HVAC · Buying a business · Pre-LOI
Buying an HVAC Company? Test the Earnings Before the Trucks and the Contracts.
Before you buy an HVAC company, test the earnings figure the price is built on: split maintenance-agreement revenue from install revenue, find the work the owner's household does for free, and ask for the paper behind every add-back. You'll inspect the trucks and read the contracts anyway. The earnings decide what you pay for them.
An SDE figure is a claim until the evidence proves it. Below: where HVAC earnings claims most often run ahead of the records, the questions to ask the seller, and exactly what a TrueQoE First Pass checks and what it leaves to you and your advisors.
Get your Self-Service First Pass →Use the HVAC earnings checklist →
By Mark Hirsch, Founder, TrueQoE · Managing Member, Strategic Lever LLC — buyer, seller, operator, and advisor across lower-middle-market transactions.
What earnings claim does an HVAC listing usually make?
Short answer: Most HVAC listings lead with Seller's Discretionary Earnings (SDE), or adjusted EBITDA on larger companies: reported profit plus the owner's pay and the costs the seller says a new owner won't carry. The story behind it is usually a base of maintenance agreements with replacement installs on top, run by a team and a fleet that are partly the owner's household.
That story is often true. It's also where an HVAC number can run ahead of the records without anyone lying. The owner still takes the after-hours calls. A spouse runs dispatch in July and isn't on the payroll at a market wage. The truck in the driveway carries the company wrap and a personal add-back. The year on the listing followed a hot summer.
None of those is a red flag on its own. Each one is a question about what the business earns when you own it, and each one has an answer in a document or it doesn't.
- Reported profitReported
- Owner's salary and benefitsDocumented
- Owner's truck and fuel cardNeeds support
- Spouse on payrollNeeds support
- "One-time" warranty callbacksUndocumented
- Claimed SDE
Illustration. Step lengths are not data from any business.
Which HVAC add-backs and revenue patterns most often don't hold up?
Short answer: Six recur. A listing that sells the maintenance base while the profit came from installs. Labor costs that look low because the owner or family fills the gaps. Fleet and fuel split loosely between business and personal. The owner's truck and family payroll added back without support. One strong season read as a run rate. And warranty callbacks called one-time.
Maintenance agreements vs. install revenue
The agreement base is what makes an HVAC company feel recurring. The margin may sit somewhere else: in replacement installs, which follow the weather and the age of the equipment in the service area, not a contract. If the P&L reports one revenue line, you can't tell which one earned the profit.
Watch the timing too. A prepaid agreement is cash collected for visits not yet made. On a cash-basis P&L it shows up when the customer pays, so a strong month of agreement sales can flatter a year.
Technician pay and overtime
Payroll only tells you what the work cost this owner. If the owner still runs calls or quotes installs, if peak-season overtime was capped by the owner working weekends, or if a technician is paid as a contractor, the cost of getting the same jobs done after closing is higher than the P&L shows. Commission and spiff plans matter for the same reason: they move with install volume.
Fleet and fuel
Trucks are an HVAC company's largest moving cost and the easiest place for personal use to hide: fuel cards used on weekends, a loan in the owner's name, a lease paid by the business for a vehicle the family drives. And SDE excludes capital spending, so an aging fleet makes this year's earnings look better and the year after you close look worse.
The owner's truck and family payroll
These are the classic owner add-backs, and they're often legitimate. They're also the ones with the thinnest paper. A truck is “personal” until the mileage log is missing. A family member “doesn't really work here” until you ask who answers the phones in August. If the add-back is real, the work behind it still has to be done and paid for.
Seasonality
Cooling and heating peaks make the monthly numbers swing, and the weather in any one year is luck. A trailing-twelve-month figure that ends after a hot summer, or a year with an unusual heat wave or cold snap, can be a high-water mark presented as a run rate. Annual totals hide it. Monthly results show it.
Warranty callbacks
An equipment warranty may cover the part without covering the labor to replace it. Callbacks on recent installs cost truck rolls and technician hours that don't bill. When a seller adds back a bad callback year as one-time, ask what changed. If the company keeps installing, it keeps getting callbacks.
What should you ask an HVAC seller before the LOI?
Short answer: Ask for the revenue split, the cost of the work without the owner, the fleet list, and the paper behind every owner add-back. Ask by month where the season matters. Ask before the LOI, when a slow answer costs nothing.
- Can you split revenue into maintenance agreements, service calls and replacement installs, for each year and month?It shows which line earned the profit, and how much of the claim depends on the weather.
