The consolidation craze of the 1990s was a magical moment in time for many HVAC contractors.

Scores of owners were able to sell their businesses to consolidators or utility companies for millions of dollars. Many are now living the good life thanks to those deals. A few got burned by accepting payment mostly in company stock that subsequently tanked, but those who negotiated cash or mostly cash buyouts did well for themselves.

For a handful it was like a well-paid extended vacation, because they ended up reacquiring their old companies a few years later for pennies on the dollar.

This commentator was enthused about the phenomenon when it arose in the mid-90s. I thought it would lead to an industry of more professionally managed companies able to bolster industry fortunes by providing greater employment and training opportunities for workers and managers. It also provided a vibrant market for successful contractors wanting to sell their businesses. Instead, they turned out to be mostly a tale of Wall Street hustlers making a quick buck and leaving behind once-promising organizations in shambles.

Too bad. The industry is now back to square one. The contracting marketplace is segmented into tens of thousands of companies having trouble squeezing profits out of the chaos. The situation is worse for construction companies than service firms. Worst of all is that far too many contractors who are nearing retirement age will have a difficult time exiting the business.

Hitting the door

Last year, the construction consulting firm FMI released a survey of construction company owners and found that 24 percent planned to exit the business in less than five years. Yet, they found that almost a third of those responding to the survey said they are not ready to transfer ownership, and another 20 percent were unsure even how to go about it. The findings were consistent with a similar survey done in 2003.

FMI determined that an internal sale to family or employees continues to be the primary exit strategy, cited by around 60 percent of the contractors surveyed. Yet, this is not so much a succession plan as a daydream. As noted, half of them had taken no steps toward getting the process underway or didn’t know how to do it.

While selling to employees or family is the traditional way most HVAC contractors exit the business, financing the transition usually is a big headache. Not many employees or heirs have the money for an outright buyout that would provide the exiting owner with sufficient retirement income. In most cases they have to either borrow a bunch of money or keep the exiting owner on the payroll. This amounts to supporting a highly paid but nonproductive employee, often for an indefinite period of time.

Profits are hard enough to come by in your business even when everyone is pulling his or her weight. Supporting a retired owner often dooms any chance for the new owners of a contracting business to prosper. In many cases it leads to internal strife as the retiree refuses to let go of the reins, which is understandable if the retiree’s income is at risk.

Unique troubles

Businesses in other fields tend to avoid these problems because they have a sizable market of willing and able buyers. If you own a restaurant or retail establishment with a track record of success, odds are good you’ll find someone willing to pay a decent price for the business. Assets may include a desirable location and oodles of customers that can be counted on to keep patronizing the business as long as it continues to provide good food or merchandise. Most patrons probably don’t even know or care who the owners may be.

In the contracting business, too often the main asset is the owner’s know-how and personal contacts, which tend to disappear with a transition.

Although nowhere near as extensive as the consolidation craze, a small trend is under way with certain private equity interests investing in successful plumbing and HVAC companies - mostly service firms - on a regional basis. Unlike the consolidators of the 1990s, these investors are not necessarily looking for a quick buck, but recognize opportunity for a handsome steady return on investment in the business. The best way to attract their interest is to operate a profitable, well-managed company.

If you plan to retire in the next 10 years, now is the time to start shaping your company up for whomever the new owners might be.

Jim Olsztynski - pronounced Ol-stin-skee - is editor of Supply House Times, a sister publication of Snips. He can be reached at (630) 694-4006, or e-mail wrdwzrd@aol.com.