HVACR Business November 2019 by HVACR Business

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Know Your Audience Pete Grasso 5

Avoid Pitfalls of Short Term Working Capital Brandon Jacob 16

Service Lessons from an Alligator Farm Terry Nicholson 20

Recurring Revenue is Rocket Fuel Ruth King 21

What Makes You Attractive for Acquisition Brooks Crankshaw 24

HVACRBUSINESS.COM NOVEMBER 2019 / VOL.14 / NO.11

DEVELOP A WINNING STRATEGY FOR FAMILY AND BUSINESS

ALSO INSIDE » Industry News ...............................................................6 Executive Roundtable: Commercial Refrigeration .................................11 Product Focus ...............................................................25 20 Questions with Dan Goodman CEO of Building36….........................................................26

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CONTENTS

NOVEMBER 2019 / VOL.14 / NO.11

F E AT U R E S

Develop a Winning Strategy for Family and Business By helping both family and management create a business strategy that supports the interests of the family and the potential of the business, a powerful synergy can result. By Otis Baskin, Ph.D.

D E PA R T M E N T S

Editor’s Notebook

Industry News

Product Focus

Executive Roundtable: Commercial Refrigeration Driven by regulations and increased efficiency, the commercial refrigeration sector has changed a lot in recent years — with more changes coming. By Pete Grasso

Avoid the Pitfalls of Short Term Working Capital It’s vital to know your options and plan for the future to obtain financing that will not constrict the cash flow of your business. By Brandon Jacob

You can have the best marketing in the world, but if it isn’t tailored to the right audience, it’s not doing you any good. By Pete Grasso

20 Questions with Dan Goodman CEO of Building36

C O LU M N S

Service Lessons from an Alligator Farm

Recurring Revenue is Your Rocket Fuel

What Makes Your Company Attractive for Acquisition?

Good marketing materials make your customers feel that you’ve done this before and you’re a professional at providing the service and the add-ons. By Terry Nicholson Contractors cannot afford a loss leader. Maintenance plans must at least break even after taking overhead costs into consideration. By Ruth King Consolidation among HVACR companies is being driven by multiple types of investors, and the industry provides an instructive example of what makes companies attractive for acquisition. By Brooks Crankshaw

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EDITOR’S NOTEBOOK

BY PETE GRASSO THE HVACR MANAGEMENT MAGAZINE

TERRY Tanker Publisher ttanker@hvacrbusiness.com PETE Grasso Editor pgrasso@hvacrbusiness.com MEGAN LaSalla Art Director mlasalla@hvacrbusiness.com BRUCE Sprague Circulation Manager bs200264@sbcglobal.net BARBARA Kerr Executive Assistant bkerr@hvacrbusiness.com

ADVERTISING STAFF EAST COAST/SOUTHEAST JIM Clifford Regional Sales Manager Tel 201-362-5561 Fax 201-334-9186 jclifford@hvacrbusiness.com MIDWEST ERIC Hagerman Regional Sales Manager Tel 216-409-3246 Fax 440-731-8750 ehagerman@hvacrbusiness.com WEST COAST TERRY Tanker Publisher Tel 440-731-8600 Fax 440-731-8750 ttanker@hvacrbusiness.com

HVACR Business, founded January 1981, is a monthly national trade magazine serving contractors, mechanical engineers, manufacturers, manufacturer representatives, wholesalers, distributors, trade associations, and others in the heating, ventilating, air conditioning and refrigeration (HVACR) industry primarily in the U.S. The editorial focus and mission of HVACR Business is to provide business owners and managers with the very best business management concepts available. Critical topics covered include leadership, management, strategy, finance, sales, marketing, training, education, staffing, operations, human resources, legal issues, customer service and more. We are dedicated to helping contractors master these key management skills and provide them with the resources necessary to build strong, profitable companies. Every effort is made to provide accurate information, however, the publisher assumes no responsibility for accuracy of submitted advertising and editorial information. Copyright©2019 by JFT Properties LLC. No part of this publication may be reproduced in any form or by any means, electronic or mechanical, or by recording, or by any information storage or retrieval system, without written permission from the publisher. Subscription Rates: Free and controlled circulation to qualified subscribers. Non-qualified persons may subscribe at the following rates: U.S. and possessions: 1 year $48; 2 years $75; 3 years $96; Canadian and foreign, 1-year $108 U.S. funds only. Single copies $8. Subscriptions are prepaid, and check or money orders only. Subscriber Services: To order a subscription or change your address, write to HVACR Business, 31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039 or call (440) 731-8600; or visit our Web site at www.hvacrbusiness.com. For questions regarding your subscription, please contact bkerr@hvacrbusiness.com. HVACR Business (ISSN 2153-2877) Copyright © 2019 is published monthly by JFT Properties LLC,31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039, Phone: 440-731-8600. Periodicals postage is paid at North Ridgeville, OH and additional mailing offices. (USPS 025-431) POSTMASTER: Send address changes to HVACR Business, 31674 Center Ridge Road, Suite 104, North Ridgeville, OH 44039.

31674 Center Ridge Road, Suite 104 North Ridgeville, OH 44039 Tel: (440) 731-8600 Fax: (440) 731-8750 Web site: www.hvacrbusiness.com (ISSN: 2153-2877)

www.hvacrbusiness.com www.HVACRBUSINESS.com www.hvacrbusiness.com www.hvacrbusiness.com

Know Your Audience

haven’t always been an editor, though I’ve spent the majority of my career as one. In fact, my background is in public relations and I spent a good many years working at a couple of different advertising and public relations agencies. Because of this, I still hold a special affinity for public relations, marketing and advertising (and I do my best to keep up to date with the latest trends). I frequently correspond with my former PR colleagues and classmates to discuss where the practice of public relations is going. We always come to the same conclusion: While there are a good many solid practicioners out there, it’s also pretty sad that there are people who simply don’t understand public relations and continue to perpetuate the sad stereotype of the profession.

terrifying to them because they’re not use to picking up the phone and speaking to someone they don’t know; and b) I’m more concerned with how well they researched this publication. What I’m really trying to assess is how well they did their homework, so to speak. Sometimes it’s clear from the get-go that all they did was see “HVACR” in the magazine title and crafted their pitch based off some obscure air conditioning technology. The students who earn a better grade are the ones who actually bothered to spend some time reading the magazine or looking through our website.

You can have the best marketing in the world, but if it isn’t tailored to the right audience, it’s not doing you any good.

I won’t go so far as to proclaim that every company needs public relations, but I will say that bad public relations will hurt you more than no public relations at all.

I regularly return to my alma mater to provide guidance for the next generation of PR pros, and I’m always encouraged when I see and meet so many eager, smart “kids” who have chosen this noble profession. As an editor — someone who is now firmly planted on the “other side of the fence” from PR pros — I’m able to offer these students a unique viewpoint. One of the things I always preach to them is the importance of knowing your audience. In my opinion, the most valuable tool in public relations is your ability to build a relationship with your audience. To do that, you truly have to know them. Every year, I give the class an assignment. They’re tasked with researching HVACR Business magazine and crafting a pitch that would be of interest to my readers. The most difficult part for many students is what comes next: they have to call me on the actual telephone and pitch their story idea to me. For many Millennials, this is terrifying (who knew you could actually call someone on the phone and speak with them rather than send a text?). When grading them, I’m not as tough when it comes to the phone call part of the assignment, because I know a) it’s

I say this, because they’re the ones who often pitch me relevant, business management content that you, my reader, is interested in. What seperates the good from the bad is something that seems so simple, but is often overlooked: knowing the audience.

