If searchers & banks don't like new construction, why do they like HVAC?

March 22, 2022

by a searcher from University of British Columbia - Sauder School of Business in Vancouver, BC, Canada

I totally get why a searcher/bank would view a GC contractor as risky because of the project-based work (lumpy revenue where the owner is typically aggressively out hounding down hew work).

But when you look at the most profitable business for an HVAC company, it is the installation work, not the service/maintenance work (in fact, from my understanding, the service/maintenance work is a loss leader).

Installation work is primarily tied to new construction, so why are HVAC companies so attractive?

Is it because one HVAC company services many new construction projects and thus has low project/customer concentration, whereas a GC has high project/customer concentration. I suspect this is the case, but just wanted to hear others' thoughts.

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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

You are correct in that most Bank's find GC's to be very risky. It is because the bear a brunt of the risk with the project and have to manage costs, potential overruns, deal with the owner, etc. Although there are plenty of lenders that shy away from all construction contractors, lenders tend to like HVAC for several reasons. First, if they are service based, it tends to be somewhat sticky business and is somewhat recession proof. You need your furnace working when it is cold whether the economy is doing well or poorly. If they are doing construction and new installation, much of the work they are doing includes materials and equipment. That usually puts them in a position where they are going to get paid out no matter what on the project.

I hope this helps. Please let me know if you want to dig any further into how Banks work. We have a ton of experience with that. We have a bank consulting division and have reviewed well over $3 billion in commercial credit over the years, so we know how Banks underwrite and tend to think about various industries.

Reply by a searcher
from The University of Texas at Austin in Dallas-Fort Worth Metropolitan Area, TX, USA

As far as residential HVAC companies, I think the service/maintenance is more of the lead gen part of the overall business, enabling companies to acquire the "project" type work with lucrative margins. If someone's HVAC breaks down, it'll have to be replaced or repaired regardless of economic conditions, housing starts, or construction trends. To gauge the led gen aspect, you might be able to model out the existing book of business by taking the # replacements over # of service customers, reaching a conversion metric. The # of service customers should be the primary driver of installations. Depending on the data available, you might take it a step further and look at the aging of HVAC systems under maintenance to estimate replacement dates. These are just my thoughts - I don't have a background in HVAC, so take this with a grain of salt.

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