Business for Sale: Pipe Dreams
Business for Sale
The business: If you're looking for a profitable, down-to-earth business, you'll probably be hot for this one -- an installer of geothermal systems. What's a geothermal system, you ask? It's a network of buried pipes used to heat and cool buildings by taking advantage of the earth's relatively constant underground temperature. Pumps and compressors allow for consistent indoor temperatures year-round. At an average price of $12,000 per home installation, the units are pricey, but they promise energy-cost savings for consumers over the long term. Plus, tree huggers love them for their lower emissions levels.
The market for geothermal systems in the United States has grown 20% a year since 1996. This family-owned business -- originally a traditional HVAC (heating, ventilation, and air-conditioning) contractor -- began installing the systems nine years ago. Today geothermal work drives 80% of its sales.
The company has always served a relatively small geographic market, enjoying the explosive growth typical of the emerging niche until 2000. Since then, the local economy has cooled, and revenues have dropped by 17%. Still, during the dip, profits rose by 40%. Now the owners hope to sell the business and retire, but their 15 employees, including a top manager, are likely to chill with a new owner.
Price: $2,999,000, including equipment, land, and the company's building.
Outlook: Warm, if not sizzling. Geothermal systems are "environmentally hip," according to President Bush, who installed one at his ranch in Crawford, Tex., in late 2000. He isn't the only friend the industry has in Washington. A bill pending in Congress grants a $250 tax credit to homeowners who install geothermal systems. Although these owners have kept busy with local work, turning down most inquiries about jobs in other states, a growth-minded buyer may choose to dig into new markets.
Price rationale: Since the company is in a specialized niche, exact comparables are hard to find. HVAC contractors often sell for 1.5 times seller's discretionary cash flow (EBITDA plus owners' compensation) -- in this case, just under $1 million. With real estate, equipment, and fixtures of $1.4 million included, the price tag would increase to nearly $2.4 million.
This owner arrived at a $3-million price by upping the multiple to 2.5 times discretionary cash flow, rationalizing that the staff's special technical expertise and the company's reputation in its market should fetch a premium.
Pros: This is a growth industry in which both consumers and the government seem to be increasingly interested. And few companies in this nascent field can boast that they've been installing geothermal systems for nine years.
Cons: The First Family is indeed "environmentally hip" when it comes to geothermal systems -- these systems still make up less than 1% of all HVAC installations. To dramatically pump up the business, a new owner will have to spend a lot of time and money educating potential customers about the benefits of this expensive technology.
|EBITDA*|| Owner's |
|2002 ***||$1.5 million||$471,151||$181,496|
*Earnings before interest, taxes, depreciation, and amortization.
**Includes benefits and discretionary income.
***Projected. Fiscal year ends September 30.
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