The same can be said for your own advertising, marketing and public relations. Yes, it’s important to have a plan and execute, but you have to make sure you’re speaking to your audience. You can have the best marketing in the world, but if it isn’t tailored to the right audience, it’s not doing you any good. Think about how your business-marketing plan has changed in the last year, or five years or 10! Sure, there are the tried and true methods that have always worked, but I’ll bet you’ve also added some new techniques to your arsenal. Jim Joseph, a contributor to Entrepreneur, believes you should follow the big brands, no matter how small your company may be. He writes: “All the big brands write an annual marketing plan to outline their goals for the year and how they plan to attain them., They map out their marketing priorities and how they plan to use their mixed media to build their business.” This is excellent advice. I don’t care if you’re a one-person start-up or a multi-million dollar HVACR company with hundreds of technicians, you need to research WHO you want to reach, write down your marketing plan and stick to it. It can be tricky, sure, but there are plenty of resources available to help you. u

HVACR BUSINESS

NOVEMBER 2019

INDUSTRY NEWS » Goettl Air Conditioning & Plumbing expands in California with acquisition of Dutton Plumbing LAS VEGAS— Goettl Air Conditioning & Plumbing (“Goettl”), one of the largest providers of residential HVAC and plumbing services in the Southwest United States, announced today the acquisition of Dutton Plumbing, a leading provider of plumbing and drain services in Los Angeles and Ventura counties. Located in Simi Valley, California, Dutton Plumbing (“Dutton”) provides dedicated and dependable plumbing and drain services to approximately 10,000 homeowners annually. Dutton’s focus on workmanship and complete customer satisfaction is reflected in its motto, “The Plumber You’d Send to Your Mom’s House.” Dutton treats its customers like family and strives to be every customer’s “plumber for life.” The acquisition of Dutton significantly expands Goettl’s footprint in the Southern California market. Goettl intends to continue providing plumbing and drain services under the Dutton Plumbing brand, while also introducing its award-winning HVAC service offerings to Dutton’s loyal customer base as well as other homeowners in the surrounding area. “In an effort to continuously perfect our service offerings, we pursued a partnership with a highly regarded industry leader in plumbing,” said Goettl CEO Ken Goodrich. “The industry holds a lot of respect for Eric Dutton, founder of Dutton Plumbing, his general manager, Eric Falconer, and the dynamic team of home service professionals these gentlemen have assembled. I am excited to be part of the next leap forward for Goettl, side by side with team Dutton.” >> goettl.com

Daikin Adopts R-32 for Key HVAC Products in North America to Reduce Greenhouse Gas Emmissions WASHINGTON, D.C. — Daikin companies in North America (Goodman Global Group, Inc.; Daikin North America LLC; Daikin Applied Americas Inc.; Daikin America, Inc.; and Daikin U.S. Corporation) today announced they are developing ducted and ductless residential, light-commercial, and applied products utilizing R-32 refrigerant. In evaluating alternative, low global-warming-potential (GWP) refrigerants for North America, Daikin — a global technology leader in the heating, ventilation, and air conditioning (HVAC) industry—is focused on reducing greenhouse gas emissions and climate impacts. The company also took a holistic approach to include safety, energy efficiency, and cost-effectiveness. Based on comprehensive evaluation and testing, Daikin concluded R-32 is the ideal low-GWP alternative to R-410A for many key residential, light-commercial, and applied products in North America. Daikin’s choice of R-32 is based on the beneficial attributes of the refrigerant. Compared to R-410A and certain alternative refrigerants, R-32 can mitigate effects of direct refrigerant emissions by reducing the equipment refrigerant charge. Daikin has found that in comparison to R-410A, R-32 has a drastically lower GWP and could reduce refrigerant charge in certain equipment by up to 40 percent. The company has also found that equipment using R-32 can be more energy efficient and compact — thereby consuming fewer manufacturing resources — when compared to equipment using R-410A or certain alternative refrigerants. In summary, Daikin believes R-32 can effectively help to minimize the environmental impact of HVAC equipment. The choice of R-32 for the North American region is consistent with the wide global acceptance of the refrigerant. In Japan, R-32 is the dominant refrigerant for residential HVAC equipment while in other Asian countries—including China— and in many European countries, the refrigerant has become an increasing popular

HVACR BUSINESS NOVEMBER 2019

choice for HVAC equipment. Daikin has estimated that more than 84 million R-32 residential units have been installed by the industry across 70 countries. By selecting R-32 for various ducted and ductless residential, light-commercial, and applied products, Daikin is extending its leadership position in North America. The company was the first to introduce R-32 residential air conditioners and heat pumps globally and has, since 2012, sold more than 21 million R-32 residential units worldwide. “We know that the net effect of air conditioning on the environment is a combination of the refrigerant used and energy consumed,” said Daikin Applied Americas’ President and CEO Mike Schwartz. “R-32 enables home and building owners to achieve reduced climate impact, superior performance, and operational savings. Daikin is in a unique position as a manufacturer of both HVAC equipment and refrigerants. Our approach has always been to use our expertise to choose the right refrigerant for each application. R-32 is the right low GWP refrigerant choice for many of our residential, light-commercial, and applied products in North America.” Daikin’s North American production of R-32 products is the latest step in its efforts to advance technologies that reduce environmental impact and provide consumers superior technology. These efforts will take account of the developments in various North American jurisdictions as they enact appropriate regulations, codes, and standards. >> daikin.com

AHR Expo Announced 2020 Educational Program WESTPORT, Conn. — The 2020 AHR Expo today announced its full schedule of sessions for the 2020 Education Program, including more than 200 free seminars, new product and technology presentations, professional certifications and continuing education courses. Each year, the Education Program discusses some of HVACR’s biggest opportunities and challenges through a series of comprehensive, informative and industry-focused sessions hosted by leaders from every sector of the industry. This year, the AHR Expo will add a series of HVACR trend discussions led by members of the AHR Expo Expert Council. The 2020 AHR Expo will be held Feb. 3-5 at the Orange County Convention Center in Orlando, Fl. To register, please visit the AHR Expo registration website. “The Education Program adds a unique element of learning to the AHR Expo with the opportunity to hear directly from leaders within the HVACR industry about the latest trends, applications and practices,” said Mark Stevens, AHR Expo show manager. “The development of our session schedule is ongoing, and we take careful consideration of discussions happening across the industry to identify pain points, opportunities, trends, etc. where we might offer support and solutions through dedicated sessions. There is tremendous planning involved, internally with AHR Expo as well as from the speakers and sponsoring organizations, to deliver useful advice, perspectives and tools to advance as professionals in the industry.” The 2020 Show features 76 free sessions led by industry experts working with leading organizations. Each session will range from one to two hours and will aim to deliver solutions to some of the HVACR industry’s most pressing challenges and exciting opportunities. Attendees are invited to attend general HVAC-related subjects as well as those specific to their sector of the industry and practice. Additionally, attendees are encouraged to download the MyShowPlanner App for iOS and Android to manage their Show and Education Program schedule. Details and instructions for downloading the 2020 AHR Expo App will be released closer to the Show and available on the AHR Expo website. >> ahrexpo.com

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DEVELOP A WINNING STRATEGY FOR FAMILY AND BUSINESS

By helping both family and management create a business strategy that supports the interests of the family and the potential of the business, a powerful synergy can result. BY OTIS BASKIN, PH.D.

oo often, great business-owning families assume that family and business represent ends of a continuum from which they must choose. To paraphrase James Collins and Jerry Porras in their seminal book, “Built to Last,” family business owners are often tortured by the “tyranny of the either/or” when they should “embrace the genius of both/and” in family business. As the central concerns of business (winning, profits, etc.) are different from the core functions of family (nurturing, traditions, etc.), it is not surprising that many people believe the success of one has to come at some expense of the other. The assumption is either we make our choices and set priorities based only on the needs of the business or we focus on the needs of the family. For example, have you ever heard someone say you have to choose

HVACR BUSINESS

While not a requirement for success, the involvement of qualified family members in leadership of the enterprise can help to ensure that the business has a good ongoing appreciation for the values and concerns of the family. between family management and professional management? The implication of such a choice is that family members cannot be professional. The danger of the either/or approach is that owners develop policies that ultimately harm the family and the business. One large family business I knew ceased to exist because the founder decreed that theirs was a “family first” business and any family member was entitled to a senior

NOVEMBER 2019

management job — irrespective of their actual qualifications. The result was an organization overburdened by an ineffective management structure that not only was inefficient but ultimately inept. By the third generation, there was so much conflict in vision and lack of initiative from senior management that the business lost its ability to compete in the industry. Further, the family was in such disarray

as a result of the stress from the declining business that many relationships were damaged beyond repair. The opposite approach can also be a recipe for failure. Another large family business I knew developed a preference for “professional management” that became a barrier to family members even being considered for roles of leadership in the company. As more non-family executives took control of senior management, they systematically shut-out family members who aspired to careers in the business to ensure “family concerns” could in no way cloud business decisions. The result, by the fifth generation, was a distant and disaffected group of family owners who did not understand the businesses they were in and therefore did not appreciate the need to reinvest capital for future growth.

