Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up HVAC Companies
Transcript
- Lucas: Alright, so we talk a lot on this show about how private equity rolls up fragmented industries — dental labs, pet groomers, cremation services. But there's one massive category that's been flying under the radar, and it touches almost every homeowner in the country. Luna: Let me guess — HVAC? I just had to replace my AC unit last month, and the consolidation was pretty obvious. The company that came out had five different brand names on the truck. Lucas: Exactly. HVAC — heating, ventilation, and air conditioning — is a roughly one hundred and twenty billion dollar industry in the US, and it's still incredibly fragmented. The largest player, American Residential Services, or ARS, has maybe three percent market share. The top ten combined probably don't hit fifteen percent. Luna: So that's the classic PE thesis: take a fragmented market with stable demand, consolidate the mom and pops, and extract efficiencies. But HVAC feels different from, say, car washes. What's the specific angle? Lucas: The specific angle is the service contract model. HVAC companies don't just sell installations — they sell maintenance agreements. Fifty to a hundred dollars a year for a tune-up. Those contracts create recurring revenue, which is exactly what private equity loves. A customer on a maintenance plan is worth roughly two to three times more than a transactional customer over a five-year window. Luna: So the acquisition target isn't just the company's revenue — it's the book of service contracts. That's the real asset. Lucas: Correct. And that's why you're seeing firms like Gridiron Capital, HIG Capital, and Leonard Green & Partners pile in. Take ARS — it started as a single shop in Memphis in 1975. Today it has over eighty locations across the country, and it's owned by a consortium led by Gridiron. They've done something like forty acquisitions in the last decade. Luna: Forty acquisitions sounds aggressive. How do they integrate all those different brands and cultures? You've got Joe's Heating and Cooling in one market, and then they're suddenly part of a national network. Lucas: That's the tricky part. Most of these roll-ups use a 'platform and add-on' strategy. The platform company keeps its name — in ARS's case, they operate under the ARS / Rescue Rooter umbrella. But they often retain the local brand names for customer trust. The back office gets centralized: dispatch, billing, inventory. The technicians keep their uniforms and trucks, but the software and purchasing get standardized. Luna: So the customer doesn't see the change, but the margins improve. What kind of margins are we talking about? Lucas: A well-run independent HVAC shop might do ten to twelve percent EBITDA margins. After consolidation — centralizing call centers, negotiating national supplier discounts, cross-selling plumbing and electrical services — you can push that to eighteen to twenty-two percent. That's a huge jump, and it's what justifies the acquisition premiums. Luna: And those premiums — what are they paying for a typical HVAC company? Lucas: It depends on the size and the contract book, but typical multiples are six to eight times EBITDA for a mid-size player. A company doing two million in EBITDA might sell for twelve to sixteen million dollars. The seller gets a payout, often with some equity rollover, and the PE firm gets a platform to bolt on more acquisitions. Luna: That sounds great for the seller and the PE firm. But what about the homeowner? Are prices going up? Lucas: That's the question. In the short term, prices tend to stay competitive because you're still competing with independents in each market. But over time, as consolidation reaches a tipping point — say thirty to forty percent market share in a given metro — pricing power increases. We've seen that in plumbing and electrical. A recent study by the American Economic Review found that pe owned home service companies charge about eight percent more on average than independents for identical jobs. Luna: Eight percent — that's meaningful. And it's not just price. I've heard complaints about service quality dropping after acquisitions. Technicians get pushed to upsell, and the focus shifts from fixing the problem to selling a new system. Lucas: There's some truth to that. PE firms put pressure on same-store sales growth, and the easiest lever is to increase the attach rate — add-on services like duct cleaning, air purifiers, smart thermostats. A good technician can double a service call's revenue just by recommending a few extras. But if it's pushed too hard, you get a bad reputation. ARS has faced class action lawsuits in the past for alleged deceptive sales practices. Luna: So the industry is in this awkward adolescence — professionalizing but also facing growing pains. What about the technicians themselves? There's a huge labor shortage in HVAC. Lucas: That's actually one