How to Secur Capital to Grow Your HVAC Business

At Nexstar’s recent Super Meeting in September, three HVACR industry veterans came together to discuss how they have navigated capital security issues over the years, the impact it has had on their business, and how contractors can successfully secure capital for their own businesses. .

Nexstar Head Coach Kurt Threlkeld moderated the discussion, which included Nexstar Business Coach Jeff Stagnoli; Chris Hoffman, president of Hoffman Brothers Heating, Air Conditioning, Plumbing & Electric in St. Louis, Missouri, and a member of the Nexstar board of directors; and Mark Paup, president of Golden Rule Plumbing, Heating, Cooling & Electrical in Des Moines, Iowa, who also serves on the Nexstar board of directors.

When the time has come

Deciding when is the right time to raise capital for your HVAC business is half the battle. Contractors will then have to figure out how they can partner with banks and find other sources of creative capital to fund growth or new opportunities in their business.

In 2016, Hoffman Brothers’ business was worth $9.5 million. After getting into business by purchasing the company from his father and joining Nexstar, Hoffman realized that growth doesn’t come cheap.

“And there are a few things I learned early on: stay committed and match your company’s growth ambitions with your own commitment to reinvesting your cash flow back into your business, and by doing so, you can delay or indefinitely defer the need to take out loans . money from the bank to support your organic growth,” Hoffman said.

For the first four years of his journey, Hoffman paid himself $80,000 a year. He paid cash for every car they bought and did the same when stocking inventory, while making sure his commitment to the business matched his ambitions to grow the business, of course.

Going to the bank and needing money should also not be the result of business inefficiency. The reality is that if a contractor’s gross margins are high, and they sell the work at the right price, perform the essential tasks well, and apply industry best practices such as the Nexstar playbook, they may not have to borrow money.

“I didn’t have to borrow money to make $100 million,” Hoffman said. “Before you go to the bank… you have to ask yourself, is my business performing the way it should? Are organic cash flows being generated as they should be? Or am I just trying to solve the problem in the short term by asking the bank to compensate for shoddy work?”

Hoffman Brothers decided to create a greenfield venture (a project or investment that starts from scratch, without any existing infrastructure) in Nashville, Tennessee, using organic cash flows from its St. Louis facility.

Before Capital

Before securing capital, contractors must ensure that their financials are in line.

When a contractor needs to borrow money, Paup says, “Can the bank easily see your profit and loss statement, or are you mixing it up in different buckets? This time of year is great for getting your financial and general ledgers in order so that by 2025, all that clutter will be gone. You’ve done the hard work over the last three months and now, in 2025, you have a clean financial statement, balance sheet and cash flow statement.”

If a contractor comes to the bank with a confusing profit and loss statement, the bank will likely note it. The contractor’s risk tolerance will increase, interest rates will rise, and negotiation terms will deteriorate significantly.

When Paup was just starting out or growing an HVAC business, he said, “Do whatever you can to reduce your living expenses, live within your means, and invest that money in the best return on investment—which will always be our business. Invest in cash-generating equipment or business assets that will appreciate, and borrow money wisely to support those value-creating investments.”

Paup also shared his experience of creating new projects when the company realized the need to raise capital.

“We went out and secured a line of credit to support our expansion into Salt Lake City,” Paup said. “If things go horribly wrong, I know my payout will range from $800,000 to $1 million, worst case scenario. I can finance this today because we are responsible with our finances. But I also approached several banks, interviewed three or four to find the best deals, and set up a line of credit as a safety net in case things went wrong. Make sure that if you provide capital, you do so from a position of strength, treating it as a resource.”

What now?

Once the contractor has ensured they are ready (meaning the books are clean and they’ve identified the next big thing they want to do) and decided it’s time to go out and look for capital, there are a few more things to do. they will need to prepare for this service and there will be certain things they need to pay attention to.

“When preparing to seek (capital), the most important thing is for your accountant to make sure everything is in order and you have a reasonable balance sheet,” Stagnoli said. “I mean, maybe even a third party will check your balance and make sure everything is in order. If you don’t, I can assure you that when that underwriter starts reviewing your account, even if he signs it, it will cost you points.”

As mentioned earlier, it is important that contractors receive capital for a specific purpose and not just because they are panicked. It’s a slippery slope if the contractor is raising capital for a reason such as a slow season and will simply feel more comfortable with a little extra cash.

“But the most important thing is just making sure you have all your ducks in a row. It all starts with the balance sheet, having a really clean book and having someone who can speak intelligently to the bank – whether it’s your controller or even a third party accountant who has already done the due diligence for you – I think that’s a really key area in that needs help moving forward,” Stagnoli said.

Not all banks are created equal, so when seeking capital, contractors must also determine who the best banking partner will be. It is also important to understand that the “relationship manager” who is sent to discuss options with the contractor is the salesperson. They will tell them that they can do anything.

But the reality is that some banks may specifically specialize in SBA loans, asset-based lending, or cash flow lending.

“Another thing that will determine the terms you are going to get and which bank is right for you is the nature of your business and the size of your current business. … Understand what your needs are and make sure you go with a lender that specializes in servicing your business,” Hoffman said.

Types of capital

But the journey doesn’t end there. Once contractors have identified their capital needs and done their best to prepare, they must decide what type of capital is right for them. As contractors consider all their options, they realize that there is a parallel spectrum of control issues.

On one side, Hoffman says, is senior secure bank debt lending—the commercial bank where a contractor goes to finance working capital, vehicles, etc. This side of things allows contractors to get out of the last line of debt. control. On the other hand, this is an increase in share capital and parting with a stake in the business. In the middle are unsecured debt, coordinated debt and mezzanine debt—options he advises people not to choose because when it comes to unsecured debt or mezzanine lending, they need more equity collateral, approvals, control and power. decide what the contractor can and cannot do with the money.

When a contractor brings in an equity partner, the biggest scam may be giving up ownership of the business. Another lending option is the Employee Stock Ownership Plan (ESOP).

“An ESOP gives you both options,” Stagnoli said. “You’ll be on the way down, so to speak, and you’ll be able to get capital for yourself without giving up control of your business, or if you give up control, you’ll give it to people you can trust and not someone else. it just has a concept that they use for other businesses. So, it can go both ways. You can also take that money and reinvest it into the business to expand it through mergers and acquisitions or something else that will be created from scratch.”