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Further, it divorces the interests of the business from the family and vice versa when, ideally, the two should be closely aligned. The business should be managed by the strongest possible cadre of managers who have a deep understanding and appreciation of the family’s priorities for the business. The best family business executives understand that a well-informed and engaged shareholder group is among the greatest competitive advantages they have as a company. Likewise, the family needs to appreciate that their interests as business owners are best served when qualified leaders are at the helm, working in partnership with family leaders as appropriate. While not a requirement for success, the involvement of qualified family members in leadership of the enterprise can help to ensure that the business has a good ongoing appreciation for the values and concerns of the family, and the family has a good “insider” appreciation of the needs and demands that are driving the business. The parallel planning process, originally advanced by Randel Carlock and John Ward in “Strategic Planning for the Family and Business,” links these two powerful forces to recognize the real potential of family business. By helping both family and management create a business strategy that supports the interests of the family and the potential of the business, a powerful synergy can result. While it is impossible to describe all the complexities of a successful family business plan in a static diagram, Fig. 1 serves to show that strategic planning between family and business, owners and management can produce mutual commitment and alignment far beyond the normal range of fiduciary responsibility. Parallel planning for the family and the business will ensure that the strategic

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Parallel Planning Processes

Figure 1

Core Values

Values

Management Philosophy

Family Commitment

Strategic Thinking

Strategic Commitment

Family Vision

Shared Future Vision

Business Vision

Family Enterprise Plan

Formulating Plans

Business Strategy Plan

direction of the business is aligned with the overall goals of the family. When a family has a long-range vision for itself as owners of a business that is strategically positioned to support its goals for generations to come, patient capital is more readily made available to grow and nurture the business. The strength of this model (Fig. 1) lies in the application of four strategic principals: 1. Family values and business philosophy as the foundation for strategic planning. The family must first clarify the shared beliefs, experiences and legacies that unite them in their ownership and stewardship of the family enterprise. With parallel planning, these values serve as the underpinning of the business culture in which the company operates and define how the family will work to support the business’ future success. 2. Strategic thinking applied to both business and family. The opportunities that a business pursues must be appropriate to the strengths of the enterprise and in keeping with the vision of the owning family. Strategic planning ensures ongoing communication between the family and the business so that the leaders of the enterprise and the family align the family’s

BUSINESS

What these two examples underscore is the need for balance, and considering the needs of both the business and the family — to ensure the optimal functioning of both. Deciding that the leadership of the business should be left either to the family or to professional managers is an artificially forced choice.

The best family business executives understand that a well-informed and engaged shareholder group is among the greatest competitive advantages they have as a company.

FAMILY

Conflict among the ownership led to division on the board and paralysis in strategy that eventually forced the sale of the company.

expectations with the needs of the business. Just as the business must proactively plan for growth, as the family expands, it must also plan for how it will continue to participate as “effective owners” and not simply leave this evolution to chance. 3. A shared future vision that guides both the family and the business. A shared vision considers how family expectations will be balanced against business needs in setting the vision for the future. Balancing the capabilities of the business and the priorities of the family the parallel planning process helps to set a sustainable vision for the future of the business and the family. Further, the process examines how family ownership of the enterprise will provide a strategic advantage to help the business bring this vision to life.

it becomes second nature over time, and the process itself contributes to strengthening both the business and the family. Developing a family business continuity plan that is simultaneously focused on critical factors of success for both the family and the business requires more than just an assessment of strengths, weaknesses, opportunities and threats for a given organization in a particular industry. It answers the essential question of why does our family own this business and why should we continue to own this business? The answer may include the legacy of the founder, but must go far beyond the genesis of the enterprise to the mutual responsibility of accepting ownership. When family values are clarified and can be identified in the values of ownership they produce actionable business values that result in both psychological and financial returns. The need to choose between “business-first” and “family-first” becomes irrelevant with the realization that assuring the success of the business now supports the continued well being of the family for generations to come. Formulating a business strategy that supports the current and future welfare of the family assures management and shareholder alignment for generations — such that these will survive economic downturns, create innovation and develop an enterprising family that succeeds in life. In the end, winning strategies must provide for winning families and winning businesses. u

Otis Baskin, Ph.D. is a consultant with The Family Business Consulting Group, Inc., a leading management consulting firm serving the unique needs of multi-generational family businesses worldwide. For additional information, visit thefbcg.com.

4. Formulating long-term plans to guide both the family and the business provides both the means to achieve success and the metrics to evaluate accomplishment of goals. The parallel planning process requires a commitment to have on-going conversations, to document decisions and to measure outcomes to determine if goals are being met. While this may seem like a lot of work,

HVACR BUSINESS NOVEMBER 2019

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EXECUTIVE ROUNDTABLE: COMMERCIAL REFRIGERATION Driven by regulations and efficiency standards, the commercial refrigeration sector has changed a lot — with more changes coming.

BY PETE GRASSO

he commercial refrigeration industry continues to evolve, thanks in large part to greater regulations, which continues to lead to new refrigerants and more sophisticated, efficient systems.

There are a lot of solutions that can help reduce total cost of ownership and supermarket customers are very receptive to these solutions.

I recently spoke with a handful of top executives at a handful of these top manufacturers to get their thoughts on commercial refrigeration regulations, how contractors should market these solutions to customers and what challenges lie ahead.

manufacturers must continue to help retailers understand these new refrigeration strategies and technologies — whether that’s recommending lower-GWP (global warming potential) retrofits or moving to new and/or natural refrigeration systems.

This Executive Roundtable panel included Drew Tombs, president of AHT Cooling Systems USA; John Galyen, president of Danfoss North America; Kerry O’Brate, North American general manager for Embraco; Dave Bersaglini, vice president and general manager, refrigeration for Emerson; Chris LaPietra, vice president and general manager for Honeywell Stationary Refrigerants; and Dustin Searcy, division marketing manager for the Sporlan Group of Parker Hannifin Corporation.

Galyen: The biggest evolution is in refrigerants, due to increased regulation, whether that’s at the federal or the state level. California, for example, is proposing regulations that would force many new supermarkets to install refrigeration systems with very low-GWP refrigerants starting in 2022. In addition, some supermarkets have sustainability targets, so they want to move to environmentally friendly refrigerants. And that’s part of their branding efforts.

How has commercial refrigeration evolved in the past few years? Bersaglini: The biggest challenge we face as a manufacturer is helping our OEM and end-user customers transition to, and prepare for, their future refrigeration systems. Our customers are facing a proliferation of refrigeration scenarios, and their decisions are being driven by sustainability goals as well as federal and regional regulatory mandates. Contractors and

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LaPietra: The industry is witnessing an unprecedented era of technology development to meet regulatory and customer demands with more environmentally preferable alternatives that strike an even better balance between energy efficiency, environmental impact and economic considerations. Refrigerant and equipment manufacturers are introducing innovative, new generation alternatives and equipment that deliver improved cooling performance and energy efficiency while driving down GWP.

O’Brate: The evolution has been a big move in the last few years toward natural refrigerants. Mainly R290/propane has become the refrigerant of choice where everyone’s moved to. The main reason for that has been some of the regulations that we’ve seen in the industry as well as the energy benefits of the R290 itself. Tombs: Food retailers are challenged with a high number of retail stores with older refrigeration systems approaching their end-of-life, and these systems need to be addressed, either through retrofit or replacement. At the same time retailers are also adjusting to a shift in retail consumers shopping habits which are forcing retailers to adapt to these behaviors. These factors create new opportunities for commercial refrigeration manufacturers to deliver new, flexible solutions to support the changes of their customer base. Searcy: There’s less brick and mortar stores that are getting built, and we’re seeing an influx of more controls going into that business. Customers are looking for energy efficiency, case controls, and managing everything on the refrigeration side right there at the case. And then we’re also seeing changes related to the shopper and that has to do with grocery pickup. We’re seeing more and more users who show an interest in moving toward case controllers.

What’s been the trend, as far as innovation, for manufacturers? Bersaglini: A convergence of regulatory and market trends is driving an active period of innovations across our industry. The global transition from hydrofluorocarbon (HFC) refrigerants toward new systems that use lower-GWP alternatives has led to a proliferation of new refrigeration equipment, components and technologies. In addition, the trend toward smaller retail store formats has end users seeking more flexible refrigeration architectures designed for smaller physical footprints. Galyen: Improving energy efficiency to meet new regulations, whether they are federal or state. What’s emerging now is the change in refrigerants; more and more toward low GWP. We’re going to start to face multiple refrigerants, and that will be very complex. Refrigerants are going to differ by application. There are transition refrigerants and there are many new refrigerants, especially those that are flammable. O’Brate: Manufacturers have made a big move to R290, as such on the contractor side, it will take a few years going from the development on the OEM side to the contractor seeing it, maybe because we make things that are so good of a quality. Basically, the contractors will start seeing in the coming years the move to propane, which is not too different as far as the changes that they need to make and how they service the equipment.