- How many maintenance agreements are active, how many renewed last year, and how are prepaid agreements recorded?Renewals are what make the base recurring. The recording tells you whether revenue is booked before the work is done.
- Who runs calls, quotes jobs, dispatches or answers the phones without being paid a market wage for it?Include yourself and your family. That work has to be paid for after closing.
- How are technicians paid, and is anyone paid as a contractor?Hourly, overtime, commission, spiffs. Classification is a question for your CPA and attorney.
- Which vehicles does the business pay for, who drives each one, and whose name is on the title or lease?
- For each add-back, what document supports it?A title and mileage log, payroll records, an invoice, a settlement agreement. "It's personal" is a claim.
- What did warranty callbacks cost in labor in each year the price relies on?
- Does the company's contractor or mechanical license depend on you personally?That one is for your attorney, but you want the answer before the LOI, not during exclusivity.
The full request list, with who should check each item, is in the HVAC earnings checklist. For the add-backs that show up in any industry, use the Add-Back Evidence Checklist (PDF).
Where does a TrueQoE First Pass help on an HVAC deal?
Short answer: On the earnings, not the operations. A First Pass ties each year of the seller's P&L to that year's own stated totals, labels each owner add-back (the truck, the fuel card, the family on payroll) Documented, Needs support or Undocumented, and lists the records that should be in the package and aren't. The revenue mix, agreement renewals, technician economics, fleet condition and licensing stay with you and your advisors.
You upload the P&Ls, balance sheets and tax returns the seller sent, as PDFs or spreadsheets. The report comes back in plain English: what the evidence supports, what it doesn't, and what to ask next.
What a First Pass reports
- Each year of the P&L tied to that year's own stated totals, with any gap shown rather than smoothed over.
- Each owner add-back, such as the vehicle, fuel or family payroll, labelled by its evidence and pinned to the line it came from.
- A list of records missing from the package, so your next email to the broker is already scoped.
Guidance for you and your advisors, not a First Pass output
- Maintenance-agreement vs. install revenue mix and renewal history.
- Technician pay, overtime and contractor classification.
- Fleet condition, replacement timing and titles.
- Seasonality across monthly results.
- Warranty callback cost.
- Contractor licensing, permits and insurance.
Every adjustment in the report lands in one of three states:
- Documented
- the adjustment traces to source records.
- Needs support
- the adjustment is plausible, but the evidence isn't in the file yet.
- Undocumented
- there is nothing behind it.
That split is deliberate. A report that claimed to judge a fleet or a renewal rate from a P&L would be telling you something it doesn't know. What it can tell you is which parts of the earnings claim already stand on paper, so your CPA starts on the parts that don't.
What a First Pass is not. It works from the documents you upload and does not verify that seller-prepared records are authentic. It is not an audit, review, compilation, valuation, legal or tax opinion, or a Quality of Earnings report, and it does not satisfy a lender's Quality of Earnings requirement. It does not check returns with the IRS or test bank deposits.
Frequently asked questions
How is an HVAC business valued?
Usually as a multiple of earnings: Seller's Discretionary Earnings for owner-operated companies, adjusted EBITDA for larger ones, with the multiple shaped by the service base, the team, the fleet and how much the business depends on the owner. The multiple is negotiated. The earnings figure it multiplies is the part you can test, and every add-back dollar that doesn't hold up comes off at the multiple, not once.
What add-backs are common when buying an HVAC company?
The owner's salary and benefits, the owner's truck and fuel, family members on payroll, personal expenses run through the business, and costs described as one-time, such as a bad warranty year or a legal matter. Each is legitimate only to the extent the records support it and the cost won't come back under a new owner.
Are HVAC maintenance agreements recurring revenue?
Only as far as customers renew them. Ask for the renewal history and how prepaid agreements are recorded. An agreement base is valuable because it brings technicians back to the equipment, but the earnings may still depend on the replacement installs those visits lead to.
How much does seasonality matter when buying an HVAC business?
Enough to check before you agree a price. Ask for monthly results for every year the price relies on, and look at whether the trailing twelve months end after an unusually strong cooling or heating season. Cash needs swing with the season too, which is a working-capital question for your CPA and your lender.
Does a TrueQoE First Pass replace a Quality of Earnings report on an HVAC deal?
No. A First Pass is a pre-LOI analysis of the financials the seller gave you: it ties each year to its stated totals, labels each adjustment by its evidence, and lists missing records. A Quality of Earnings report is a deeper diligence engagement by an accounting firm, and a First Pass does not satisfy a lender's QoE requirement. It tells you whether the deal deserves one, and where to point it.