By Ron Coleman
I recently helped one of my Ontario-based HVAC clients sell their business. The company was making $1 million per year, and the owner was working 20 hours per week. He did that for many years and then decided it was time to move on.
Around 25 per cent of HVAC contractors net at least 10 per cent to 20 per cent pre-tax profit on sales every year. Those are the people I tell to continue doing what they have always done. What about the other 75 per cent? I have compiled an annual financial study of HVAC contractors for the Heating, Refrigeration, and Air Conditioning Institute of Canada (HRAI) for more than 20 years. Eventually, we decided enough was enough. We saw many repeat issues from the same contractors that it became obvious they just wouldn’t change. Why do some of these contractors settle for mediocrity?
When you first went into business, you took a leap of faith — there were no guarantees that you would succeed. At some stage, you reach your complacency plateau. We reached our goals and are too afraid of going back, so we plateau. Having gone through the pandemic, I hope you are now more risk-tolerant and less risk-averse.
Testing it out
There are many different ways that a business can make micro-adjustments that can aid in their long-term profit. The simplest approach would be to increase your prices. This is particularly true for service contractors. You may lose some of your high-maintenance customers, but you will be able to better serve those who stay. Nobody has ever told me it was a mistake when they increased their hourly rate by $10 — that could be $1,600 profit per technician per month. With five technicians working 11 months, a year that’s $88,000 profit in one year. In 12 years, you will have an extra $1 million in the bank. Roll on retirement.
Categorizing your customers into different groups can help you determine which should be prioritized and which should be dropped. “A” customers provide lots of work, appreciate the relationship, and pay their bills on time. “D” customers complain, challenge the bill, and are slow to pay. Get rid of these. Instead, your effort should be on levelling-up your “C” customers to the “B” level, or getting new “A” and “B” customers and losing some of the “C” customers.
We have touched base on this suggestion many times, but I cannot stress enough the benefits of building a planned maintenance program into your business. This allows you to do more work in the shoulder seasons and frees up technicians for the busy seasons.
The biggest asset in your arsenal is your team members. Provide them with all the support they need, and you will have loyal employees for years to come. Train them in sales and in customer communications. Your employees likely fall into one of three categories. I call it the 20/60/20 rule. Twenty per cent of your employees are stars — they are passionate about the business and are reliable. Sixty per cent are the drones — they turn up regularly, do their work, and go home.
The remaining 20 per cent can be replaced — they are unreliable, do poor quality work, and they have a lot of callbacks. It can be difficult to get technicians in this market, but if they can’t be upgraded, they have to go. Replace them one at a time. Make sure you support your top 20 per cent employees, otherwise, they will become your competitors. Spend less time on the bottom 20 per cent and more on the top 20 per cent.
Does size matter?
Looking at the age-old question that everyone in business asks themselves, does size matter? Yes, it does, and bigger is not better. Growing your business too big, too quickly usually means a loss of control. Many contractors have told me that when they grew too quickly, they made less money.
Look at your overhead structure. Could it support another technician? If so, then do that. If not, then increase your prices so that you don’t need more hours to make more money. Historically, I have found that HVAC contractors with sales under $1 million rarely make money unless they are in a very specialized area. Growing to around $2.5 million is good, as any owner or manager can typically control that amount of work. Growing from $2.5 million to $4 million is a danger zone as you have to add more technicians, management and overhead.
Speaking of overhead, we all need it, but we must ensure that every overhead activity is adding value. It is easy to add overhead, but it is difficult to reduce it. If your gross profit percentage is 40 per cent, then $500,000 in additional sales will generate $200,000 in gross profit. That will be needed to pay for the additional overhead of generating those sales.
If you can get to $1 million in sales, then the investment in the overhead will pay off. Try to increase your overhead in small steps. For example, if you see that one of your techs would be good at sales, put them on sales for one day a week. That way, you can support the overhead and gradually grow it as the sales grow.
How many hours do you pay your technicians per payroll, and how many hours get charged out? You need to reach at least a 90 per cent rate. A very successful contractor will get to 110 per cent. If you have a minimum of two hours per call and the tech can do five per day, that’s 10 hours of billing.
Remember to reward your technicians. If they bill out 10 hours, pay them for the 10 hours. Share the wealth! Also, reward them for signing up planned maintenance and other revenue generating results.
It is possible to work on a straight time and material basis. It is also possible to work on a flat rate pricing program or on a hybrid program.
Using a hybrid program would mean that you must prepare a list of the most common repairs that you do and have a price list for them. This might include replacing fans, motors, thermocouples, belts, faucets, or toilets. Make your own list. Also, review your travel time, consumable pricing and other add-on costs that don’t get billed. Do you bill for using a vacuum pump?
Don’t put this article away without committing to implementing some changes. Appoint someone within the company to champion each change. Give them the authority and the budget and, hold them accountable.