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continued on page 12

NOVEMBER 2019

EXECUTIVE ROUNDTABLE PANEL

Drew Tombs, president of AHT Cooling Systems USA

Dave Bersaglini, vice president and general manager, refrigeration at Emerson

John Galyen, president of Danfoss North America

Chris LaPietra, vice president and general manager for Honeywell Stationary Refrigerants

Kerry O’Brate, North American general manager for Embraco

Dustin Searcy, division marketing manager for the Sporlan Group of Parker Hannifin Corporation

continued from page 11

Tombs: We’ave seen a shift in focus of OEMs to move towards lower GWP alternatives as the basis for their refrigeration systems — both for increased Energy Efficiency and to support Lower GWP regulations expected to begin impacting the market in the near future. Searcy: New refrigerants have continued to come out and they continue to evolve. I think they are likely to continue to change over the next few years. So as that happens, I’m sure we will see changes to equipment designs and I imagine there will also be retrofits that occur for existing systems that are out there. I think that will continue to increase in the years to come. The real question is, are we getting towards a sustainable solution that gets us out of this iterative retrofit process? Some of the systems out there were installed 20 or 30 years ago, and they may be on their second or their third different refrigerant at this point. These systems have undergone refrigerant retrofits in the past and likely more in the future.

HVACR BUSINESS

Advances in remote monitoring and predicative maintenance will be a major contributor to the way food retailers operate in the near future. What type of education and training do you offer contractors? Bersaglini: Emerson offers a wide variety of educational options to meet today’s diverse training needs — including hands-on seminars in the classroom or online and mobile tools in the field. We provide a combination of course offerings and teaching tools to help technicians of all skill levels work with new technologies and complex systems. These options are designed to allow technicians to continue their education according to their preferences, needs and schedules. Galyen: We are most active around CO2 training. We have a mobile trainer deployed around the country for contractor training, and it’s been quite successful. We do have an online training portal that

NOVEMBER 2019

is open to contractors with a fairly extensive library. We haven’t been so active yet on the flammable refrigerants, though it is a very hot topic. I am on the AHRI Board and we’re investing a lot in a Safe Transition Task Force that’s trying to look at this holistically because it will be a different landscape. LaPietra: Honeywell offers a good online selection of publications and video to assist contractors. In addition, our sales and technical marketing teams hold face to face training for contractors and wholesale customers on request. Honeywell proudly sponsors RSES and HVAC Training Excellence efforts as well as hosting Regional training days throughout the year. O’Brate: We have several channels, including webinars that we offer through

RSES as well as some videos on YouTube that are able to provide answers to any kind of training questions. We’re also going to different wholesale branches throughout the country conducting training. Tombs: For food retailers already adopting this refrigeration design, AHT works closely with the customer and their preferred contractors, as we support the start-up, commissioning, handover and maintenance of the system. In addition to the hand on site support, AHT also welcomes contractors to our manufacturing facility to see first hand how the equipment is produced which provides valuable insight into how to support the equipment when installed. Searcy: Parker Sporlan is a big advocate of education. For years we have conducted face to face training. We had our sales engineers doing training at wholesaler branches in the evenings and it would be very common that you find training in your area in the evening. In addition to these face to face opportunities, we’re moving more online. This is the demand from the contractors and technicians.

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We’ve been moving our training online to a webinar format over the last few months. Once a month we have a webinar. We capture the content and our future plan is that we will be putting that onto YouTube and our website so that it builds a repository of technical information that people can then view at their convenience.

How has efficiency helped the market? Bersaglini: It’s estimated that the average 50,000 square foot store can incur approximately $200,000 in annual energy costs, and can emit as much as 1,900 tons of CO2 in one year. Among these costs, refrigeration and lighting account for more than 50 percent of total energy usage. It’s no wonder that the goal of improving energy efficiency has become a top priority for many supermarket chains, especially in regions where energy costs are high. It’s also an important consideration for companies driven to lower their carbon footprints. Galyen: The greatest benefits of efficiency is achieved when you have owner/ operator sites because the owner is benefitting from the investment in more efficient equipment. Supermarkets are a great example of this because energy is their second highest operating cost and they operate on low margins. There are a lot of solutions that can help reduce total cost of ownership and our supermarket customers are very receptive to these solutions. O’Brate: The efficiency requirements have been coming from the regulation side, but also seeing the benefits from the OEMs and the end consumer side where they’re using less and less energy to power their equipment with higher efficiency. As I mentioned earlier with R290, there’s higher efficiency gained by using that refrigerant. It requires less charge as well from the refrigerant charge level itself and is able to provide a better end product for the final consumer. How is that helping contractors? They’re also able to bring it to the final user, more efficient products, even replacing some older products that are better or less efficient with newer ones that provide the same kind of cooling but with less energy requirements. Tombs: I think R290 Refrigeration Systems are becoming more commonplace driven by manufactures like AHT and TRUE who continue to take a leading approach to this natural refrigerant. As Food Retailers understand the benefits this type

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Contractors need to work with the industry organizations and local chapters in their areas to stay abreast of any changes that are coming. of equipment can offer, both in energy savings and flexibility in their store design process, contractors also understand that the market adoption will continue to expand. Rarely do we encounter contractors that are not actively engaged in this type of self-contained equipment. Searcy: The efficiency levels have changed on a lot of equipment and it continues to evolve. Going back a few years, we saw a lot of open deck cases, but now that’s changing. So there’s an evolution to cases that are closed primarily. There still are some exceptions, but I think that’s probably one of the biggest changes that we’re seeing in supermarkets is people that are going to closed-door cases and it’s saving energy.

How has the evolution of smart controllers impacted this space for the end user and for the contractor? Bersaglini: Some alternative refrigerant-based systems have led to a need for system electronics that can help to manage refrigeration cycles and system operation. Elsewhere, built-in compressor protection and diagnostics are simplifying service and maintenance processes by assisting contractors with troubleshooting and repairs. Smart facility management controllers offer operators access to easy-to-use platforms for managing and optimizing all the critical systems in their facilities, including air quality, lighting and of course, refrigeration. Galyen: We’ve seen greater transition from mechanical controls to electronic controls and now to smarter connected controls. And that’s across this entire space. Whether you’re talking a glass door merchandiser or a commercial refrigeration unit, or a supermarket, which tends to be most integrated. In supermarkets we’ve seen an increasing shift away from a ‘central rack controller’ to more individual case controls. LaPietra: When properly applied, smart controllers can enhance the performance of commercial refrigeration systems. In an age of technician shortages, contractors can benefit by utilizing the

features of very smart controller/loggers. A well-developed controller/logger can obtain great amounts of operational data and utilize the benefits for improved efficiency, predictive maintenance and troubleshooting. O’Brate: Those are actually helping the OEMs make sure they right size their equipment to have the perfect match between the compressor that goes into the equipment and the overall equipment size itself. So we’re not over-specifying capacity or under- specifying on the equipment. The smart controllers are self-learning, basically, they learn how the equipment and the compressor match and help them speak to each other better. This better match helps reduce energy consumption and better meet energy regulations and food safety regulations throughout. On the food safety side, it’s more focused on the energy needed to prevent temperature variation and energy regulation is basically reducing the energy consumption needed to cool down the equipment. Tombs: AHT believes that advances in remote monitoring and predicative maintenance will be a major contributor to the way food retailers operate in the near future. AHT is already standardizing its controllers across our equipment platform and are investing in technology to ensure our refrigeration systems remain easy to set-up and commissioning while providing key metrics to help food retailers reduce service issues while increasing food safety. Searcy: Smart controllers can be preprogrammed from the factory. If the case manufacturer programs that controller with all the set points, it saves a lot of time on the installation time. Less programming results in a quicker startup time. With an electric expansion valve, you don’t have to worry about manually setting the thermostatic expansion valve’s superheat. With an electric evaporator pressure regulating valve, you no longer have to set your EPRs to maintain circuit pressures. It’s all pre-programmed and it’s really about faster installation times. As far as service, when you have all the data recorded at the case controllers, the technician can view

or export the data and analyze it. Whether it’s going up to an enterprise solution level where you view all your systems/stores at a glance from an offsite location anywhere or view it at the case level when you’re working at the case, it makes it easy for the technician to troubleshoot problems.

