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While private equity (PE) investment in the MEP skilled trades—mechanical, electrical and plumbing—is not a new phenomenon, momentum seems to be accelerating. The Wall Street Journal reported that, since 2022, private equity investors have acquired “nearly 800 MEP companies, according to data from PitchBook” (https://bit.ly/4caCfPE).
Long-time industry veterans may recall the consolidation craze of the 1990s, which led to the creation of Encompass Services, Blue Dot and EMCOR. Except for EMCOR, all those consolidators went belly up. Their demise was due partly to rebranding efforts, where many family business names disappeared, and staffing and business practices changed. Customers no longer had those long-standing relationships with their contractors, so they took their business elsewhere.
So, is this PE trend any better?
Finding the Right Fit
“We see many platforms succeed, but this is where the seller needs to do their due diligence by learning about each buyer, their approach, culture and their plans for the future,” explains Brendan Hughson, a Mergers and Acquisitions Advisor with Apogee Equity Partners. “Not all buyers are a good fit for sellers; some are spreadsheet-driven, while others prioritize people and protecting legacies while growing consistently but not too quickly.
“Today, sellers have more options than ever to find the best fit for themselves, their employees and their families.”
Scott Adams, Co-Founder of PE firm Soul Street Group, agrees, adding that plumbing and HVAC business owners, mostly family businesses, can be assured that their employees and their legacy will be taken care of. He worked in his grandfather’s construction company to put himself through college, so he knows the industry.
“We're buying these companies for the long haul, trying to carry on a legacy from the people who founded these companies,” he says. “We're not firing a bunch of employees; we're not going to change a million things. Yes, we're going to make changes, yes, but we understand we're standing on the shoulders of giants. These are good, well-run companies. So that's where we're starting from.”
An eight-year Blue Dot veteran before founding Wrench Group in 2016 with four home services companies, supported by private equity, Ken Haines, CEO of Wrench Group, understands the mistakes of the past. Today, Wrench Group operates in 28 markets across 15 states, supporting a growing network of home services companies.
“Private equity played a crucial role in the formation and growth of Wrench Group,” he says. “In 2016, Investcorp made a majority investment, allowing us to enhance our infrastructure, strengthen marketing efforts and pursue strategic acquisitions. This partnership enabled us to expand our operations, ultimately leading to a 15% increase in net sales and a 42% growth in employees within just a year as we broadened our service offerings beyond HVAC to include plumbing and electrical services.”
Today, the group has investments from three PE firms—Leonard Green & Partners (majority shareholder), TSG Consumer Partners and Oak Hill Capital—to enable its growth.
The Attraction for PE Firms
“Private equity firms are drawn to this industry due to its essential and recession-resilient nature, which offers stable revenue streams, opportunities for operational improvement and tailwinds from the growing demand for more energy-efficient solutions,” Hughson notes. “Overall, the industry is highly fragmented, offering numerous opportunities for private equity firms to consolidate and build larger, more efficient and profitable businesses.”
Haines agrees: “It makes solid business sense. Home services like HVAC repairs, plumbing and electrical work are essential, ensuring consistent demand and recurring revenue.”
Industry fragmentation, he adds, “creates opportunities for PE firms to provide the infrastructure, capital, knowledge and resources to consolidate smaller HVAC businesses into larger, more valuable entities.”
Many of these plumbing and heating companies are family-run with no succession plans, so PE can be an exit strategy for some.
“Baby boomers are retiring at record rates, and many of these plumbing and heating business owners don’t have kids in the trades,” Adams notes. “The second person in charge can't afford to pay eight or 10 million for a company, right? And that's why private equity is coming in, giving these owners an option to either shut down the business or sell it.”
Haines says that skilled trades businesses offer many qualities PE firms are looking for: a scalable business model, a strong customer base with recurring revenue, solid financial fundamentals, an experienced leadership team and significant market potential.
“They will also assess your marketing efforts, reputation across all channels, branding, employee perks and benefits, as well as training,” Hughson adds. “These will make a buyer more confident.”
Due Diligence Concerns
“The idea from the private equity side is that there is an opportunity to take these small, very localized businesses, regionalize them and rebrand them fundamentally, so that you have a corps of entities, such as plumbing and heating, fire protection or roofing,” explains Patricia Harris, a construction industry attorney with Zetlin & De Chiara.
She’s also the founder of Licensure, incubated by the firm, to help other businesses with the administrative aspects of licensing, but also the strategic planning of business rollouts. Due diligence in these matters is crucial to success down the road.
