As we head into the fall heating season, I see several issues affecting how we do business. New technologies, market forces, business climate and energy policy create challenges and opportunities for PHC business owners. A willingness to learn and change will determine future success or failure.

Connectivity

I am seeing more and more manufacturers offer connected equipment. While this is not a new development, it is becoming more and more prevalent. We currently install two boiler lines and one unitary HVAC line that offer connected equipment.

I see two main advantages of connected equipment. One, it allows for quick and easy setup on new installations. Operating parameters can be set using a laptop or smartphone much quicker, easier and more accurately than entering this information through clunky equipment control panels and user interfaces. Commonly used setups can be saved, allowing for one-touch setups.

Two, connected equipment allows for remote monitoring, diagnostics and adjustments. Most boilers we install incorporate outdoor reset. Sometimes the reset curves we initially set up are too aggressive or do not account for atypical conditions such as solar gain, wind conditions or indoor loads such as people, lighting or appliance gains. This would usually entail a call-back visit to adjust the reset curve. 

Imagine now, through connected equipment, sitting on your La-Z-Boy watching the game and going into your phone app to change the reset curve parameters, saving an on-site service call. Game-changer.

This feature can be extremely helpful even when the equipment fails, requiring a service call. In many cases, you can see an error code and deduce the failure point. For example, if the boiler is off on a flow error code, there is a good chance it is a pump or zone valve failure. If the combustion airflow switch fails to prove, it is likely the draft motor has failed. This allows you to act accordingly and respond to the call armed with the part or parts most likely to solve the problem. 

Inflation/Interest Rates

The Federal Reserve continues to raise interest rates to fight growing inflation. The cost of money is rising. Equipment and material costs are also increasing. Anyone watching the nightly news or reading the paper (does anyone read the newspaper anymore?) already knows this. 

What does this mean for you, the business owner? You better keep a sharp eye on your cost of doing business and pricing your services accordingly. It is not possible to bury or “eat” these cost increases and stay in business. Your customers must bear these price increases. 

I failed to do this recently, and it cost me dearly. I failed to update a price list for a boiler we typically use. My direct cost for this boiler increased by almost $1,000 over a year. I looked back at my installations; we had installed more than a dozen severely underpriced systems. This was a lesson learned the hard way. 

It is critically important to work with your suppliers to keep track of price increases and act accordingly. Don’t wait for your monthly statement to catch them. 

We cannot control inflation, interest rates and operating costs. We can monitor these changes, adjust our service prices to reflect them and continue to earn a well-deserved profit for our risk, liability and hard work in running a PHC business. 

Supply Chain

For the first time in several years, I have seen supply chain issues gradually decrease. They have not completely gone away, but they are no longer the daily headaches of the past couple of years. Stock-outs and backorders are not nearly what they were last year. 

There are some holdovers: parts/equipment with chips or computer boards, such as ECM motors and pumps, have had stocking issues. Some of our local suppliers have had difficulty keeping typically used unitary HVAC equipment in stock. In many cases, we will need to hit two or three supply houses to fill out job material lists where one-stop shopping used to be the norm. 

The supply chain still has some kinks and hiccups, but I see the severe issues of the last two years as a thing of the past. 

Electrification/Heat Pumps

This is a recurring theme that will only continue to grow. My company has seen a dramatic increase in clients requesting heat pumps to replace existing, working fossil-fuel heating systems. We currently have four new houses going up that are all-electric: two are geothermal-based and two incorporate air-to-water heat pumps. 

One of the new houses added a change order for garage heat and a small band of snowmelt in the garage apron. This zone was unsuitable for a heat pump as the required supply water temperature was 145 F. The client was given the option for a condensing natural gas boiler to serve this zone. They declined this option and instead chose an electric resistance boiler. Their house, their choice. 

I have learned to advise my clients on how I think the job is best done but to respect their decisions and to design around their choices. 

In my Washington, D.C., metro area market, geothermal systems have been steady and consistent. I have seen a significant interest in water-to-air heat pumps, as not all lots are suitable for drilling a loop field. These systems work best at relatively low supply water temperatures, 120 F or lower. I typically design around a maximum supply water temperature of 110 F to maximize efficiency.

This low supply water temperature works well in new construction jobs with tight envelopes, high-grade windows and good insulation packages. Radiant floor heat is a perfect application. 

Retrofit jobs can be a challenge due to the low supply water limitation. I recently looked at a 1950s bungalow in Bethesda, Md. The client wanted to remove the original American Standard oil boiler and replace it with a water-to-air heat pump. 

The heat emitters were copper fin-tube baseboards. The construction was brick on block plaster walls with no insulation. The original single-pane, metal-frame windows leaked like a sieve. The 6 feet of Rockwool attic insulation had settled to 2 to 3 inches in most spots. This was not a good application for a heat pump without some modifications.

