A Contractor’s Guide to Planning for Success(ion)
No matter if you plan on passing your company onto one of your children or if you sell or partner with an outside party, succession planning is paramount.
Ryan Kletz is now in the early stages of his control of Classic Air’s One Hour Heating & Air Conditioning in Virginia Beach, Virginia, as his father, Todd, succeeded the business to him this past summer. However, the changeover is slightly different than what happens in most family-run businesses – the Kletz family has a private equity partner, Envest, based in Virginia Beach.
Classic Air was started in 1979 by Todd and his brother-in-law, Alan Heckel, as a family-owned business. Alan retired about 15 years ago and sold his interest to Todd, and Ryan joined the company in 2008.
“Over the years we would start talking about planning for the day and then other pressing matters would happen that had more urgency, and then those succession conversations would come and go,” Ryan says. “Retirement in my dad’s eyes sounded a lot better than it did in reality, particularly as it got closer.”
Then Envest reached out to the Kletzes indicating an interest in a partnership, and seven years later in 2018 the deal was closed. The Kletz family still maintains a majority ownership in the company – an “essential” 75 percent to 25 percent split with the private equity company. Ryan is the controlling manager, and two brothers-in-law receive equity distributions from quarterly payouts.
“Our partnership with the private equity firm came to be because we’ve been trying to expand via acquisition for quite some time,” Ryan says. “We would be close to the finish line on deals, but at the end of the day we couldn’t put it away – either it was overvalued or undervalued, and the acquisition didn’t come to be. That’s when we decided that if we wanted to grow at this substantial amount, we might want to look at outside partners.”
Part of the Kletz family’s deal with the private equity firm involved developing a decision matrix. A board of directors was formed, in which the Kletzes have three directors and Envest has two. For many board decisions, only a simple majority vote is needed, while some decisions, like whether to make certain acquisitions, require a unanimous vote.
“We got lucky in our partnership – we’ve run a successful operation for 42 years and so the private equity firm doesn’t want to get involved in the day-to-day minutia of the business, unless of course, we’d ever do something crazy, and then they would step in,” Ryan says. “We have a great relationship with them.”
For HVACR contractors contemplating selling or partnering with an outside party, there’s plenty of opportunity, says Fred Silberstein, president of SF&P Advisors in Boca Raton, Florida.
SF&P Advisors, which provides M&A consulting services for HVACR and plumbing contractors, completed 46 transactions last year, totaling $740 million, and over 24 years, the firm has completed 333 transactions totaling $1.9 billion.
Today, M&A deals are based more on private equity than in the publicly-traded sector, Silberstein says. There are 65 PE-backed strategic firms across the US, taking partnerships and operating within the trades. Some want a nationwide footprint, and some are staying within a specific geography.
“Private equity likes the trades because they are highly fragmented, and end-users want to be treated right and fairly, so there’s opportunity to gain share if the PE firms help contractors do that,” he says. “Moreover, contractors are recession-proof and pandemic proof as well.”
Contractors should consider partnering with a PE firm, particularly because of the valuations, Silberstein says. Multiples are being paid in advance for the next eight years or more, and that becomes “pretty attractive” to sellers.
“PE firms also want to help grow these businesses, maybe even faster than what the owner could do on their own,” he says. “By recapitalizing the business and taking on a partner, sellers professionalize their organizations and ability to make decisions without cash or working capital constraints prove to be invaluable.”
PE firms can provide working capital for additional acquisitions, as well as back-office operations technology, including financial systems, eliminating constraints on the business, Silberstein says. They will want contractors to focus on the right KPIs to successfully grow their business – more calls, more service, more vehicles, and more replacement. Inevitably, this will lead to increased profits which will help drive EBITDA and create value for both the buyer and seller, as typically sellers roll some of the equity into the new deal.
When considering a potential partnership, the “worst thing” a contractor can do is to answer a “bird dog call” and do a deal with the first PE firm they talk to.
“The market is so robust that they need someone in the corner to maximize deals,” he says. “By conducting a broad process, contractors have the best possible chance for the best possible outcome. This way they will have multiple suitors bidding which increases leverage and ultimately the outcome.”
The highest offer isn’t always the best offer – “chemistry matters,” Silberstein says. Contractors should also determine what the cadence is with working with their new partner and what expectations of growth looks like, what the PE partner expects of them, what they expect of the partner – is the growth plan realistic?
When preparing their business for a possible partnership, contractors should have their books in order, making sure they are GAAP-compliant, considering that deals are “really driven by numbers,” he says.
Contractors should also build their service contract base and control costs as they become more mature, Silberstein says. As an example, a company that is in the growth phase would spend a higher percentage of revenue on marketing expenses compared to a company that was more established or in the mature business cycle phase.
“Contractors should also have a succession plan of who will run the business, as having a strong general manager matters,” he says. “Finally, contractors should have some kind of back-office system in place – pushing a ton of paper is inefficient, and makes it hard for PE firms to interface with their back-office.”
Robert Champe on Jan. 1 took over the role of president of Shearer Heating A/C & Refrigeration Inc. in Washington, Pennsylvania, while his father Bob Champe remains the CEO. In high school, Robert also attended the Western Area Career & Technology Center, a vocational-technical school in Canonsburg, Pennsylvania. He went on to complete the HVAC bachelor program at the Pennsylvania College of Technology in Williamsport and then worked in all aspects of the business at Shearer, from being a laborer, to doing maintenance, to budgeting, sales and marketing. For the last several years, Robert has worked with a business coach to learn “the business side” of running the company.
His father Bob knew that when the time was right, the mantle would be passed – and that time was this year.
“He’s earned it. He’s good at it – he’s learned a lot and he knows what he’s doing, so the time was right,” he says. “We’ve talked about it for a number of months, maybe years, and for my wife, Denise, and I, we felt that he was ready.”
Bob will remain at the company for another 10 years, working 25 hours a week, helping Robert on whatever he needs. Bob will also be conducting some sales and running more of the commercial projects, including on site.
“Robert’s now free to make his own decisions, but if something costs a lot of money, we both talk,” Bob says. “I’ve never been a real control freak – I like to have stuff done correctly, but we all learn by our mistakes.”
For a bit, the two had a rough time of it together – Robert quit four times and Bob had to beg him to come back. But after that the two began to have “an understanding” and Robert has since stayed.
“When I saw I had a career opportunity in the company and knew if I worked hard enough and showed that I could learn what it takes to be in a leadership role in the company, that the possibility of future ownership was in the cards,” Robert says. “I knew I had to be a sponge, learn how to manage issues, take care of our customers and employees.”
Earlier, Robert had quit because when working with his father, sometimes it was ‘my way or the highway,’ and he couldn’t take it. But the two finally came to an agreement on how Robert should be treated if Bob still wanted him around and make the company grow.
“We just had to learn each other’s dynamics,” Robert says. “Now, it’s not just all business with us – we have a family dinner night once a week every Wednesday and we don’t mention business.”
It’s hard working with family, he says.
“You just have to speak up and say what you want,” Robert says. “As a child sometimes, you just let them lead the way, but in business you need to show them you have your own ideas and input too. You can learn a lot from each other, and being brought up in the business you have your ideas on how you would handle things when you get to make the decisions.”
Before Robert officially took the reins, he kept a diary of sorts in his iPad under the notes section, jotting down differences he would like to see if he were the owner.
“Now I get to refer back to them and make the changes I believed that needed to be done,” he says.
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