What are contractors saying are their greatest challenges? Bersaglini: The transition from legacy refrigerants to lower-GWP options presents a number of new challenges for contractors, including: additional costs and using proper procedures of recovery of new refrigerants; additional training to enable safe servicing of some new system types; and helping to educate their customers on the new refrigerant landscape. Contractors must be able to align their customers’ goals with the available equipment options, especially in situations where federal and regional regulations require change(s). Galyen: First, it’s finding qualified manpower. But there’s also the challenge of the new refrigerants and regulations. That’s why AHRI has decided to spend more than a million dollars to try and bring the collective entities together. Especially as we move again toward some of these lower GWP refrigerants, which are likely going to be flammable, or potentially toxic and contractors will have to manage legacy refrigerants as well. LaPietra: The lack of trained technicians is by far the greatest challenge. In 2018, the Bureau of Labor Statistics estimated the current HVACR technician shortage at 70,000, and that there will be a need for 115,000 new HVACR professionals to meet the demand within the next four years. The lack of high-level personnel along with the increasing complexity of some refrigeration systems is a difficult challenge. Honeywell is well positioned to continue to provide training to current and new technicians on safe practices as they navigate changes in the industry. O’Brate: Honestly, I think the greatest challenge that they’ve seen is lack of information. They’re not able to gain enough information as to what they need to do to stay compliant and to be able to handle these new refrigerants. This is why we expanded the training and try to provide as much information as we can. As far as continued on page 15

HVACR BUSINESS NOVEMBER 2019

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I see, we are the pioneer within light commercial refrigeration, doing these trainings for R290, promoting the changes that are to come and helping the contractor be ready for when the new refrigerants come to his or her doorstep.

The adoption of a larger number of refrigerants, as well as changes to system architecture, seem to be the most active movers.

Tombs: Based on industry reports and discussions during key industry events, the greatest challenge seems to be current resources and development of the next generation of technicians. AHT believes our R290 Platform creates opportunity for both food retailers and contractors to benefit from a simplified system design and ensures that all technicians with a contractor can continue to support their retailer accounts as adoption of this technology continues to grow. Searcy: The biggest challenge right now is finding skilled technicians. There is a technician shortage and a knowledge gap for new technicians. Bringing new technicians up to speed faster to get them to the advanced level is a challenge. This is a big concern for a lot of companies. And it’s being recognized not only at the manager level, but I think down to the technician level too. Everyone wants to do a good job, they want to do the best job that they can, but new technicians need some mentoring and somebody to help them develop their skills as they start in this career.

What advice would you give to contractors to help them prepare? Galyen: I’d recommend getting involved in industry associations to stay informed of what’s happening and to collectively voice concerns. They should be sure they stay abreast of the changes and train their organization because what’s coming at them is like it’s never been before. LaPietra: The adoption of a larger number of refrigerants as well as changes to system architecture seem to be the most active movers. The industry appears to be waiting on regulatory and code standards surrounding flammable refrigerants and charge size limitations as well as specific application requirements. Discussions are now underway to address the concerns of contractors and technicians on safe practices in the installation and servicing of HVACR equipment that

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commercial air conditioning applications, Honeywell has developed an environmentally preferable solution with a similar or better performance. O’Brate: We’re bringing a range of products that cover servicing R290 refrigerant equipment, and we’ve actually already started bringing them this year. We’ve seen more and more contractors coming across this new, natural refrigerant, and we’re doing training throughout the country to be able to support them, answer any questions on what they will come across. As far as the products, we have several R290 products that offer very high efficiency, on-off as well as variable speed compressors, which are known in the industry as inverter compressors. These inverter compressors add even more efficiency on top of the one brought to you by the switch to an R290 compressor.

use flammable refrigerants. O’Brate: Go to their wholesaler and ask for training, because we’re offering it through them. Also, stay on top of the information of what changes are coming. We have a good resource for information online at www.refrigerationclub.com as well. Tombs: Like in most industries, adapting and embracing technology advancements is needed to support future changes in commercial refrigeration systems. Contractors that are investing in their people and their development, exposing them to new opportunities and challenges will remain a key pillar in the continued evolution of commercial refrigeration for food retailers. Searcy: Contractors need to work with the industry organizations and local chapters in their areas to stay abreast of changes that are coming. There are a lot of great organizations from the service side. Equipment manufacturers also monitor changes coming – refrigerant changes, efficiency changes, etc. They know what changes are coming related to efficiency and they are working very closely with their teams to not only understand but comply with these requirements and build equipment that meets the new standards.

What new innovations are you introducing in this space that you want contractors to know about? Galyen: We continue to invest in technologies to support CO2 in refrigeration applications. We recently were honored with the AHR Innovation Award in the Refrigeration category for our CO2 Adaptive Liquid Management (CALM) solution that combines Danfoss’ liquid ejector and adaptive liquid control case controller algorithm to fully utilize the evaporator surface in display cases and cold rooms. LaPietra: Honeywell has a long history of developing safe, environmentally preferable refrigerants that have been adopted around the world. Mildly flammable refrigerants (A2L), such as Solstice L40X, Solstice ze or Solstice yf, have been extensively proven safe and have become the refrigerants of choice for a number of applications with charge sizes ranging from less than one kilogram to several tons. They offer users and installers comprehensive range of benefits such as energy efficiency, low climate impact, cost and – indeed – safety. And as the HVACR industry continues to explore how to best replace R-410A, which is widely used around the world as a refrigerant in residential and light

Tombs: AHT is continuing to expand its penetration of our R290 Multidecks System as food retailers continue to adopt this system design based on the needs to their organization. And AHT, as a new member of Daikin, will expand our onestop shop offering bringing about key technology innovations in both commercial refrigeration and HVAC to create greater value to our food retailer customers. Searcy: We’ve come out with a new case controller in the last few years. It has the ability of being standalone or networked to communicate with an enterprise level controller. This is the S3C case controller. It controls all the case activity – EEVs, EEPRs, lights, fans, defrosts, etc. It is Bluetooth enabled. So after receiving training, you can download the app and access case parameters, setpoints and performance data – giving the technician the ability to troubleshoot using their smart device. They don’t have to go back and forth between the rack and the display case. That allows a technician to do a lot of things right at the case. This solution brings a lot of benefit to the service technician and it makes their life a lot easier. u

Pete Grasso is the editor of HVACR Business magazine. To contact him, email pgrasso@ hvacrbusiness.com.

HVACR BUSINESS NOVEMBER 2019

AVOID THE PITFALLS OF SHORT TERM WORKING CAPITAL It’s vital to know your options and plan for the future to obtain financing that will not constrict the cash ﬂow of your business. BY BRANDON JACOB

he service contracting industry is flush with great resources for critical components of your business, including as flat rate pricing, marketing and software. And rightly so, these components are important to a successful business. Equally as important is a business’s ability to properly secure the right working capital loan when the need for capital arises. But step cautiously, as securing the wrong working capital loan can be like putting the proverbial final nail in your company’s coffin.

SHORT TERM WORKING CAPITAL LOANS For some time, short term, high interest rate lenders have been around, but with many taking advantage of the Internet, their accessibility to businesses has increased substantially. These nonbank lenders are not bound by the same rules and regulations of a traditional bank. Their mode of operation is to be able to offer to small businesses working capital loans very quickly with minimal hassle.

HVACR BUSINESS

Understand what you are agreeing to before borrowing as unrealistically high interest rates coupled with a short pay-back period is recipe for disaster.

$25,000 is retained for working capital reserves. The loan is a short term 12-month loan. Because John does not expect to have the loan for more than a year, he is able to justify the 15.0 percent annual interest the lender expects him to pay.

The quick process and lack of upfront hassle are attractive attributes to business owners who are in a cash crisis, unfortunately the terms of these loans often put in place payment terms that adversely affect the cash flow of the business. It is vital to know your options and plan for the future to obtain financing that will not constrict the cash flow of your business.

Assume John runs an HVACR business and produces $1M in annual sales and after a reasonable salary paid to John, the Company earns $100,000 (cashflows from operations).

Keep in mind, the interest rate associated with these short-term loans can be well above 15.0 percent. To secure the loan John signs a personal guarantee and the lender will most likely place a lien on the operating entity, both of which are common terms associated with any small business loan.

Despite current profits, John is seeking additional capital to make upgrades to his office as well as purchase additional equipment. John estimates that he needs $150,000 for the office upgrades and equipment purchases.