Our solution: The client agreed to replace the windows and attic insulation. Wall insulation will be part of a whole-house renovation three to five years down the road. A water-to-air heat pump provides hot water to the baseboard at 40 F ambient. Below 40 F, a 95% condensing gas boiler takes over to supply the baseboard with the hotter supply water required at colder temperatures. It also provides domestic hot water (DHW) through an indirect DHW storage tank. 

This may not be the absolute best solution, but it was a creative way to meet my client’s wishes and provide a system that functions comfortably and efficiently. 

SpacePak National Sales and Training Manager Jim Bashford says this about the growing heat pump market: “You won’t stop it; it’s like a train. Everything is going to go electric or close to it. In some cases, it’s a blend between fossil fuel and electric.”

Jeff Riley, co-owner of Coredron, the SpacePak rep in D.C., Maryland and Virginia, comments: “SpacePak has successfully been doing air-to-water heat pumps for 12 years, but with the electrification push, the interest has exploded. The key is providing training to properly apply and install all projects.” 

Carrier recently bought Viessmann for approximately $12 billion. Inside sources have told me that Carrier wanted Viessman’s heat pump technology as well as an entry point into the European heat pump market. It sees the future in heat pumps, not fossil-fuel boilers. 

Its own press release states that the Viessmann acquisition “positions Carrier to lead in the rapid climate and energy transition in Europe, which is driving sustainable market growth.”

This market will only continue to grow. It is critically important to learn how to design around low supply water temperatures properly and install these systems to manufacturer specifications. 

Mergers, Acquisitions and Private Equity

Outside entities are acquiring private PHC companies at a rate not seen since the late 1990s. If you recall, that was when Wall Street attempted to “roll up” our industry and create giant, publicly traded companies such as Blue Dot and Group Mac. This was a massive failure as most of the roll-ups did not last more than a few years. 

What is driving current interest in acquiring small to moderate-sized PHC companies? Why is this different than the last go around 25 years ago? I decided to dig deeper and check in with three friends who recently sold their PHC businesses. 

Tim Cropp is the general manager and former owner of CroppMetcalfe Services based in Fairfax, Va. He sold his company to HomeServe in 2019. Cropp’s motivation to sell was centered on paying off debt, paying off partners and cashing out equity tied up in his business. After the sale, he stayed aboard as general manager.

I asked him why this was different than the Wall Street acquisitions before. “Lessons were learned from the mistakes made 20-plus years ago,” Cropp says. “The private equity firms currently buying PHC companies view them as long-term investments. They are not publicly traded companies driven by quarterly profits.” 

He adds: “The acquiring firms are allowing the entrepreneurial spirit and company culture that made them successful to remain without being bogged down by rigid ‘big company’ policies and procedures.” 

Alan Givens, the former owner and CEO of Parrish Services in Manassas, Va., sold his company in May as part of a group of companies purchased by Ace Hardware. Givens received more than a dozen offers for his company before making his decision. The sale was a cash transaction, and he is assisting with training and quality control. 

I asked Givens why there is renewed interest in our industry.

“COVID-19 changed the way people live and work,” he says. “Homeowners are working from home and investing in their homes. Home service companies offering residential HVAC, plumbing and electrical services are attractive acquisitions for three reasons: recurring revenue streams through repeat service and maintenance; virtually recession-proof and cannot be outsourced; and recurring revenue from replacement installation as equipment wears out.”

He is dead right. Our businesses are very attractive to outside investors. It was especially true when interest rates were at record lows. It remains to be seen how higher rates will affect future acquisitions. Givens notes that the focus has been on residential service companies; residential new construction and commercial service companies have not seen the same level of interest. 

Scott Goulet is the general manager and former owner of M.E. Flow, based in Leesburg, Va., with multiple branches throughout northern Virginia. He sold his 128-employee company last year to a private equity firm based in Florida. 

Goulet felt he received the right offer, and it was the right time to sell with his company at peak value. He mentioned the liability and risk of running his company. It was time to “take some of the chips off the table.” 

The proceeds were used to pay off partners and reinvest a portion into the acquiring private equity firm. Goulet chose to remain as general manager on a three-year contract. 

Business is cyclical. What was old is new again, only with a new twist. With private equity dollars flowing into our industry, now may be the time for PHC business owners to check out the current value of their companies, even if they have no intent to sell. 

Our business environment is constantly changing. Some challenges are new; some are old challenges repackaged with a twist. 

Our clients’ need for the basic services we provide will never change. They will always need heating, cooling, hot water, clean water and plumbing/sanitary needs. What will change is the technology to provide these services and the business setting in which we operate.