facility services platform via Jackson Mechanical Service in November 2020. Since then, Orion Group has been pursuing a consolidation strategy centered around family-owned service providers with a focus on HVAC/R, plumbing and DTO business.
  
  
• Sila Heating & Air Conditioning: Residential service provider and aggregator Sila has made 28 acquisitions since receiving an investment from Morgan Stanley Capital Partners in May 2021. The company announced three acquisitions in April 2024, followed by five between May and September 2024.

Other Recent HVAC Services M&A Transactions

Source: PitchBook and PKF Investment Banking

Select Public Company Data as of November 8, 2024

Source: CapIQ
Note: Dollars in U.S. millions; EV = Enterprise Value; LTM = Last Twelve Months

Contact Us

The PKF Investment Banking team is available to discuss current M&A dynamics in the HVAC services industry and determine which opportunities may exist for your business. For more information, please contact:

• Alberto Sinesi
  Director
  PKF Investment Banking
  asinesi@pkfib.com | 203.273.5024
• Robert Murphy
  Senior Managing Director
  PKF Investment Banking
  rmurphy@pkfib.com | 561.337.5324

About PKF Investment Banking

PKF O’Connor Davies Capital LLC (DBA PKF Investment Banking) is a subsidiary and investment banking affiliate of PKF O’Connor Davies Advisory LLC. Securities-related transactions are processed through an unaffiliated broker-dealer, Burch & Company, Inc.

Whether a business owner is ready to sell the company or seeking growth through acquisition, our investment banking team is committed and credentialed to help owners achieve their objectives. PKF Investment Banking provides guidance through every step of the process and brings the expertise to enhance certainty to close – while always staying focused on maximizing the value derived from the transaction.

With deep expertise in and a dedicated focus on advising privately held middle-market businesses, the PKF Investment Banking team has completed over 300 M&A and capital raise engagements in North America and abroad during their careers. Our key services include sell-side and buy-side M&A advisory, exit readiness and transaction planning. For more information, visit www.pkfib.com.

PKF Investment Banking provides this report for information purposes only and it does not constitute the provision of financial, legal or tax advice or accounting or professional consulting services of any kind.