A $150,000 loan with a 12-month term and 15.0 percent interest will call for 12 payments of $15,795 each. Let’s assume John’s business is not seasonal (although we know in actuality all HVACR businesses have their seasons).

John goes to a non-bank short term lender and with very little paperwork or delay, secures a $175,000 loan, of which $150,000 is used immediately for office upgrades and equipment purchase and

With this assumption John’s business earns $8,333 a month ($100,000/12). You can see there is already a problem,

As a borrower, it is critical that you pay attention to the terms of the loan as it has been proven over and over again that the shorter the terms, the more challenging it is for a borrower to keep up with payments (pay-back). In addition, the unforgiving short payback periods, non-bank lenders are free to charge you high interest rates. Understand what you are agreeing to before borrowing

NOVEMBER 2019

as unrealistically high interest rates coupled with a short pay-back period is recipe for disaster. Let’s look at an example.

continued on page 18

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the monthly payment of $15,795 exceeds the monthly earnings. But the end is not immediate here is how it plays out (see Chart 1 below). The first three months provides John some cushion. The retained working capital of $25,000 plus the $8,333 a month in earnings offers some relief (and for once a positive bank account). But there is trouble ahead, the $15,795 a month in loan pay-back pulls hard on John’s cash and by the end of Month 4, the cash account is negative. By the end of the 12 months, all things remaining constant, John is short $64,544. The most alarming point to this example is the Company is profitable through all this! The reality, no small business can sustain an aggressive pay-back period like what John has agreed to. If cash reserves aren’t sufficient, the business doesn’t increase its profitability, many businesses will resort to adding on more short-term debt or increasing credit card usage, which can ultimately layer on too much debt and put the business in a real bind.

SBA LENDING OPTIONS One solution is to consider is a shortterm working capital loan from an SBA lender such as Live Oak Bank (liveoakbank.com). Live Oak Bank specializes in SBA lending and by doing so, is able to efficiently lead the process of securing financing for small businesses. Although securing SBA financing may involve a few extra steps (as opposed to other non-bank sources) the end result will be a short-term

Although securing SBA financing may involve a few extra steps, the end result will be a short-term working capital loan that can be used to help the borrowing company prosper.

working capital loan that can be used to help the borrowing company prosper. An SBA 7(A) loan for working capital may have a 7 to 10-year term, as opposed to a 12-month term as described in the example above. The extended length of terms significantly decreases the amount of monthly principle that the borrower is obligated to pay back. In addition, an SBA loan will most likely come with a lower interest rate. To demonstrate the significance of extended terms and lower interest rates,

let’s go back to the original example from above, except this time John goes through an SBA lender and secures a 7-year working capital loan with 8.0 percent annual interest.

CONCLUSION A short-term working capital loan can be the right choice for a small business. An influx of capital may be just what a business requires in order to grow or strengthen the company’s cash position. However, before taking on short-term debt, take some time to fully understand the terms of the loan. As demonstrated in this article, the terms of a short-term working capital loan can be the difference between succeeding and failing. u

Brandon Jacob’s career includes extensive experience in business valuations, exit strategies and business transactions. Specific to the contracting trades, Brandon has more than 20 years of assisting in the valuation, sale and purchase of contracting businesses of all sizes. Brandon currently operates Contractors Financial Opportunity, LLC (contractorscfo. com) a financial consulting firm specializing in businesses valuations, exit strategies and transactions for contracting businesses of all sizes. Brandon has been a licensed CPA in the State of Texas for 30 years. Brandon can be reached directly at 713-443-8311 or by email at brandon@contractorscfo.com.

A $175,000 loan with a 7-year term and 8.0 percent interest will call for 84 payments of $2,728. With the same assumption that John’s business earns $8,333 a month ($100,000/12). It’s evident that the business is in a far better cash situation at the end of the 12 months as compared to the previous 12-month loan (see Chart 2 below).

Chart 1 1

Beginning of Month

25,000

17,538

10,076

2,614

-12,310

-57,082

Income

8,333

Payments

-15,795

End of Month

17,538

10,076

2,614

-4,848

-19,772

-64,544

Beginning of Month

25,000

30,605

36,210

41,815

53,025

86,655

Income

8,333

Payments

-2,728

End of Month

30,605

36,210

41,815

47,420

58,630

92,260

Chart 2

HVACR BUSINESS NOVEMBER 2019

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SALES

BY TERRY NICHOLSON

Service Lessons from an Alligator Farm

n Palmdale, Fla., on Highway 27, there is a tourist attraction called Gatorama. After visiting with my family, I realized they provide a number of great lessons to help contractors enhance the service experience. It may seem like a stretch that a gator farm could change your business for the better, but to save you the trip to Florida and the farm, I’ll explain.

Good marketing materials make your customers feel that you’ve done this before and you’re a professional at providing the service and the add-ons.

When you arrive at Gatorama, you enter through a retail store and get your first views of the lagoons filled with alligators of all shapes and sizes. It’s only $20 for adult admission ($10 for children), but they offer you other opportunities to enhance the Gatorama experience.

It’s important to note that the service experience was actually enhanced by the gator bait. Make sure that your offerings are actually important to your clients. Never make them feel like they’re just being sold unnecessary “stuff.”

For example, children can wade in a small pool to learn how to catch a baby gator for an additional $10, or they can participate in a python encounter or meet an albino gator for another $10. Throughout the day, a variety of staff members host informational gator shows and tell you stories and history about the goliath. At the conclusion of the show, you can further enhance your experience by paying an additional $40 to participate in the faceto-face challenge, where a team member teaches an adult how to interact with a gator, with only a stick between you and the reptile. You can feed the large gator whole chickens and really get up close and personal. This is an experience only for the real daredevils, and Will Purdue, the chicken baron from Arkansas, would be proud! Maybe you prefer seeing the gators from above? As you walk over a wooden dock hovering over the gator-filled waters, a Gatorama team member will ask, “Would you like to feed the gators?” Of course, the next logical question is, “How much is it?” To which they respond, “For only $20,

Those signs posted all over the park advertising the gator bait and other experiences available are a reminder that documentation of your offerings can help with the sale. Could you have a flyer or brochure serve as your gator bait sign?

the gators will leap up to take the gator bait from your hands. They’ll fight each other for it.” And if you say no, there are still signs around the park reminding you of the opportunity to purchase the food. Well, who doesn’t like a gator fight? “I’ll take two bags of gator bait!” After the incredible display as I fed the gators, other visitors who initially declined the purchase were suddenly pulling out their wallets. It was a memorable and enjoyable experience and I left the park telling family and friends, “I just fed a ton of gators!” Throughout the day, snacks and soft drinks, souvenirs and memorabilia were available to my family. It’s hot in sunny Florida, so of course virtually everyone in the park needed refreshments. By the time you’ve fed the gators, fed yourself and left the park, there was an upsell on the average ticket of nearly 150 percent of the entrance fee, but never once did I feel I was being sold things. That’s impressive.

HVACR BUSINESS NOVEMBER 2019

GATOR BAIT Now here’s the question: does your company offer such products or services that clients buy happily to enhance their experience and comfort, while also increasing your company’s profitability? If not, perhaps it’s time to create your own version of gator bait. There are three easy take-aways for any savvy contractor who visits the gator farm. Do you have the staff trained properly to ask the right questions? Staff should get to know your customers enough to know what matters most to their comfort. They can easily find opportunities to sell additional products, without making the customer feel they’re being upsold by a sleezy salesperson.

Make sure your team is trained to provide the best experience when on a service call. Ultimately, that will keep your customers coming back and they’ll tell their family and friends, just like I told mine about the gator farm. What Gatorama does for customers like me, you can do for your business and your customers. Learning more about your service clients and ultimately adding value to the call for your customers, while increasing your average ticket, that’s how you turn your company into a moneymaking machine. u

Terry Nicholson is chief success officer and leading HVACR expert at PRAXIS S-10, the fastest growing success college for contractors. Visit praxiss10.com for additional information.

Gatorama strategically places a staff member to ask if you’d like to feed the gators as you walk over the gator-infested pools, that’s a value-add to the customer experience.

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FINANCE

BY RUTH KING

Recurring Revenue is Your Rocket Fuel

ocket fuel is necessary to reach your goal. Contractors’ rocket fuel? Maintenance plans. Whether residential or commercially focused, all companies need a thriving maintenance program.

because of the relationships the business had generated through maintenance.