“The most important thing for contractors to know if they are thinking about selling their business is to have your housekeeping in order,” she emphasizes. “There's a whole range of due diligence questions that that a potential purchaser is going to ask, from employment agreements to litigation history, to licenses people that you employ or the owners carry, to licenses that the business carries, to workers comp and insurance programs.
“These deals happen fast. It's worth getting counsel in advance if you think you're going to sell the business, to understand what you're going to need to disclose and start to put it together in a meaningful way.”
Understanding the financials is key to any PE offer, Adams says: “We can understand the assets, but are the numbers the numbers? We use tax returns frequently because they are often the source of truth for many small companies. I think we spend more time really digging into the financials to ensure everything is in order. If you do light audits of your company financials, you will get a premium for your company because you verify what you've done.”
Regarding licenses, Hughson notes that if the owner holds the plumbing, HVAC or electrical license, he or she should stay on for a period so the business can keep operating. “Depending on the state, the owner can remain on payroll, allowing the buyer to use the license even after the previous owner is no longer full-time.”
Harris notes that PE acquisitions in the MEP space have different transactional forms: “They are largely tax driven, but they have impact on largely business name and licensing issues. In many cases, depending on the deal structure, the buyer cannot move licenses until after the deal. Private equity firms continue to rely on the seller’s existing licenses in place for a post-close period before making changes.”
She adds: “Private equity firms are looking for employee continuity, whether that be a family member or a valued long-term employee with a lot of contractor licenses—someone who's a qualifier for the business. They may be making changes incrementally, but they don't want a business where everybody's saying ‘Bye’ at closing.”
Upsides and Downsides
PE investment can be extremely beneficial for small plumbing and heating businesses.
“Private equity provides plumbing and HVAC owners, as well as contractors, with the financial resources and strategic support needed to accelerate growth, enhance operations and position the business for long-term success and increased value,” Haines explains. “That said, plumbing and HVAC owners must make sure that pursuing or exploring private equity aligns with their goals and long-term vision for the company. It's also crucial to find a partner whose values are in sync with theirs.”
Hughson states: “Most business owners have a significant portion of their assets and wealth tied to the business. So, taking on a partner or selling will allow them to cash out and become more financially free. The other benefits would include an influx of capital to grow the business faster than you could do on your own, additional training, decreased material costs based on the size of the buyer's portfolio, acquiring competitors and retiring or exiting the business more quickly than initially planned.”
From Adams’ perspective, contractors working with private equity firms are typically positive experiences.
“For instance, a plumber has four crews: four trucks and two people per truck,” he says. “He’s maxed out, but could he add a fifth or sixth truck? Yeah, he could. We have resources to help invest and continue to grow the company that maybe the owner doesn't typically have.”
PE investment in family-run companies can also offer employees advancement opportunities they may not have had before.
The downside, Harris notes, is that PE firms are evaluating results through metrics. “There is going to be a culture shift, even for the smallest of businesses that get acquired,” she says. “It's no longer about driving down the street to your neighbor Joe's house and fixing his plumbing. It's about making sure that the business is profitable.”
“This can all depend on the type of buyer,” Hughson explains. “Some buyers will centralize call centers, financials, HR and marketing. In some cases, this can be a benefit to the business, while in others, it can cause uncertainty among employees, leading to them leaving. I suggest interviewing multiple buyers to see what will be a culture fit for you, your employees and your community. I’ve seen some buyers that offer equity to key managers and select employees, which can be life-changing for them.”
Kelly Faloon is a contributing writer to CONTRACTOR magazine and principal of Faloon Editorial Services. The former editor of Plumbing & Mechanical magazine, she has more than 35 years of experience in B2B publishing, with 26 of those years writing about the plumbing, heating, cooling and piping industry. Faloon is a journalism graduate of Michigan State University. You can reach her at [email protected].
Kelly L. Faloon | Freelance Writer/Editor
Kelly L. Faloon is a contributing editor and writer to Contractor, Contracting Business magazine and HPAC Engineering and principal of Faloon Editorial Services. The former editor of Plumbing & Mechanical magazine, Faloon has more than 26 years of experience in the plumbing and heating industry and more than 35 years in B2B publishing. She started a freelance writing and editing business in 2017, where she has a varied clientele.
Faloon spent 3 1/2 years at Supply House Times before joining the Plumbing & Mechanical staff in 2001. Previously, she spent nearly 10 years at CCH/Wolters Kluwer, a publishing firm specializing in business and tax law, where she wore many hats — proofreader, writer/editor for a daily tax publication, and Internal Revenue Code editor.
A native of Michigan’s northern Lower Peninsula, Faloon is a journalism graduate of Michigan State University. You can reach her at [email protected].