Arkansas HVACR NewsMagazine May 2025 Issue

HVACR NewsMagazine May 2025

Business & Marketing Tips

Earnings a must have Without positive earnings, the business is only worth tangible assets. Positive earnings are demonstrated by income and operating statements. Income statements are just as they are titled and must be supported with operating reports. The operating statement balances out income against discretionary and extraordinary expenses. Discretionary spending reduces operating earnings. An example is the owner’s pay is excessive, or it may indicate the owner gives back to the community by sponsoring events or causes. Either way, this discretionary spending can be adjusted, and a new owner can see monies that could be recovered if there was a change in ownership. An example of extraordinary expense might be a warehouse fire, where spending was not something that will occur regularly. Only when we provide a history with positive earnings, added to tangible assets, can a proper valuation be made. Time So how long must I be profitable for? We have witnessed companies with the right formula to sell after less than five years in business. Financials from current business to three years are under special scrutiny. Five years and beyond are far less important. Did your company struggled through Covid in years 2020 and 2021 and have since been profitable? The years 2022, 2023, and 2024 should be enough to put you back on track provided your earrings are in the twelve to eighteen percent range. Over the last decade the market has averaged twelve and a half percent return so it makes sense an investor will not risk monies in an HVAC company if the returns do not exceed over twelve percent. Of course, the higher the

earnings, the more your company is worth and the more quickly it can be marketed. We have seen businesses sell with earnings of ten percent due to the buyer valuing unrealize profits available with a modified business plan, but these are rare. The HVAC business that garners fourteen to twenty percent earnings, is likely to have a buyer in short order. Records On the topic of records keeping, we should remember, the number seven years is related to tax liability records. In some instances, ten is the magic record keeping number concerning IRS. Where fraud is concerned there is no statute of limitations. You should keep in your possession statements from accountants, ledgers, bank statements, journal entries, cash books, balance sheets, check registers, and records of investment purchases and sales permanently. Employee files should be kept while employed and for three years after termination, but you need to hang on to W- 2’s, payroll, and retirement information permanently. Risk Just as we discussed the required percentages of earnings to be a viable candidate for purchase, percentages concerning the return on investment (ROI) and risk are a major concern. The higher the risk the greater the return must be. You might ask what those factors for risk are. The items below are listed in a weighted order of importance.

Historical net profits Historical gross profits

Business size Business age Business track Pricing