Contractors cannot afford a loss leader. Maintenance plans must at least break even after taking overhead costs into consideration.

The reasons have been known for years — customers experience lower utility bills, more comfort in their home/office, equipment lasts longer, and more. From a company perspective, a large maintenance client base provides increased cash flow, less seasonality, referrals, and predictable replacement sales and referrals.

A contractor called me. He was tired, in his 60s and wanted to sell his business. What was the value of his business? Unfortunately he had no maintenance plans and business that was not very profitable. As a result, the business was not worth much. All of his years of hard work amounting to less than $100,000 of value.

Here’s the major reason a thriving maintenance program is critical:

Contrast this sad situation with another contractor I started working with in

1999. He and a partner had just bought the company they worked for from their boss. The company generated less than $1,000,000 in sales when they purchased it. Fast forward to 2015. The partners sold the business for $9 million in cash. The reason the business was so valuable was the number of maintenance plans they had. The new owners stepped in and generated $10 million the year after the sale

Owners will exit their business either through choice or through death. It’s much better to exit through choice having a valuable business to sell or pass on to the next generation. The greatest valuations are given to companies with large numbers of maintenance plans. The major mistake I see companies make with growing maintenance programs is thinking that maintenance is a loss leader and that the losses can be “made up” through service and replacement sales. HVACR companies are NOT continued on page 22

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HVACR BUSINESS

NOVEMBER 2019

continued from page 21

supermarkets who advertise a phenomenal deal on milk to lure you into the store. Then, the milk is at the back of the supermarket so you see everything you might possibly need and walk out of the store

with much more than milk! Contractors cannot afford a loss leader. Maintenance plans must at least break even after taking overhead costs into consideration. Here’s why: A company has 1,000 maintenance plans each of which loses $20 per

year after including overhead costs. This is a loss of $20,000. The owner thinks, “I can make that up through service and replacement sales.” How many sales would it take? The $20,000 loss is shown on the

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HVACR BUSINESS

NOVEMBER 2019

company’s bottom line — a loss after direct costs and overhead costs are subtracted. What replacement revenues do those maintenance customers have to generate to make up for the loss? Assuming the company’s net profit is 5 percent, the answer is $400,000 in revenue. This means that the company needs to generate $4,000 in sales from each maintenance client each year to make up for the $20 loss per maintenance plan. This is NOT likely to happen. How could a company lose $20 per maintenance plan? • Maintenance plan price is $180 • It takes 3 hours total to perform the maintenance (two visits including travel time) • Maintenance technician wage is $20 per hour (no highly compensated techs perform maintenance most of the time) • Overhead cost is $40 per hour • Coil cleaner and other materials are $10 per year • SPIFF is $10 Total cost is $60 for labor, $120 for overhead and $20 for SPIFF and materials = $200 in cost. The revenue per customer is $180, assuming all customers pay cash and not with credit cards. If the payment is through credit cards or monthly recurring revenue, the average 3 percent credit card fee must also be subtracted. This company loses $20 per maintenance plan. The only option is to sell something on each maintenance visit which is not likely when the maintenance is being performed properly each year. If your company uses highly compensated technicians to perform maintenance, the costs will be higher. Your company’s overhead cost per hour might be lower which would reduce the loss and potentially turn the loss into breakeven (overhead cost per hour must be less than $33 per hour). Make sure your company has the proper rocket fuel — Maintenance plans that at least break even. u

Ruth King has more than 25 years of experience in the HVACR industry and has worked with contractors, distributors and manufacturers to help grow their companies and become more profitable. Contact Ruth at ruthking@hvacchannel.tv.

www.hvacrbusiness.com

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MERGERS & ACQUISITIONS

BY BROOKS CRANKSHAW

What Makes Your Company Attractive for Acquisition?

magine an investment banking professional like me meeting a company owner for the first time, whether it be at a conference, cocktail party or owner’s office. At some point early in the conversation, the owner often asks: How much is my company worth? With a few data points and some qualifications, a broad range can usually be specified. But a different question begs a much more interesting answer: What is it that makes my company an attractive acquisition candidate? Over time, the answer to this question

Companies pursuing a growth strategy through acquisition are funded by historically high levels of investable capital on their balance sheets. changes based on market dynamics, economic considerations, and investor sentiment. The answer also changes based on popular “investment theses,” or strategies being pursued by financial investors like private equity funds.

For example, consolidation among HVACR companies is being driven by multiple types of investors, and the industry provides an instructive example of what makes companies attractive for acquisition.

investors. For example, an increasing focus on environmental concerns and the products addressing these concerns are part of the broad interest in acquiring HVACR companies. Today, mergers and acquisitions are characterized as being a “sellers market” and valuations remain at historically high levels.

ESSENTIAL NATURE OF PRODUCT/SERVICE

According to Pitchbook, financial buyers continue to exhibit strong demand for good acquisitions which are “attributed to vast sums of dry powder (capital) raised in recent years, as well as continued economic expansion in a low interest rate environment.”

Food manufacturing is the classic example of this dynamic because, stating the obvious, everyone needs to eat. The HVACR industry presents another example. Whether it’s a school district that needs a heating system repair in the winter, or a factory that needs to be cooled in the summertime, HVACR service and equipment will be required.

Companies pursuing a growth strategy through acquisition are funded by historically high levels of investable capital on their balance sheets. In addition, empirical research by The National Center For The Middle Market demonstrates that companies without an acquisition strategy have a lower growth rate than those pursuing acquisitions.

The technical nature of the products or services prevent the end user from doing the work itself.

The next time we meet, you should know that I’d be happy to give you an estimate of what your company may be worth. But I’d much rather talk about how attractive your company would be to an investor with an interest in acquiring all or part of your business. u

Consistent and ongoing demand makes for good acquisitions.

TECHNOLOGICAL ADVANCEMENTS Offering improvements in efficiency, functionality, or design can drive a company’s success, whether market- or user-driven. In HVACR, for example, new regulatory requirements and demand for improved efficiency have the effect of increasing demand for products and services, making an acquisition more compelling.

CHANGING CUSTOMER PREFERENCES

Brooks Crankshaw is a Managing Director and Partner of The Chicago Corporation, an investment bank enhancing shareholder value by advising clients on mergers, acquisitions, and raising capital. For additional information, visit thechicagocorp.com. Securities transactions conducted through TCC Securities, LLC, an affiliated company, registered Broker/ Dealer and Member of FINRA/SIPC.

Innovation and new service models can drive growth which proves attractive to

HVACR BUSINESS NOVEMBER 2019

www.hvacrbusiness.com

PRODUCT FOCUS »

DANFOSS

COLEMAN

LEAKSMART

NAVAC

The Danfoss EVR v2 is a complete range of servo-operated solenoid valves for air conditioning and refrigeration systems. With connection sizes ranging from 1/4 in. to 2 1/8 in., EVR v2 valves were already one of the most versatile solenoid valves available; now that they can be used in oil-free and R-1234ze systems, EVR v2 valves are more adaptable than ever before.

The Coleman HVAC brand of Johnson Controls brings value and rugged reliability to the rooftop unit market with the launch of Coleman Point Choice. The 15-27.5 ton units exceed Department of Energy (DOE) 2018 guidelines by up to 25 percent and already surpass future DOE 2023 part-load standards by nearly 10 percent to reduce energy use.

Protect by LeakSmart with Flow provides advanced water flow analytics and monitors and controls the home’s water activity — from in-wall to appliance leaks — detecting water leaks instantly, shutting off a home’s main water supply and sending alerts via smartphone in less than five seconds.

Suitable for residential and light commercial applications, NAVAC’s new NP4DLM can achieve a flow rate of 4 cubic feet per minute (cfm), among other attributes.

The system provides daily, weekly and monthly water usage statistics via the LeakSmart app that can be leveraged by homeowners to become more water efficient while also ensuring the home is protected against damaging leaks.

The NP4DLM Cordless Vacuum Pump features a high-performance lithium battery capable of up to one hour of continuous running time. At a scant 15.4 pounds, the unit is exceedingly efficient and, for technicians, easy to carry and store. The NP4DLM’s twin cylinder operation provides high vacuum down to 15 micron.

>> leaksmartpro.com

>> navacglobal.com

>> danfoss.us

Choice rooftop units provide greater system design flexibility to meet the demands of diverse applications. An optional four-stage IntelliSpeed discrete fan control allows units to deliver 15 percent higher IEER ratings than some competitive high-efficiency units.