of the arguments for consolidation. A larger company can offer better benefits, more consistent schedules, and career paths — lead technician, supervisor, trainer. Independents often can't match that. Some pe backed firms have started their own apprenticeship programs. ARS, for example, has an in-house training facility in Texas that graduates about two hundred technicians a year. Luna: That's smart. If you can solve the labor shortage while consolidating, you've got a double edge. But it's capital-intensive to train people. How do the financials work out? Lucas: It works because the retention rate is higher. A trained technician who feels valued stays longer. That matters because the lifetime value of a technician is enormous — one good tech can generate two hundred thousand dollars in annual revenue. Losing them means losing that revenue and the customer relationships. So investing in training actually improves the unit economics. Luna: Let's zoom out. We've talked about HVAC specifically, but this is happening across all the trades — plumbing, electrical, roofing. Is there a bigger play here? Lucas: There is. The big vision is the 'home services super-company' — one brand that does HVAC, plumbing, electrical, maybe even pest control and handyman services. The customer has a single app, a single phone number, and the same trucks show up. That's the model companies like ServiceTitan and HomeServe are building toward. Private equity sees the opportunity to create a national champion in a space that's still mostly local. Luna: So in ten years, we might not call a local guy named Bob anymore. We call a national call center and get a branded technician. Is that better or worse for the consumer? Lucas: It's a trade-off. You probably get more consistent service and faster response times. But you lose the personal relationship and the incentive for the local owner to go above and beyond. And there's a risk that pricing becomes more opaque — the national chains are already experimenting with dynamic pricing based on demand, like Uber but for furnace repairs. Luna: That sounds dystopian. 'Your AC repair costs two hundred dollars at noon, but four hundred at five PM.' Lucas: We're not there yet, but the technology exists. The same dispatch software that optimizes routes can optimize pricing. And if the industry consolidates enough, there's no alternative for the consumer. That's the long-term concern. Luna: It makes you wonder — is there any industry that private equity won't try to consolidate? Lucas: I think the question is less about which industries and more about what happens when the consolidation is complete. We're seeing pushback in healthcare and veterinary services. Home services might be next. But for now, the deals keep getting done. Luna: And speaking of deals that keep getting done — Lucas, I know you've been tracking this space for a while. What's one metric you watch to see if the HVAC consolidation is accelerating? Lucas: I look at the number of acquisition announcements each quarter. In Q2 of this year, there were seventeen publicly announced HVAC buyouts by private equity-backed platforms. That's up from eleven in Q2 of 2025. If that pace holds, we're looking at roughly seventy deals in 2026, which would be a record. Luna: Seventeen in a quarter — that's a lot of small businesses being acquired. And each one means another family-owned company cashing out. Lucas: Yeah, and that's just the ones that get press releases. Many smaller deals go unreported. The actual number is probably double that. Luna: You know, it's conversations like these that help me make sense of the world. And I know our listeners get a lot out of them too. Lucas, we keep these shows ad-free by design, and it's because of people who chip in a few bucks a month at buy me a coffee dot com slash fexingo. It genuinely keeps the lights on. Lucas: Yeah, it's not a big ask. If these episodes have helped you think about your business or your own investments, that link is buy me a coffee dot com slash fexingo. Small contributions, real impact. And it keeps us independent. Luna: Exactly. And speaking of impact — let's bring it back to HVAC. Lucas, what's the one thing you think listeners should take away from this episode? Lucas: I think it's this: the next time you schedule an AC tune-up, you're probably interacting with a company that's part of a larger financial machine. It's not good or bad — it's a structural shift. But understanding that shift helps you make better decisions as a consumer and as a business owner. And if you're an HVAC technician, there's never been more career opportunities. Luna: Or more leverage. If you're good at your job, you can name your price in this market. Lucas: Absolutely. And that's the flip side of consolidation — it creates demand for skilled labor. So maybe the real winner in this story is the person who can fix your furnace. Luna: I'll drink to that. Thanks, Lucas. Lucas: Thanks, Luna.