NAVIEN

ROTOBRUSH

TEKMAR

VIEGA

Navien took the first step into the non-condensing market by introducing their new Navien Premium Noncondensing (NPN) series tankless water heaters. The new NPN will be offered in two series, the NPN-U (universal) and NPN-E (exterior), both of which will be available in 160,000 BTU/H, 180,000 BTU/H and 199,900 BTU/H models for either natural gas or liquid propane.

The BlowBeast Negative Air Machine is a portable air duct cleaning solution that is taking negative air portability to a new level. Most negative air systems are bulky, big and take up a lot of truck space, which was the reason Rotobrush wanted a solution for portability.

tekmar Control Systems has announced the addition of four new switching relay and zone valve control models to their existing line of zone control solutions.

Viega LLC is proud to announce that 3-Piece Ball Valves are now available for its MegaPress carbon and stainless steel pipe pressing systems.

tekmar now offers 2-zone pumps, 3-zone pumps, 3-zone valves, and 5-zone valves. The newly added switching relays and zone valve controls are compatible with all low-voltage thermostats and offer a variety of benefits for homeowners. These include unlimited expansion; exercising, which prevents pumps from seizing during the summer; zone priority; and priority override to protect homes from freezing over the winter months.

The newest component of Viega’s MegaPress system is approved for all MegaPress applications, excluding natural gas. It is available in multiple materials for specific applications. The carbon steel valve is available with EPDM and FKM sealing elements. The 304 stainless steel valve has an FKM sealing element, while the 316 stainless steel valve has an EPDM sealing element. Repair kits and replacement handles also are available.

>> tekmarcontrols.com/products/zoning

>> viega.us

R-1234ze is a viable, long-term refrigerant option for a wide range of applications, and enables OEMs and end users to reduce GWP, resulting in direct CO2 emissions and refrigerant cost reductions.

>> colemanac.com/pointchoice

Navien utilizes the technology and innovation that helped make the NPE series the number one condensing tankless water heater in North America in their new NPN series, with some new additional features.

Negative air machines are ideal for situations where a traditional brush and vacuum won’t be as effective. The BlowBeast provides superior air flow and high vacuum capabilities to remove contaminants and improve indoor air quality. With a removable pod for collecting the contaminants, contractors will also have an easier time getting their machine ready.

>> navieninc.com

>> rotobrush.com

www.hvacrbusiness.com

HVACR BUSINESS NOVEMBER 2019

20QUESTIONS >>

with DAN GOODMAN

Publisher Terry Tanker sat down with Dan Goodman CEO of Building36 a technology company that provides smart home solutions to HVAC, plumbing and electrical contractors. The two discussed the connected home, reduced energy costs, smart maintenance agreements and electronic tools that tie the contractor to their customers for improved service and better customer service. 1. After attending MIT what were your plans? I discovered two things at MIT. First was a passion for electronics, and second was that I liked working with people. I wanted to find a way to bring technology to people in a way that wouldn’t require others to have an electrical engineering degree. 2. What is your business background? After college, I went to work for Texas Instruments as a sales engineer. I helped companies design products around TI’s microcontrollers. I worked with a broad range of companies, for example Honeywell, Emerson, Bosch, Milwaukee and Whirlpool. 3. Can you explain the name Building36? When Craig Heffernan, our CTO, and I were at MIT, the computer science building was named Building36. When we started the company we realized the technologies we were developing all started with ideas we had back in school inside Building36, so Building36 Technologies stuck. 4. You played basketball at MIT. What did sports teach you about life? Perseverance, dedication and teamwork. When you play Division III basketball, there are no scholarships or special benefits. Players were there because they loved playing ball. Like most athletes, we needed to manage a course load, homework, labs, and more. The critical lesson I learned was how to build mental toughness. 5. What did sports teach you about business? Sports and business are incredibly similar. In both, you have hard days and stiff competition that is always looking to beat you. The hard work you put in builds mental toughness which lets you rise up to any challenge and lead by example. 6. How long were you with TI? Four years, and during that time, the trend clearly pointed toward getting products on the internet. I joined a startup that made low power wireless chips to help devices communicate. A big win was getting our chips designed into a smart meter. California electric utilities wanted to prevent rolling blackouts during periods of peak electric demand by sending signals through smart meters to set back thermostats. 7. How did you get started in HVAC? In 2007 I co-founded Radio Thermostat Company of America. We made the first Wi-Fi thermostat. It was sold at Home Depot under the 3M Filtrete brand. We also made thermostats that we white labeled or integrated with residential security systems for companies like Alarm.com, Vivint, GE Security (acquired by UTC), 2Gig (acquired by Nortek), as well as cable companies like Comcast, Time Warner, Rogers and Cox. 8. What made you want to strike out on your own? As SoCal Edison set out to deploy 5 million smart meters, I saw an opportunity. They needed a thermostat

HVACR BUSINESS NOVEMBER 2019

that could communicate with their smart meters. This was the beginning of the battle for ownership of the smart home. Cable companies, wireless phone companies, and security companies all wanted to leverage the smart home as a sticky method to retain customers. 9. What was your Ah-Ha moment? I realized we were missing the most important part of the HVAC business – the contractor! Most thermostat companies sell their thermostats at retail. While a thermostat can be easy to install, the next step is complicated, for example, when something goes wrong with the system. 10. What happened to Radio Thermostat Company? It’s still a supplier to many of our partners in the space. Often, business partnerships change and as a result, I left and started Building36 Technologies. 11. Was the plan for Building36 to tie the customer and the contractor together from the start? Yes, when something breaks, you need a professional to diagnose, repair and or replace your equipment. It’s not a DIY project. We wanted to eliminate stress for customers by making sure they were relying on a trusted professional. Our vision was that we could use our background in technology to easily allow professional contractors to monitor their customer’s equipment. 12. Why do contractors need to embrace home automation sooner than later? Customers want it. Plus, competition is coming from unexpected places. Traditionally it was another HVAC company. Now tech giants want to get inbetween the contractor and customer by selling direct and subcontracting the work to HVAC contractors at a reduced rate. We help build long-term customer relationships with our partners. Our solutions are installed and monitored by someone the homeowner gets to know and trust. 13. What is your offer to the contractor? We offer home automation to help strengthen the relationship between contractors and their customers. Customers log in to a contractor branded

app every day to manage systems in their home. Once the platform is installed, contractors receive notifications if there is a problem with the customers’ HVAC system. This insight empowers the contractor to turn their HVAC business from reactive to proactive, and turns one-time customers into long term partners. 14. Why should contractors partner with you? Home automation is rapidly increasing. You can sell a Wi-Fi thermostat and get paid once or, you can sell a Building36 starter kit. It includes a thermostat and numerous other sensors for critical system monitoring generating recurring revenue, all while building a better long-term relationship with your customers. 15. How do you do that? Take your existing maintenance plan and make it a smart plan. By including proactive monitoring as part of your maintenance plan, often you’ll know your customer has a problem at their house before they do! For example, if you sell a current plan for $199/year, offer a smart plan for $25/month instead. 16. Why is the recurring revenue model so important? It’s how you build value in your company. If you ever decide to sell your business, the real value for the buyer is the number of customers you have under agreement. In the short term, recurring revenue can also help flatten out your business cycles. 17. What’s different about a smart maintenance agreement? When you include the Building36 solution, you’ll be able to offer your customers an app that can control thermostats, door locks, lights, garage doors, cameras, water valves, and more. More importantly, you can monitor their HVAC, condensate pan, water heater, sump pumps, CO, and contact them when you are alerted to a problem. 18. What are the benefits of offering a smart maintenance plan? You offer a more valuable level of service. Monitoring enables you to be proactive it simplifies repairs and really helps with customer retention. Once customers have the app they don’t want to cancel it. They love the connectivity to their home. 19. What’s the difference between your Wifi thermostat and others? The critical difference is the relationship with the customer. With Building36 solutions, the contractor builds and maintains a relationship with the customer. Knowing exactly who to call during times of need is the peace of mind many homeowners want, which others can’t give. 20. How can a contractor find out more about Building 36? It’s simple, just go to our website, www.building36.com or call us. www.hvacrbusiness.com

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We’re hungry for your success. That’s why we help you grow your business with tools like online training, expert support and easy, direct access to parts and equipment thanks to a streamlined distribution model with over 200 stores. With all the top HVAC brands and products, your local Lennox® Store has everything you need to create perfect air for your customers. See what’s possible when you partner with Lennox at LearnLennox.com/hvacr

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